Small Stocks Continue to Look Interesting

For the past few weeks, I have been mentioning the action the Russell 2000 index of small cap stocks. Along with the S&P 400 index of mid cap stocks, this group has been lagging the returns of the more popular Dow, S&P 500 and NASDAQ 100. I continue to believe the Russell’s fortunes are changing, if only for a short period of time.

Below is a chart I have shown a few times before. It’s the Russell 2000 with the most widely watched horizontal line (blue) in the markets. The masses were watching to see if the Russell could finally break out above the line and stay above the line. While the jury is still out, I do believe that is happening and will happen this month.

Let’s also remember that seasonally, December and the first part of January is historically strong for small caps versus large caps. While that doesn’t mean it occurs every single year, 2019 certainly looks like good risk/reward.

Over the coming week or so, there are enough macro events that some downside volatility should not be surprising. The Fed meets on Tuesday and Wednesday. Impeachment proceedings continue. Trump’s deadline of December 15 for more tariffs looms. As I write about every year, it’s very difficult to see significant and sustained downside so late in the year. Obviously, it’s not 100% as 2018 and 2000 were ugly, but as you knows, the odds don’t favor it. And this year with stocks up by a healthy margin, it’s going to be even more difficult for the bears to make much noise until 2020.

Stocks could certainly revisit or even slightly and quickly breach last week’s lows, but that would present yet another buying opportunity for new highs into January.

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Was That All?

On Wednesday, I wrote that stocks were supposed to bounce and not to be surprised if they regained all they lost a few days earlier. However, the odds did not favor the whole pullback/consolidation being over. I am still in that camp although with this morning’s much stronger than expected employment report and the pre-market surge, I guess I have to be open to the notion that the little bout of weakness is over. We will certainly see in the coming days if all of the major stock market indices can hit fresh highs.

As I have mentioned for a month, by turning neutral to slightly negative in the short-term, it simply meant that I was basically in a holding pattern and not committing new money to stocks nor raising risk levels. In a perfect world, any pullback would be used to make some small modifications for the run into year-end I have been discussing.

I have been saying that leadership from the Dow, S&P 500 and NASDAQ 100 should cede to the lagging S&P 400 and Russell 2000. I continue to believe that with the two latters finally hitting all-time highs early in 2020. My four key sectors are all in good shape. Semis and banks continue to lead and be strong. Transports have a strong ceiling overhead but I expect that to be breached in early 2020.

Discretionary offers an interesting opportunity as you can see below. Price has been in a range for 6 months with continued compression. Highs are lower. Lows are higher. Think of a coiled spring. Usually, prices will ultimately continue with the previous trend, in this case, higher. Sometimes, prices breach one side first as a fake out and the immediately head in the opposite direction, trapping the masses. In this case, while I believe the upside will win out, it doesn’t pay to take a stance right here.

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3 in a Row for the Bears as ISM and Trump Give Aid

The bears are on a three day winning streak with Tuesday scoring the most points and the chorus growing louder that this is anything but a harmless little pullback. On Monday, the media chalked up the decline to the ISM survey which was disappointingly weak. If that was truly the case, why did bonds also sell off? If the economy was weakening, shouldn’t bonds have rallied? My good friend, Tony Dwyer (@dwyerstrategy), offered that the media reported a disappointing number based on one account whereas another account showed that number to be stronger than expected. Tony said that stocks were just looking for an excuse to decline, something I have been writing about for three weeks or so.

On Tuesday, the on again, off again trade tantrum with China was suddenly back on as President Trump’s 5:15am off handed comment about possibly not having trade deal in place with China until after the 2020 election may be the best course for the U.S. That sent overseas markets plummeting and the U.S. stock indices opened near its low for the day with the Dow down more than 400 points. From there, very quietly, stocks slowly crept higher all day and into the close. With so many money managers sitting on boatloads of cash and only four weeks left in the year, there won’t be many more opportunities for folks to buy into weakness in hopes of playing some catch up into year-end.

Looking at the major stock market indices, the Dow has pulled back to a logical area to find buyers. The S&P 500 and NASDAQ 100 still have another 2% or so to go. The weaker S&P 400 and Russell 2000 are basically there. However, I still don’t believe the all-clear has been sounded. Stocks are supposed to bounce from here, so don’t be surprised if they regain all that was lost on Tuesday. However, I don’t have strong conviction that the mild pullback is 100% complete.

Speaking of the weak Russell 2000, I direct you to the chart below and the lower horizontal, blue line. It seems like bull and bear alike has been focused on that line in the sand for some time in the small caps. As you can see on the far right of the chart, price finally broke above the blue line which simply represents the top of the trading range we have seen all year. While the bulls began to celebrate, it was short-lived as the bears immediately put up a fight, pulling price back into the 2019 range. Chartists will call this a false breakout, which can be a powerfully bearish signal if we price follow through to the downside, something I am not counting on just yet. I think the bulls have some dry powder up their sleeves and will not allow the bears to make much progress this month.

December is off to a less than stellar start, which is somewhat typical as I mentioned on Monday. Stocks usually find a low around the third Friday of the month, plus or minus a week. I expect this December to be no different. The cracks in the pavement I have been discussing for three weeks won’t be magically fixed and if my scenario is correct, price will rally despite these warnings into what may be an even bigger warning come January.

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Lots of Action Across the Board – Stay Alert

Welcome back from Thanksgiving! I hope you had a safe, fun and meaningful holiday!! For me, I was very thankful to be alive after my mid-May mishap. As usual, I will have the various details of the Schatz Thanksgiving feast in an upcoming Street$marts.

With 11 full months in the books, December trading starts today. The last month of the year is typically a very bullish one, especially when it begins in rally mode. 2018 was certainly an outlier that caught the masses off guard. I do not believe 2019 will look anything like a year ago and I expect more new highs into January before things possibly change.

When we left off last Monday, I wrote about the holiday-shortened week being bullish with healthcare being the biggest surprise of late and how much I liked the behavior from my key sectors. A week later, I can revert back to my previous position of several weeks being short-term neutral to a little negative into what I think will be an up opening. I don’t see anything big on the downside. Just a little pause or mild pullback. All that means is that I am not really interested in committing new money or raising risk, just staying the course until something changes.

The “haves” on the index side hung in well on Friday with the “have nots” struggling. I want to see how the mids and smalls fare on Monday. Semis, transports and banks all look like good buys into weakness. Discretionary may be as well but that group hasn’t acted as well as the others. Industrials and materials remain strong and biotech looks like a tech stock from 1999. Energy is the lone dog and it’s susceptible to tax loss selling for another few weeks. I changed my tune about utilities over the past weeks and no longer love that sector. Too far, too fast with way too many people turning positive. I do, however, still like Staples on the defensive front.

High yield bonds had a really nice week last week and I expect that to continue into the New Year. Commodities, but crude oil in particular, had an awful close to the week and I want to see if that was an illiquid aberration or the start of something more on the downside. Gold, however, looks interesting for more than just a few days as long as last week’s low isn’t breached on a close. The gold stocks could be starting a rally into the New Year.

In the next update, I will discuss the breakout in the small caps and if it’s real.

Lots going on.

Stay tuned…

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Bullish Week Coming. Healthcare Leading

Stocks are set to open higher to begin Thanksgiving week where we only have 3 1/2 days of trading. This week is typically a good one for the bulls. Last week, the stock market treaded water and the bears definitely had a chance to make some noise. I doubt they will have the same opportunity this week unless a piece of random news hits out of nowhere.

As you know, I have been neutral to a little negative in the very short-term for a few weeks, not willing to commit new money just yet. I have written about the S&P 400 and Russell 2000 (mids and smalls) seeking to step up and lead the next leg higher for stocks. I am still patiently awaiting for signs this change is happening.

I really love how three of my key sectors have been behaving lately. Semis, banks and transports have all pulled back very mildly and look like they are readying themselves for a run into year-end. I just don’t think that run will begin right here and now. Five weeks is a long time to the end of December, but I don’t have strong conviction on that one.

Healthcare is a sector that has really surprised me this quarter. Historically, this group does not garner much positive attention heading into a presidential election year as both sides like to vilify and blame the companies for price gouging and taking advantage of patients. This plays very well with the electorate as you can imagine. Look at the chart below. The horizontal blue line is last all-time high made in October 2018. Just last week, healthcare quietly broke out to the upside and continued running. This move isn’t garnering much attention from the media nor pundits, but it’s certainly an unexpected move, at least in my eyes.

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Bulls Biding Their Time

Stocks continue to trade very quietly lately. It seems like every day there is a narrow range from high to low. And that’s okay. Although I have had short-term concerns for the past few weeks, the bulls have done an amazing job of thwarting each and every little attack by the bears. As I have said a number of times, stocks will either mildly pull back or move sideways for several weeks. Right now, the latter is the preferred scenario, but I wouldn’t get super comfortable just yet.

I really love how the laggard, left for dead, mid and small caps are biding their time right around key breakout levels, those horizontal blue lines. It’s the epitome of a tug of war between the bulls and bears. I happen to feel strongly that after the next little bout of weakness hits, these two indices are ready to bust out and give the market the ammunition it needs for the next leg higher. And I think that will begin in December.

And before I get the emails, the Dow, S&P 500 and NASDAQ 100 all look similar and very constructive as they have all already broken out to new highs and are now working that off. Many, many times a security will have an obvious break out, only to stop in short order for a pause to refresh that works its way back to that key break out level. Sometimes, the instrument will regather itself and surge higher while occasionally it will completely fail after sucking in the bulls and move quickly in the opposite direction. You can see how much air lies between the current price below on the S&P 500 and the horizontal, blue line which is where stocks broke out.

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Bulls Still in Charge, But

As stocks headed into November the Dow Industrials, S&P 500 and NASDAQ 100 were all at or very, very close to all-time highs. I know this comes as no surprise to my readers as I have written about my upside projections over and over and over. Dow 28,000 was next, a target I began discussing at the end of 2017. Five straight closes above that level will open up my long, long, longstanding target of Dow 30,000, a pie in the sky number I first floated when the Dow closed above 20,000 several years ago.

You certainly wouldn’t know stocks have behaved well this year if you listened to or watched the media. Almost all of the stories are just so negative and even dire. Earnings are bad. The economy is essentially in recession. Europe is a disaster. China is falling off a cliff. Tariffs will raise prices for consumers. The President colluded with Russia. Trump to be impeached. Sanders and Warren are attacking wealth and success. It’s enough to send you screaming into the night.

This bull market has feasted on all of the hate and negativity. No bull market in history has been more disavowed than this one. Yet every single time stocks weaken, every bear comes out of the woodwork with forecasts of a bear market, economy about to plunge and a repeat of 2008 or worse.

Most of those clowns just write newsletters and try to swindle people out of their money by predicting constant gloom, doom and Armageddon. Negativity definitely sells. Eventually, a day of reckoning will come and you can bet that those same clowns will claim success, fill the media with their nonsensical ads and try to peddle even more expensive newsletters, completely ignoring history or hiding from it.

The bull market is alive and reasonably well and will live on into 2020. Next year will likely present some challenges, but we will cross that bridge when I start to work on my 2020 Fearless Forecast.

For the most part, I have been positive on stocks throughout 2019 with a few exceptions, especially in June and July. At no time did I see the bull market ending nor a significant 10%+ decline coming. Buying any and all weakness has been my theme and for the most part, that has worked. Of course, like every year, I did have my share of flops when I dialed down on a more granular investment level.

I remain slightly negative in the short-term due to a host of small concerns I outlined yesterday in Street$marts. I will offer more detail tomorrow. Closing below Wednesday’s low should confirm a short-term peak has been firmly established and then we will look for weakness to turn positive again.

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Target Hit

On Friday, the Dow hit yet another one of our upside projections. This continues the longest stretch of successful upside targets since I started forecasting them 20 years ago. When the bear market ended in 2009 I remember being on CNBC with Larry Kudlow in early March thinking that stocks could bounce 1000 points before a possible retest of the lows could set up. People thought that was nuts. When stocks exceeded 8500 for five straight days, 10,500 became the next target and that was, of course, laughed at.

And here we are today. Dow 28,000. A target I offered on Fox Business, Yahoo and CNBC more times than I can count. Five straight closes above 28,000 will open 30,000 as the next target. I remember first discussing Dow 30,000 when stocks first breached 20,000 and people thought I was crazy. Interestingly, at this point, there isn’t another number above 30,000 to target. I am not sure what that means, but we will cross that bridge when we get there.

With Dow 28,000 I am seeing more people become bullish and a few cracks developing in the market with the number of stocks making new highs and new lows on the same day. Smart money is really increasing their level of quietly selling and dumb money is pouring into stocks. That’s usually not a recipe for good risk/reward and I am sticking with my neutral position in the very short-term. Simply put, that means I am not committing new money or raising risk until either stocks soften or the market internals improve. I am not calling for an end to this rally or the bull market or anything significant on the downside. Just your routine mild pullback or sideways action. I am, however, beginning to think about 2020, recession and how a bear market could develop.

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Lots of Opps But Market Not Ready For Another Leg Just Yet

Today is options expiration where moves used to be wide and volatile. However, these days expiration has actually become a fairly tame affair. As I wrote about the “haves” and “have nots” in the indices the other day, I think today will shape up to be fairly quiet with an obvious bias to the upside as the bears have been thwarted multiple times this week. Stocks should jump to fresh, new highs this morning but I do not expect an acceleration from there. The Dow, NASDAQ 100 and S&P 500 continue to lead while the S&P 400 and Russell 2000 are trying to play catch up and eventually take over leadership for the run past 28,000.

While I have been an unabashed bull for many quarters in semis, I think there is an opportunity in communication services, the newer S&P 500 sector. Banks and financial also look good to me for more upside. I am not sure today is the day to buy transports, but before long, they should be ready for an all out assault on all-time highs.

Some pundits have started to cry foul regarding the NYSE Advance/Decline Line’s inability to score new highs lately while stocks have marched higher. I am not worried about that just yet. However, I remain in the neutral camp over the very short-term for the same reasons I have spelled out lately. Stocks may only see a few percent lower or just go sideways for a few weeks before the next upside assault begins. Either way, I think there is time.

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Bulls Recharging. Bears Turning into Bulls

It’s good to be home after a great but quick trip to Dallas. Uncharacteristically, the markets were fairly quiet on Monday and Tuesday while I was away. Usually, my travels bring about all kinds of fireworks which force me to change plans and stress about being available and not missing an opportunity. I hope that doesn’t mean that the next trip will be worse than normal to make up for it!

Since I turned neutral on the very short-term, stocks have a done a beautiful job of doing, well, nothing. The “haves”, Dow, S&P 500 and NASDAQ 100 are doing a really nice job of going sideways which was one of my scenarios. The “have nots”, S&P 400 and Russell 2000 have done a nice job of mildly pulling back which was my other scenario. Nothing really has changed. The great growth/value debate rages on with growth bouncing slightly relative to value over the past week.

Semis look strong. Banks are readying themselves for another assault higher. Discretionary may have ceded leadership but it still behaves well. Transports are a little weaker than banks, but also look like they want to surge into year-end. Junk bonds do not behave like they have peaked. Industrials and materials have quiet caught fire as value has become back in Vogue. Healthcare and biotech are very strong. Energy remains in the doghouse.

All in all, I am seeing no signs that the rally has peaked or is about to end. My next upside target of Dow 28,000 should be seen by year-end with 30,000 possible shortly thereafter. I do find it hilarious that so many pundits have revised their bearish history by calling for Dow 30,000 or something similar when they have been neutral or negative for years. One negative I will leave with is just that. A lot of folks have turned positive after stocks eclipsed new highs recently. That’s cause for concern.

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