Time to Be Careful

Before I dive in, let me be very clear, I remain bullish over most time frames. Nothing has changed. Five straight closes above 18,000 as I spelled out on CNBC last week and many times over the past six months may create a slingshot to 20,000 this year. The bull market is old and wrinkly but not dead. Same old lines from me.

The headline about being “careful” is more about the short-term and because stocks just broke out to all-time highs where risk usually increases. The major indices had been in a trading range for three months and just hit fresh highs over the past few days. Historically, this can lead to a quick surge higher as bears scramble to cover losses and bulls pile in. However, it can sometimes lead to a fast and sharp downside reversal which usually happens sooner than later.

At this point, I am not concerned yet that a double digit correction is here, just a little warning not to be complacent. The window of opportunity for the bears to make a stand is now, meaning over the next week. The longer stocks remain at new highs, the less likely a sharp reversal can take hold.

I will talk about sector leadership rotation tomorrow, but suffice it to say that it’s very encouraging! My position in the long dated treasury is not.

REMINDER: I will be on Fox Business’ Making Money with Charles Payne tonight from 6 pm – 7 pm. Tune in for a fast paced hour we talk markets, economy and a random group of topics.

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Bears Pulling a Pete Carroll?

The bears began Monday’s trading with the ball, seemingly just needing to breach the lows to force a wave of technical selling. It shouldn’t have been that difficult. After multiple intra-day reversals by the bulls stocks ended sharply higher on decent internals. While that all looks very nice and neat on a chart, I would have still preferred to see a clear breach of all recent key lows by at least the majority of the major indices. All we saw on Monday were the Dow’s bottoms being cleaned out.  Interestingly or curiously, the S&P 500 essentially saw the exact same level as in December while the S&P 400, Russell 2000 and Nasdaq 100 weren’t even close.

All this together, the bulls have a little advantage here but must use it right away. If and when Monday’s lows are breached on a closing basis, that would likely set off a sharp “whoosh” lower of several percent across the board as I mentioned in Monday’s three scenario piece. For now, keep an eye which sectors are leading and lagging for signs of change. Eventually, the short-term “all clear” signal comes when the S&P 500 closes above 2064.

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Stock Market Groping for a Low

If you woke up this morning, turned on the computer or TV and saw another Texas healthcare worker with Ebola, European markets under siege yet again and our own stock market futures in collapse, you probably did not feel so great. Anxiety? Panic?

As the morning progressed and our stock market opened, your saw an immediate mini panic with the Dow down 370. At the same time, the 10 year treasury note’s yield absolutely and totally collapsed under 2%. That is capitulation in stocks and flight to quality or safety in bonds. Heading to the exits en mass. Throwing the baby out with the bathwater. Choose any cliche you want.

(Side note. Our Global Asset Allocation strategy has owned treasury bonds almost every day this year and today is the first time we are seeing a sell signal in that asset as its price has spiked to unsustainable levels.)

Is this “A” bottom or “THE” bottom or even a bottom. We should know more by the end of the day. If stocks rollover yet again during the afternoon and close below the lows of the morning, the panic is likely to follow through until we see another panic set up. If, however, stocks can hold the morning low and firm throughout the day, even to still close down, that would be a good sign that at least a bounce, if not full fledged rally is here.

The Russell 2000 index of small cap stocks, which has been bludgeoned since July has performed very well this week on a relative basis. And so far today with stocks taking it on the chin early, small caps fought back to unchanged. This is bullish behavior and not typically what we see if stocks were on the verge of additional collapse or even crash. It will be VERY telling to see how the Russell 2000 ends the day.

Besides the small cap stocks, Apple and Netflix have been pillars of relative strength of late. When stocks finally bottom and bounce, I would closely watch these two large caps for leadership.

On the sector front, none have been spared the carnage of the last month with energy being decimated the most, close to the point where they have performed so poorly, it’s actually good going forward. I remain positive on REITs, biotech, transports and semiconductors for now, but that should change with the heightened volatility from day to day and week to week.

I fully expect wild swings today and probably the rest of the week.

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BOOM! Now High Yield is Key

What a great day in the city on Wednesday! I knew I was okay when Metro North actually ran on time to start the day. I did two segments with the good folks at Yahoo Finance, one discussing the most overused word in investing, “bubble”, and the other on the current state of the bull market. As they are posted I will share the links.

I headed to the floor of the NYSE in the afternoon for a quick stint with Bill Griffeth on Closing Bell. Since the 1980s in the FNN days, I have always been a big fan of Bill’s and I really enjoy chatting with him. The floor was crazy busy and I could hardly move around. It wasn’t, however, from floor traders and professionals doing business. There all kinds of groups visiting and moving around.

Finally, Fox Business’ Making Money with Charles Payne was my final stop and I got to spend a full hour on the show with the other guests. That was special and I will post the various links shortly.

Stocks had a huge day on Wednesday, in both directions. After Tuesday’s drubbing, the decline continued yesterday morning before firming into lunch to get back to unchanged. Then the Fed released their minutes and the market took off like a rocket ship. Frankly, stocks were so stretched to the downside to begin with and were already firming into the news. Yellen & Co. just threw gallons of gas on a tiny little fire and the inferno ensued.

At the end of the day the major indices gained back what they lost on Tuesday plus a little bit. I would have liked the internals to be a little stronger, but you can’t have everything.

The big question now is, “Was that THE bottom or A bottom?”

The jury is out at this time, but for sure, the bulls have the ball now. Let’s see where they are at 4pm today. Let’s watch leadership emerge.

High yield bonds funds, one of my most important canaries, all closed down yesterday which is the norm on a day when stocks  take off during the afternoon from a decline. I would be shocked if funds like PHYDX, NNHIX, MWHYX and JAHYX do not show gains when their prices are posted tonight. If these funds are not up at least .20% or more, that will be very worrisome for the intermediate-term.

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Big Ben Pours Cold Water on Bulls

The stock market saw a very dramatic and emotional reversal today as fresh all time highs were seen in the morning followed by a vicious selling wave from the highs until 3:30. The hardest hit sectors all focused on dividends that would become less attractive if interest rates rose. Utilities, telecom, REITs and financials. Pundits were quick to compare today’s action to that seen at THE peak in 2007 and 2000, but I believe that is misplaced. While the price behavior may look similar for this one day, little else resembles 2007 and 2000.

At bull peaks like 2007 and 2000, we typically see the New York Stock Exchange Advance/Decline line diverge with price along with high yield bonds. Neither was seen. The same can be said of the Dow Jones Industrials and Transports. Additionally, we have almost no meaningful sector leadership warnings. I suppose there is a first for everything, but this would set a precedent for bull market peaks and I am not ready to drink that Kool-Aid yet although stocks could certainly fall 3-6% very easily here.

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