Two Vital Canaries

After Tuesday’s “big” decline, there was some short-term damage done to most of the major indices. Rather than return immediately to new highs, I think we need a period to repair, which is not the worst thing in the world. A likely scenario is to see movement in both directions, perhaps into April, before the next leg higher begins.

On the key sector front, semis and discretionary escaped most of the damage and should be poised to lead again. Banks and transports are a bit more wounded, but by no means fatal. While software and homebuilders remain strong, telecom and retail are hurting. Industrials and materials are still okay. Interestingly, the defensive utilities and staples are quietly very solid. I am not going to guess on healthcare and biotech until we see how they react to the vote. Remember, it’s not the news but how they react to it.

Let’s turn to my favorite two canaries, high yield bonds and the New York Stock Exchange Advance/Decline Line along with the S&P 500 so you can see if we have any divergent behavior.

High yield (junk) bonds are below and you can see that they just recently peaked in early March and have been in a pullback all month, down roughly 2% since the highs.

The NYSE A/D Line is next and it has almost the exact same behavior as junk bonds with the early March peak and decline. The only difference is that the little bout of weakness this week has not been as noticeable. In other words, this indicator looks a little stronger.

Finally, the S&P 500 is below and just like the two canaries above, it peaked in early March and has been pulling back ever since. The index has seen its lowest point this week which creates a short-term positive indication with the canaries showing a little more internal strength.

The takeaway from this confirms what I have said, am saying, and will continue to say. As long as the two canaries peak coincidentally with the S&P 500 and the other major indices, the bull market will live on. If and when they begin to diverge, the clock will start on the potential end of the bull market, but there will absolutely need to be more several more canaries dying before the bull market does. It’s just not that easy to kill a bull.

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Teeth of the Pullback

As you know, for the past few months I have written about this overdue pullback to refresh the stock market. While I have written much about it, I am certainly not taking credit for getting the timing correct as I started discussing it many weeks before it began. Until Tuesday, the pullback, which began three weeks ago, has been about a shallow and mellow decline that has just gone sideways in consolidation mode.

Tuesday was the ugliest day of 2017 for the bulls. If you look at charts, the day printed thousands of downright awful days. The talk in the financial media was all about the “Trump Rally” being over and a large correction possibly unfolding. Let’s be real here. Stocks finally declined 1% for the first time in four months. 1% should be a normal daily move, not a cause for the “Special Report”.

Let’s get one thing out of the way. I absolutely do not believe the bull market ended or is about to end. This is a normal, healthy and expected pullback that just turned from a mostly shallow and sideways move to a price decline. Weakness should be bought. Buy the dip.

Price-wise, all of the major stock market indices got in gear to the downside after the NASDAQ scored fresh new highs on Tuesday morning with CNBC exclaiming that stocks were “soaring”. They weren’t. The downside could be another 2-3% lower, but I wouldn’t hold my breath for that. After the largest down days in months, stocks usually trade in both directions over the next day or two and then bounce over the next week or so. Lots of short-term indicators are in or approaching oversold territory.

As I wrap this up, I see the media dubbing this pullback, the “Trump Dump”. It is no more the president’s fault right now than it was his credit for the post-election rally. The rally was in response to a sweep by the GOP which would set the stage for the strongest pro-growth agenda since at least Bush II’s first term, if not back to the mid 1990s. In other words, it was Paul Ryan’s rally more than any other single person.

Speaker Ryan intends on holding a vote Thursday night for the ObamaCare replacement bill, however you want to refer to it. TrumpCare? RyanCare? Who cares? Some say the markets are concerned that if this bill fails, the corporate tax cuts won’t happen this year and then the individual cuts won’t happen and more regulations won’t be removed so quickly. I think that’s all a load of nonsense. A week after the bill fails, if it does, the world will move on to the next bill or another topic. If it’s one thing we learned about Donald Trump, it’s that he pivots from topic to topic as a dizzying pace, especially when he loses.

I am headed to the city tomorrow, but I will try to write a leadership update on the train which looks at the sectors and my favorite two canaries. Speaking of canaries, it’s the perfect time to do a full Canaries in the Coal Mine update and I will get working on that shortly.

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Going Nowhere

Well, at least last Wednesday was fun if you were a bull! The Fed raised rates by 1/4% as expected and stocks took off on the premise that there would only be two more interest rate hikes the rest of 2017. That hurt the banks and the economically sensitive sectors and gave a strong push to the defensive sectors. I remain skeptical of only two more hikes and stand by my forecast that four hikes are in the cards this year and the risk is to the upside.

Before the FOMC decision, I offered the model for the day which called for a plus or minus .50% move until 2pm and then volatility with a green close. One of our FOMC trends indicated a 75%+ likelihood that stocks would close higher. With March option expiration also last week and that being a separate and strong upside bias, the market had all of the ingredients for a rally.

However, as is often the case with outsized FOMC-driven moves, those gains or losses are usually reclaimed in the short-term. Through Friday, the S&P 500 has given back all of Wednesday’s gains. In short, the stock market’s pullback continues, however the weakness seems to be more about time than price. The major indices are moving sideways or consolidating instead of declining in price with the exception of the NASDAQ 100 which continues to power ahead, albeit at a slower pace. Both pullback scenarios serve the same purpose and should eventually lead to an upside resolution once the pullback ends, likely by early Q2.

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Pullback Remains in Place. Junk May Hold Key.

The short-term pullback I have seemingly written about for weeks and weeks remains in place although I am certainly not taking credit for calling it in a timely fashion. The Dow, S&P 500 and NASDAQ 100 have all pulled back constructively while the S&P 400 and Russell 2000 are uglier. The three stronger indices are just about to kiss their 21 day moving averages, while their weak cousins knifed right through the 21 as well as their 50 day moving averages. While the 3-5% pullback I keep talking about is here, the average stock is now off roughly 10% which is masked by the strength in the major indices.

Turning to the four key sectors, banks, semis and discretionary are holding up very well and only a solid two day rally or so from new highs. Transports, however, are under more pressure although certainly not bull marketing ending behavior.

Both high yield bonds and the NYSE A/D Line saw all-time highs in early March, but have since pulled back more significantly which is something I discussed recently. The junk bond decline definitely has my attention and should be watched very closely. The sector began to lag last week and is now down sharply this week.

The A/D Line, while weak, is still behaving constructively.

Stocks are finally pulling back and giving all those folks who sold last February, post-BREXIT and at the election a time to buy. I doubt they will until the train leaves the station again. The bull market isn’t over.

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Bulls Remain Large and in Charge Despite Pullback

We had a lot of negative news between Friday’s market close and Monday’s open, almost all on the geopolitical front with the vast majority surrounding President Trump. Of course, Deutsche Bank finally agreeing with the markets that they needed to raise capital was icing on the cake. In a weak market, that backdrop would have yielded a 1-2% lower opening on Monday. In a strong market, we’re talking about .25-.50% lower.

Stocks are due and have been due for a pullback or at least a pause to refresh. That looks like what’s happening right now. With so many investors on the outside looking in, any weakness should be mild and followed by further strength until more serious cracks in the pavement develop. I found it interesting that CNBC’s Fast Money midday report was all about the Trump rally ending. I think those pundits will regret those words.

As I watch the major indices and sectors come off their morning lows, I can’t help but notice that high yield bonds are not following suit and lagging. One day or a few days means absolutely nothing, however, should stocks rally with junk bonds falling, I would become more concerned.

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Volatility Genie Trying to Pop Out

After what has been celebrated as this huge, epic rally on Wednesday, the major stock market indices gave back all of their post 9:30am gains and then some on Thursday. I mentioned the other day that volatility compression leads to volatility expansion and vice versa. When the volatility Genie finally gets out of the bottle, we will probably see a sustained increase. I think we’re close to that now. Please remember, volatility does not always mean decline. It means wider price movement in both directions.

Right now, the important takeaways from the week are that small and mid caps look the most vulnerable, relatively speaking. All of the indices remain overbought and stretched but I do not see a large scale decline unfolding. Emerging markets and commodities are under pressure with gold clearly failing at its 200 day moving average. I wrote about oil peaking the other day and the decline may be starting. High yield bonds and the NYSE Advance/Decline Line continue to act well which should buffer the downside. Three out of four key sectors scored fresh highs this with semis very close although banks saw a nasty reversal from new highs on Thursday.

Altogether, this behavior remains very typical of bull markets. Weakness should be bought.

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Sector Leadership Remains Very Strong

This is going to be a quick update as I am standing at the gate in Hartford waiting for my delayed flight to board. It’s never a good sign when early morning flights are late. I am heading down to the east coast of Florida for a quick trip to visit clients and maybe even hit a few golf balls in between meetings if my back holds up.

Let’s get the theme out of the way early. The short-term still looks overbought and extended, something I continue to say, however the intermediate and long-term remains strong. The GOP, Trump, Paul Ryan inspired rally is not over! Just remember that overbought/oversold and extended can always become more so in the strongest markets. Buying weakness is the correct strategy as I have discussed for a while, until proven otherwise. Looking at the S&P 500, a pullback to the 2310-2315 level seems the most logical.

While all of the major indices have had glorious runs, the NASDAQ 100 has been the strongest and most extended this quarter. This was the index I spotlighted during the first week of 2017 as one that had the best potential to start the new year. Now it has the greatest risk of underperformance. As I look for other index opportunities, Europe looks the most appealing as a laggard play.

Turning to the four key sectors, while they are all leading and look fine, semis have rallied the most and are a bit stretched here, followed by consumer discretionary. Banks appear to be consolidating again before another move higher and the transports bring up the rear, but are by no means behaving poorly.

Tomorrow, I will discuss the divergence in crude oil and the energy stocks. I tried loading the charts through the plane’s WiFi, but that’s just not happening as I finish this on board a very bumpy flight. Longtime readers know how much I hate turbulence and how it seems to follow me on the road. At least I will be in sunny and warm Florida for a few days with a bevy of good restaurants lined up.

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Short-Term Iffy But Long-Term Remains Strong

Following up from Friday’s post, stocks remain overbought and certainly stretched to the upside although the same can certainly be said all month. They are much in need of a break or at least a quick pause to refresh. However, sometimes strong momentum overpowers everything as we have seen from time to time. I closed last week by saying that the bull market is absolutely not over in my opinion. That prevented the usual emails.

Look no further than two of my favorite long-term indicators, the NYSE Advance/Decline Line and high yield bonds. The NYSE A/D Line just scored a fresh all-time high last week. I can’t tell you how many times people have questioned me on its value, yet it’s been one of the strongest advocates for the bull market since 2009. The rally from the pre-election low has been historic and the rising tide has lifted all ships. The bull market ain’t over.

Junk bonds are below and as you know, they are among my favorite canaries in the coal mine. Bull markets typically don’t end with high yield bonds making new highs as they have been and are right now.

I have said this for years and years, and I will say it again. While this is no longer the most hated and disavowed bull market of all-time, buying weakness remains the strategy until proven otherwise. Those waiting for the perfect pullback to buy will either freeze when it comes or it won’t be the pullback to buy.

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Trump Top Ticking Stock Market?

As I write the next issue of Street$marts, there is a lot of Donald Trump included. Not so much from a political standpoint, but more how he is impacting the stock market and economy. It’s really been amazing that every single meeting I have with clients and prospects, the Trump question is the first one asked.

As you know, when it comes to investing, I have a strong contrarian side to me. As the late Joe Granville once said, “if it’s obvious, it’s obviously wrong”. No one can argue that stocks have been on an historic run. For almost a month, study after study has pointed to a pullback, but one has simply not materialized. That’s called strong momentum or a “creeper” market, one that just keeps creeping higher day after day.

Until today, our models remained green with all systems go. That has changed.

The higher stocks have climbed, the more people have seemed to hop on board, something I have discussed for years on CNBC and Fox Business. I often joked at Dow 12,000, 14,000, 16,000 and 18,000 that we should watch Dow 20,000 for signs of investors finally buying. That turned out not to be such a joke.

Anyway, presidents typically do not comment or answer questions about the stock market. That’s an unwritten rule. However, President Trump seems to be blazing a new trail. Yesterday, he sent the Tweet below.

That Tweet by itself is shocking, but remember, this comes from a man who sold all of his stocks last June and then beat up the stock market during the campaign. Assuming he sold his stocks at roughly Dow 17,700, he is now touting the stock market at Dow 20,600. The contrarian in me says to be a little worried. Couple that with our sentiment model which was coupled with our market model and you  have the ingredients for some weakness.

I absolutely do not believe the bull market is over.

That will stop the usual emails. I am somewhat concerned about the next 4-7% move. It may be time to play some defense and take some very nice profits.

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Sector Leadership Immunizes Stock Market from Bear Market

On Friday, I wrote about the Russell 2000 and what a potential breakout could mean for the stock market. At the open today, this index hit a fresh all-time high. Before breaking out the balloons and party streamers, let’s see if it can close at new highs and not give back too much over the coming days. With the Dow closing above 20,000 for five straight days I will have a new target very shortly that looks to be several thousand points higher.

Turning to key sector leadership, it’s continues to be strong and constructive. Semis have paused of late, but continue to trade right up against new highs. While extended, the rally should still have legs.

Banks, which have traded in a tight range since early December, are trying to breakout to the upside right now. Only a failure here and break to the downside would cause me to temper my intermediate-term enthusiasm.

Like the banks, transports have also been in a trading range since early December and are trying to breakout higher  now. That is certainly bullish from an economic standpoint.

Finally, consumer discretionary, which I did not think would quickly reassert itself heading into 2017, has done just that. It now stands at all-time highs.

It’s really hard for the bears to argue that a bear market or even 10%+ correction is close at hand. The major stock market indices are back in gear to the upside as well as the four key sectors. Of course, this strength never, ever precludes a routine, normal and healthy 2-5% pullback. In this case, as I have said for many years, weakness is a buying opportunity.

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