Headwinds Abound This Week

Almost all markets finished on a sour note last week and that spilled over to begin the new week. While I have written about stocks needing a short-term breather, I was surprised that treasury bonds could not get a lift as stocks weakened. In fact, both stocks and bonds peaked the same week, but bonds sold off more significantly, something that is unusual.

The major stock market indices certainly look like they want at least a little rally, but the bigger question is will that occur right here or perhaps after the Fed concludes their two day meeting on Wednesday at 2pm. So far, the bulls are trying to mount an attack. Investors are concerned that Yellen & Co. might strike the words “considerable period” from the statement, which would be interpreted as the Fed hiking rates sooner than the 6 months initially described by Ms. Yellen’s at her first foot in mouth chat, also known as her press conference.

Besides tomorrow’s FOMC announcement, the market has also been facing three distinct headwinds this week. First, on a calendar basis, this is a particularly weak time of year through the end of the month. Second, market sentiment into last week had become very bullish, which can signal that investors have much of their money already in the market. Historically though, sentiment impact beyond a few weeks usually requires a catalyst to get the snowball moving downhill.

Finally, the largest initial public offering of all time, Alibaba, comes to market this week. With current pricing indications, it looks like the company will raise roughly $22-24 billion. That money has to come from somewhere and it stands to reason that it’s likely coming from funds using some spare cash and selling current tech holdings.

The rest of the week is going to be action packed, but the bull market remains alive, albeit, a little wounded.

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Dow 18,000 Next as Twitter, Investors, Advisors and Media Root for Bears

Small Caps Play Catch Up in BIG Way

When we last left off, the major stock market indices were all playing nicely together except for the small cap Russell 2000 which had seen a full fledged 10% correction, but was beginning to bounce. The performance of that one index was a key ingredient to the bears’ negative stance on the market. At that time, here and on the blog, I dismissed the Russell’s warning and went so far as to call for all time highs before long.

On the first day of the new month and quarter, the Russell 2000 joined the S&P 500, S&P 400, Nasdaq 100 and Dow to score fresh all time highs. At the same time, the New York Stock Exchange Advance/Decline Line, which is a barometer of health on the NYSE also saw a new all time high along with many other sectors and indicators. This continues to be intermediate and long-term positive for the bull market.

More shorter-term, the market can best be described as grinding or creeping higher day after day. When you are on the correct side, there is nothing better. This kind of market has been seen many times since 2009 but rarely before that. The most common ending is a sharp and fast decline that wipes out a lot of gains in short order but does not end the bull market. At some point that scenario will become more likely.

The Market People Love to Hate

Remember, as I have now said for two years, this bull market may be old and wrinkly, but certainly not unhealthy or about to die. It continues to be the most unloved and disavowed bull market of my lifetime. Instead of friends asking me for the latest or greatest “hot” tip which I would expect at Dow 17,000, I am frequently pushed to opine as to when this all ends or when the big correction is coming.

And it’s not just individual investors. On a daily basis I speak with other advisors as well as the media. It really surprises me how many peers have been negative, are negative and will be negative. This is a market where people in my industry should be raising lots of money. Markets have been “easy”, meaning there has not been any significant downside since June 2012.

I think it’s very hard to run an investment management business being a perma-bear or holding on to the belief that although stocks have rallied, they remain in a secular (long-term) bear market that began in 2000 with the Dow at 11,750. That’s crazy in my humble opinion.

On the media side, they may have finally realized that I have a better face for radio than TV, but it certainly feels like they are not as interested in my bullish stance anymore now that the market has rallied. I have lost several opportunities lately because my opinion wasn’t bearish or I wouldn’t forecast some kind of doom (my word) on the horizon.

You can accuse the Fed of manipulation or supporting the market or anything you want. But the reality is that this has been one of the most powerful bull markets of all time. From my seat, as long as investors ask questions about the downside, advisors are bearish, the media only wants to sell negativity and my Twitter feed is full of bears, the bull market will live on.

How It Usually Ends

Yes, the market is 33 months from its last 10% correction and some surveys show complacency, but bull markets do not usually end with a whimper. There are typically many warning signs long before the bear comes out of its cave. Today, we have almost none. Additionally, the market historically sees a 10% correction where the end of the bull market is claimed by the masses, only to see yet another rally to new highs take shape. We haven’t even seen the correction yet. And before the 10% correction, there should be a modest 2-4% pullback.

Don’t get me wrong. Investors need to remain vigilant and active and on top of their holdings. Or hire someone like me to do it! (Shameless plug) Throwing caution to the wind and taking a “get me in at any price” mentality will likely end in ruin. Eventually, stocks will pullback, probably sooner than later, and finally correct 10% or more. But as I have been saying for years, any and all weakness remains a buying opportunity until proven otherwise. These kinds of markets are rare and should be fun. It’s too bad that so many can only see negativity.

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Bounce and Then Some! Two Possible Scenarios

In the middle of last week, I posted a piece about the potential for a very short-term rally, which you can see here, http://investfortomorrowblog.com/archives/1002. Stocks had come down very hard and very fast relative to what we have seen over the past year. I didn’t believe the ultimate low was seen, but the market could certainly bounce for a few days to a week.

It’s a week later now and boy did the market bounce! The NASDAQ 100 even made it to a new high for 2014, although the other four major indices I regularly discuss still have a ways to go. Market sentiment never got truly dire a week ago, just a bit pessimistic, and now it’s back to the bullish side of neutral.

While price has pretty much rallied in vertical fashion, market internals have been underwhelming, meaning that the foundation of the rally is shaky. The market is now in the zone where the rally is supposed to end, IF it’s going to end before new highs. See the chart of the S&P below with the two possible scenarios.

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