Q2 Begins Where Q1 Left Off

I hope you all enjoyed April Fool’s Day. I know I definitely did and the emails, calls and texts continue rolling in. Even the media called for an interview about my new gig! 🙂

The first quarter and the month of March rolled in like a bear and both rolled out like a bear, meaning that the bears had the upper hand at least in the short-term. During the middle of the quarter, the bulls were in firm control. The market certainly seems like it has transitioned into a trading range after February’s big surge. That’s not a bad thing.

When markets get overbought and sentiment is frothy, risk substantially increases. That can be worked off through a period of sideways movement in a range which frustrates both the bulls and bears, or it can be overcome by corrective action with a sharp pullback in prices. The former is what you most want to see during a healthy bull market.

While my intermediate and long-term views remain completely unchanged, the short-term is a bit murkier. The stock market doesn’t seem like it’s ready to explode higher by thousands of points just yet. That day is still coming, but I don’t think it’s right here. Rather, it looks like the trading range will continue and perhaps expand to the downside until we build up enough pessimism to launch another assault higher.

In the interim, it pays to watch sector leadership for future clues. There have been lots of good things happening, especially with the consumer as discretionary, retail and homebuilders have all led with biotech and healthcare. The latter two, which I remain long for full disclosure, went too far too fast and are now correcting sharply. On the laggard side, energy, which we also remain long in smaller size, has  been percolating nicely and seems poised to see a small breakout this month. Remember, every time oil has declined at least 50%, it rallied 50% from the low over the ensuing year. Something to continue to keep in the back of your mind.

In the very short-term, the government will release the March employment report tomorrow, Good Friday, when the markets are closed. Why they do this I have no idea. It makes little sense. The bond market and stock index futures market open for a brief period to disseminate the news and then close until Monday. The stock market remains closed. Rob Hanna from Quantifiableedges did some top notch research and found that when this release happens on Good Friday, Monday’s trading has outsized volatility. See his excellent work HERE

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The Bounce The Bounce The Bounce

In the spirit of Herve Villechaize telling Ricardo Montelban on Fantasy Island, “Da Plane Da Plane Da Plane”, here is the bounce, the bounce, the bounce.

After writing about the market bouncing and what was “supposed” to happen in several posts, stocks cooperated on Friday with what has been described as a “huge rally”. I am always keenly aware of what questions I am asked by the average investor as well as the comments. Over the weekend, folks I spoke with were in more of a celebratory mood,  believing the pullback is over and all time highs are in store this month.

I hope to have a Street$marts out later today, but in short, the evidence does not suggest an immediate return to all time highs on the way to Dow 18,000, at least not yet. I am watching a few different scenarios which I will share shortly after I am able to eliminate one.

With the anticipated bounce here, it’s important to watch how far price rallies and what the market internals suggest. High yield bonds were hit very hard and if they do not bounce very hard, that will indicate a more complex and deeper pullback than just 5%. Also, with so many sectors seeing significant damage, this bounce is vital for the intermediate-term trend.

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Speaking Out of Both Sides of my Mouth

It was such a pleasure and privilege to spend an hour on Fox Business’ Opening Bell with Liz Claman, one of my all time favorite anchors. She was hysterical off camera and we had a lot of fun with the various segments which I will publish here over the next week. The whole Fox Business crew was incredibly nice as they always are. I can’t wait to do it again, hopefully next month.

The first topic we covered was Market Flashing Warning Signs. This is not a new topic for blog readers, but it’s one that I imagine will be front and center for some time. As supported by fierce sector rotation, including taking the momentum groups out and shooting them, the stock market is transitioning into the next and final stage of the bull market. At this point it looks like the final top isn’t until 2015, but I will take the information as it is presented.

Although stocks have basically gone nowhere since late February and really all year, we have seen somewhat of a schizophrenic market with the Dow up triple digits one day and down triple digits the next. While that may seem frustrating on the surface, the bulls say it is a sign of underlying strength that after such a powerful advance, the bears cannot make any meaningful headway. The bears on the other hand, say that the stock market is distributing stock from strong hands to weak hands as a major peak is developing. In fact, they can both be correct depending on one’s time frame.

It is definitely bullish in the short-term that stocks are holding up so well with all of the geopolitical nonsense and Fed tapering. At the same time, trading ranges like we are seeing now, often resolve themselves with a final blast higher to a peak that leads to corrective behavior over the intermediate-term. That’s putting the cart before the horse as we have not yet seen the blast off by any of the major indices.

For now, we need to watch the indices as they attempt to breakout or down from the range. I am absolutely loving the action in emerging markets, not only because our EM strategy is finally killing it after a few challenging years, but also because it was one of my trades of the year, long EEM and short IWM. It’s also a positive for the bull market.

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Markets Stabilized… For Now

Here is the segment I did with Fox Business. I think Adam Shapiro was trying to interview me as a bull, but he ended up calling me a bear. Truth is, I am an opportunist right here and willing to play both sides of the market for a while. I think big rallies can be sold and short-term panics can be bought.

http://video.foxbusiness.com/v/2506211035001/markets-stabilizedfor-now/

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Market Getting Tired

Here is Monday’s segment we did on CNBC which remains our position today.

http://video.cnbc.com/gallery/?video=3000103231&play=1

Stocks have been on a nice little run this week with a dearth of news out of Europe and generally better than expected earnings from bellwether companies.  Keep in mind that the earnings “beats” are after Wall Street cut estimates over the past month and the general sentiment regarding earnings had become so negative that it should not be a surprise to see them bettered.  This is a common game each quarter with companies doing the opposite of what Wall Street does in the weeks leading up to the reports.

The market is beginning to show some signs of tiring as it trades in the upper half of the range from the April peak and June low.  The next few sessions should certainly give us clues what lies ahead the rest of July and which groups offer the best opportunity and the biggest risk.

On a personal note, happy 9th birthday to my favorite girl in the world!  I am not liking the fact that she is growing up so quickly!!

Have a great weekend!

Paul

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What would Thomas Jefferson Say to the Architects?

The latest Street$marts is out, “What would Thomas Jefferson Say to the Architects?” http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20120625.pdf

Topics in this issue include a little known, but important economic indicator, the latest pullback in stocks and where gold is headed.

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