China Again

A few weeks ago, I published a piece about the Shanghai having further to fall. Chinese Market Collapse Not Over

Last night, Chinese stocks saw their largest decline since February 27, 2007, a day I vividly remember as I was running money for a hedge fund in Boston and about to leave for a week’s ski vacation in Utah to celebrate a belated 40th birthday with a bunch of friends. At that time, the prevailing sentiment was that the Asian Flu was cause a 15-20% stock market correction was taking hold in the U.S. I vehemently disagreed and argued for fresh all-time highs over the summer as major corrections typically don’t begin with such volatility and fanfare.

Today, we have another huge rout in China. Our market looks weaker than it did in February 2007, but I still don’t believe the bull market has ended just yet. It is, however, living on borrowed time and the next new high will have to be scrutinized very, very closely.

U.S. stocks are getting short-term oversold and a counter trend rally shouldn’t be far off. This should be a rally to sell into rather than buy, but we’ll analyze that if and when some strength develops. For now, keep an eye on the sector leaders in healthcare, biotech, housing, financials and consumer discretionary. If the major indices see accelerated selling, I would expect the leaders to have a quick and very sharp bout of strong selling that should result in another buying opportunity. On the other hand, it would be concerning if these sectors began to underperform.

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Short-Term Murkiness Continues

While I continue to be intermediate and long-term positive on the stock market, there remains a small cloud over the markets in the short-term. That usually means a pullback, which equals weakness to the tune of 3-7%. Market sentiment has become slightly less bullish, but not to the degree where I believe the next launch to all-time highs can begin.

Recent price action shows the S&P 500, S&P 400 and NASDAQ 100 poking to all-time highs and then being rejected by the bears. While that looks really ugly on a chart, historically, it usually just leads to some short-term weakness.

Additionally, the semiconductors have always been one of the better canaries in the coal mine for the tech sector and the overall stock market. Of late, we have seen all-time highs in the NASDAQ, finally eclipsing the Dotcom bubble nosebleed levels from 2000, but the semis are pinned roughly 100% away from the same level. That’s not troubling to me and won’t get repaired for years and years and years.

The short-term concern, which has been written about by data miners all over the Internet, is that the NASDAQ 100 has been rallying with the semis closing lower. Some days, we have seen the semis down more than 1% with the NASDAQ 100 higher and at yearly highs. Historically, that’s not healthy action and usually leads to a two to four week period of digestion or consolidation or sometimes outright weakness. However, I continue to believe that all dips and bouts of weakness are buying opportunities until proven otherwise. The climate for the bull market ending is simply not there.

This is the time to make a little market shopping list in case there is a small sale in May.

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Stocks Looking a Little Tired

The bull market remains alive and reasonably healthy. I am still long-term bullish. I am still fairly bullish over the intermediate-term.

With that out of the way, stocks are looking a little weary at all time highs, which should not be totally unexpected. The market has powered higher all month and started to struggle a bit of late. At least for now, I think risk equals reward or perhaps even slightly outweighs reward.

To refresh the rally, stocks can either decline over the coming few weeks or enter a sideways trading range for a few weeks to a month. Should the market continue higher here without participation remaining strong, I would have more intermediate-term concerns. For now, a mild, orderly and routine 2-5% pullback would be very welcome.

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