Getting Anywhere?

Early Monday I wrote about the market setting up for a bounce. And that was certainly the case on Monday. Tuesday, however, was a different story as stocks gave back all of Monday’s gains and then some. Wednesday’s solid action, once again, puts the stock market on bounce alert.

I keep using the word “bounce” instead of rally because it looks like there needs to be some more work on the downside before the current pullback wraps up. With each successive red day, the markets seem to be rebuilding the wall of worry necessary to begin the next meaningful rally. The problem is that this does not happen overnight.

Stocks are “supposed” to make some upside headway right here and now. Treasury bonds are “supposed” to pullback right here and now. Gold is “supposed” to rally right here and now and the dollar is “supposed” to decline right here and now. That’s the short-term scenario, some of which I positioned clients for while some isn’t worth the risk.

I am still keenly watching which sectors lead the bounce and which cannot get off the carpet. Right now, very few look enticing for more than a quick trade.

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Monday is Bounce Day

After some normal volatility on Friday, the bulls held their own and are positioned to see some green as the trading week opens. There are two scenarios I am watching here.

The first is the lows hit on Friday. If the major indices close below those levels sooner than later, we should see some trap door, elevator shaft, immediate selling. That’s the more bearish path. Scenario number two has the market bouncing for a few days and then rolling over to revisit the lows from Friday where the bottom is quickly formed.

As I mentioned last week, the quality of the bounce is so important right now. Poor participation or sector leadership may well have more intermediate-term consequences, but if the bulls can make an internal stand, the stage can be set for Dow 17,500.

Just like with the stock market, treasuries are at an important juncture as well. They are positioned to see more upside, but that needs to be much sooner than later to stave off a multi-week pullback.

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Watching the Bounce

Thursday’s shellacking in the stock market was a bit unusual given how close in time stocks were to all time highs. As I mentioned in Street$marts, my screen was a complete sea of red except for the instruments that go up when stocks go down. As I have over said over and over and over, based on history, the bull market remains alive.

In the short-term, it looks like the best case for the bulls would be a few days of bounce to the upside followed by another decline to revisit this morning’s low or briefly exceed it this month. Then another run to new highs could ensure.

I would become a bit more concerned if stocks began to unravel this afternoon or rallied mildly today followed by an ugly day on Monday. In any case, it’s important to watch which sectors bounce the most or withstand selling pressure the best. So far, I am not heartened to see utilities and staples leading today.

On the bond front, it’s time for treasury bonds to make a stand. They have pulled back for a few days and they need to stabilize here. High yield (junk) bonds have been decimated lately, wiping out the entire gain since January. This is a serious canary in the coal mine if it’s not rectified this year.

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2nd Fed Trend a Success… Pullback is Here

Yesterday, I wrote about the Fed statement day trends. History suggested, a pre announcement market of +-0.50% which was spot on with the day closing green; it closed neutral. Today, the post Fed model called for lower prices which is spot on as well. This is all in the context of the pullback I forecast two days ago.

Today’s action so far is nasty with my entire screen red except for the items that go up during a down market. Days like this bring the market closer to the eventual bottom, but it’s not there yet. Patience…

What is a little different right now is that very few sectors look appealing into the weakness, something that hasn’t been the case since 2011. Additionally, the treasury bond market, which I have been bullish on all year is flirting with the unchanged level when it should be sharply higher.

This will all sort out sooner than although I am very, very glad that we raised so much cash just a few days ago!

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Beginning to Feel Like a Pullback

As you know, I have been uber bullish on stocks here for a long while. It’s time to temporarily temper that enthusiasm for the market to repair a bit of short-term damage.

I DO NOT BELIEVE THE BULL MARKET IS OVER!

Sorry to yell, but I know that is going to be the first question I get. From my seat the bull market remains reasonably healthy, albeit old and wrinkly, and should live on into 2015 with much higher prices seen in the Dow. It’s probably time to do a full canaries in the coal mine update to see where everything stands. Hopefully, I can get to that later in the week.

For now, it’s time to play short-term defense, raise cash and add some hedges. A better buying opportunity lies ahead and we should not even see a 10%+ correction here, but if we do, we are prepared.

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Something for the Bears to Hang their Hats on

The Dow hit yet another all time high today and there hasn’t been a 10%+ correction in 35 months. When stocks opened sharply lower on July 10th, the bears came roaring out of hibernation calling for everything from a 10% correction to the end of the bull market. It was a sea of ugly red prices on my screen due to Portuguese bank worries, and weak China data. That decline didn’t even last a full day. Nor did the decline based on the -2.9% GDP print or Yellen’s previous press conference or a host of other headlines that were quickly absorbed.

I just cannot understand why more people are not excited about this market. It has truly been a bull market for the ages. The masses just keep hating and disavowing and predicting doom and gloom while the rest of us are smiling ear to ear for as long as we can. Bull markets do not end overnight and while this one continues to be old and wrinkly, it is generally healthy.

Because I am running out of ways to celebrate after all these years, I thought I would spend some time exposing some of small cracks in the pavement.

What can the bears hang their hats on?

For now, the S&P 400 and Russell 2000 are seriously lagging the Dow, S&P and Nasdaq. High yield bonds, a major canary in the coal mine, have been lagging for almost a month. The NYSE advance/decline line has not confirmed the recent all time highs and has been lagging all month.

Is that enough to end the bull market? Hardly, but it could certainly spell market pullback at any given time. Have we had these types of warnings before? Yes, many, many times during this bull market with most common outcome being a short-term pullback.

Weakness remains a buying opportunity and the Dow should continue to power higher to 17,500, 18,000 and perhaps even higher before all is said and done.

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Bears Out of Hibernation

Stocks open the day with the largest down opening in some time due to Portuguese bank problems, slowing Eurozone concerns and less than stellar data out of China. As hard to believe as it is, I have already seen a few articles calling this the beginning of a new bear market. Geez, how many time have we heard that over the past 64 months!

What we are seeing now is a routine, healthy and normal 3-7% pullback. Short-term downside risk looks to be above 16,200. After the market bottoms, the quality of the next rally to all time highs will decide whether there is a 10%+ correction later this quarter or not. Remember, at the peak only the other day, there were almost none of the usual warning signs seen to indicate any major decline let alone the bull market ending.

For months and months and quarters and quarters, investors have been waiting, hoping and even craving for a decline to get invested. Now that it’s here, I doubt many of them will even take advantage of the temporary sale in stock prices. They will rationalize why they shouldn’t buy with all of the bad news out there, only to regret it later and buy at higher prices.

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Bull Market’s Peak

The stock market hits the new week with a tiny headwind from post holiday seasonality. Last Thursday’s solid employment report finally got at least some bulls to celebrate, but it’s still very muted. At Dow 17,000 after a 10,000 point rally in the market, you would think that the majority would be in a good mood, even giddy. But that’s just not the case.

Before the bull market ends, history suggests a 10%+ correction, which we haven’t seen yet. And before the 10%+ correction, we are supposed to see a 4-6% pullback, which we haven’t seen. Bull markets typically do not peak out of nowhere and certainly not with the solid foundation this one still has.

I continue to scratch my head when I speak with, watch or listen to all this negative market chatter. At some point, probably sooner than later, we will have some weakness in stocks. Maybe that’s 500 points or 1000 points or even 1500 points. But the bull market should not end out of the blue without warning.

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Much Ado About Nothing from Yellen & Fed Today

My how time flies…

It’s Fed decision day again with Janet Yellen set to announce another $10 billion cut from bond purchases, keeping the FOMC on pace to wind down QE Unlimited later this year. After the 2pm announcement, Ms. Yellen will head over to the always entertaining (NOT) press conference.

One thing I am sure of is that the Fed chair will not commit another rookie, foot in mouth, Joe Biden esque’ gaffe by committing to a specific timeline for interest rate hikes. Everyone knows that rates hikes are coming next year although I continue to disagree 100% as I have since Bernanke first floated the QE taper trial balloon in May 2013.

Until the Fed’s statement is released, we can expect a very quiet stock market, +-0.50%, as we historically see. After 2pm, it’s the norm to see some fireworks in both directions although the trend says that stocks should finish in the black on the day.

For a change, I am more interested in how bonds and gold react to the FOMC announcement than stocks. The stock market remains on solid footing and the bull market should continue into 2015. Bonds and gold are in a different position, especially in the short-term…

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Short-Term Pullback Continues

Stocks head in to the new week with the bears in control over the very short-term. That’s it. Not the intermediate-term and certainly not the long-term. The major indices peaked last Monday and look like they are digesting the recent gains in very orderly fashion. More all time highs should follow when this pullback concludes.

The next rally is the one I would pay particularly close attention to, especially in the small caps. The Russell 2000 is SUPPOSED to hit fresh highs. Should it fail when the others do, it would then open the possibility for more a more substantial decline, perhaps in the 5-9%. But that’s getting way ahead of ourselves.

For now, let’s see which sectors decline the most and entice buyers first. I also want to see how one of our biggest positions in long-term US treasuries performs. They are poised to see new highs for 2014 over the coming weeks as I have written about ad nauseum here. The trade from late 2013 is certainly long in the tooth by my standards and sentiment is beginning to bare that out.

Finally, it’s FOMC week and I will have more to say on that topic tomorrow and Wednesday.

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