Bulls Drive Ahead But More Stocks Down

The bulls did a nice job on Monday and Tuesday after laying an egg during Thanksgiving week. I don’t think Wednesday will be quite as easy during the afternoon. While the major stock market indices scored gains on Tuesday, there were almost 700 more stocks going down than up. That’s not exactly the pillar of strength which leads to immediate gains. Frankly, it’s a little disappointing.

The vast majority of our work turned positive at the end of last week so my scenarios will continue to have a bullish outcome. As I mentioned the other day and will continue to state, the worst case downside looks to be just under Dow 24,000 while the upside should be around 27,000. I will take that risk/reward ratio every single day.

Since the bottom last week, the lagging and pummeled NASDAQ 100 has been the index leader which is what normally happens in the embryonic stages of a rally. Sooner than later, the real leadership will emerge which very well may be the NASDAQ 100, however it’s too soon to tell. I am also not reading too much into sector leadership just yet nor the fact that high yield bonds look downright stinky.

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The Makings of the Bottom

Coming back from being out of the office for over a week is never easy although I received a few emails doubting I was actually away since I sent so many updates last week. It’s not that hard when your kids like to sleep in and you don’t. I got a lot done before any of them, including my wife, starting stirring in the morning.

Stocks came back from the Thanksgiving feast with the bulls firmly in charge early on. This is very unusual behavior as we would normally see strength last week and some give back today. When I ran my numbers and models over the weekend, I saw almost across the board strength and improvement in the face of lower prices last week. That may seem a bit counterintuitive. The stock market went down but my research became more positive. That’s exactly what happened. Prices went lower, but the internals of the market actually improved.

Look at the Dow with the Volatility Index (VIX) beneath it. The VIX spiked to its highest level in early October but has made a series of lower spikes, showing less downside momentum and ripe for a turn in the Dow.

Those conclusions don’t say anything about the next day or possibly week, but it does further confirm that the next significant move should higher as I have been stating for a few weeks. I think the risk/reward is strongly skewed to the upside by a factor of at least 3:1. Looking at the Dow, sure, prices could tick just below 24,000 or 2% lower, worst case. On the upside nothing has changed. Dow 27,000 should be seen in Q1 of 2019. That’s a 5:1 spread. Not bad if I am right.

Volatility is going to remain. Lots of repair work still needs to be done. The incredibly strong seasonals that everyone was quoting last month have fallen flat on their face. Investors have become fairly¬† negative. The news flow isn’t good. Between the Fed, Europe and tariffs, there much to worry about. All the ingredients for a stock market bottom are here.

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What Happened to the “Easy” Week?!?!

I hope you had a meaningful and terrific Thanksgiving! I cannot believe the amount of food I consumed although without the traditional bottles of wine, I guess there was a lot more room. Having been out of town since last Thursday, I am looking forward to getting home today, seeing my pets and sleeping in my own bed.

This week was supposed to see a mild drift higher, especially after Monday. You know, it was one of those “easy” weeks where you sit back, do nothing and watch your portfolio rise. Stocks “always” rise during Thanksgiving week. It’s those strong seasonal tailwinds. Well, someone forgot to inform the bears who have been out in force selling the entire week with the exception of Wednesday morning. I know I didn’t expect to see this kind of damage this week. I thought the bears would stay at bay and allow a little holiday rally before the possible resumption and completion of the correction next week or the week after. I hate being caught off guard.

Today is one of those half days for the stock market. We sometimes get them around July 4th and Christmas. The industry wants to be closed but the powers that be on the exchanges don’t want to lose coveted business to Europe. Hence the half day. It’s also a day where liquidity is very light, making it much easier to push stocks around. The day after Thanksgiving is also typically one of those “easy” days where stocks “always” rise. That doesn’t appear to be the case today, at least at the open, as the market looks to open down roughly 3/4%. With so many investors taking the day off, I wouldn’t be shocked if the bears exhaust themselves early in the day and the bulls can move stocks from there.

China was bludgeoned yet again last night over the ongoing tariff war. This is one giant game of chicken between Trump and Jinping with both countries losing, but China more so than the U.S., so far. There is no way the Chinese are going to stand idly by and watch their stock market fall 50% without taking action, either by coming to an agreement or retaliating in the currency market and/or geopolitical arena.

Don’t forget the chart below which I keep posting. Yes. I am still looking for Dow 27,000 sooner than later. The pink line is the only scenario I am considering right now, which I know can be a dangerous assumption. I am sure I will be able to add another over the coming weeks unless stocks just collapse from here which would render my scenario as embarrassingly wrong.

One closing comment of interest which I will expand on next week when I am back in the office. For all the blame and publicity, long-term interest rates are now making 9 week lows. CLEARLY, that’s not what’s bothering stocks.

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Bears Maul Seasonal Tailwinds

Two weeks ago in Battle Lines Drawn, I showed four horizontal blue lines which I thought would dictate market behavior for a while. There wasn’t anything secret or proprietary about them, just four price areas that seemed to garnering a lot of attention. When the masses focus on certain prices, the market will usually do its best to exceed them and make the most people look like fools. In this case, soon after stocks exceeded the closest blue line, they ran straight to the next and sharply reversed lower.

Having breached the next blue line on the downside, the S&P 500 is left with the two most prominent price areas shown below, still in blue. Again, nothing shown below that everyone and their dog couldn’t make out. In other words, we have a well defined trading range, albeit a fairly volatile one. The S&P 400 and Russell 2000 look similar, but the NASDAQ 100 is clearly weaker, scoring a new low on Tuesday as you can see in the second chart.

Although stocks remain very volatile with the path of least resistance being down right now, one thing has been cleared up this week. I am able to obviously remove one of the two most likely scenarios I offered last week in THE Bottom Right Now or Soon. The light blue scenario below is no longer valid and we are left with the path in pink. That is, IF I am correct.

When I offer forecasts and scenarios, I always, always, always receive emails asking me “what if you are wrong”. Well friends, that is always a possibility. 30 years doing this, I have been wrong before and I will be wrong again. Those are facts. However, I think my track record speaks for itself. When I don’t have strong conviction, I don’t have an issue stating that. When I pound the table like I did after the Q1 correction that stocks were not in a bear market and heading back to all-time highs, I go all in. Likewise, in late September when I kept on the theme of a mid to upper single digit decline in October, I did not waver. Making as many forecasts as I do, I will be wrong and sometimes in grand fashion.

In today’s market, I see this decline in its late stages with perhaps some more downside and high volatility before the rally to 27,000 begins. Yes. As I have mentioned for weeks and months, I remain firm that Dow 27,000 is next, probably in Q1 of 2019. If I am wrong and stocks don’t find a low and continue lower, well, I will reassess at that time. In the markets, I always try to ask myself how I will be wrong. In other words, what’s going to tell me that I fell on my sword.

Finally, in the very short-term as I have written about this week here and here, this week’s seasonal tailwind has been blown over by the big bad bears, something I did not expect to happen. I had thought that stocks would add to last week’s late reversal and then perhaps roll over to the downside for the final time next week. I don’t get the sense that stocks are going right up from here. They still need some more foundation building and maybe even some panic. In the shortest of short-term for the most nimble, selling one to two day rallies is probably a good tactic until proven otherwise.

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OUCH!

The bears absolutely mauled the seasonal tailwinds I mentioned yesterday. Remember, seasonal trends are just helpers and usually do not begin or accelerate a trend. Nonetheless, Monday was very ugly for the bulls and Tuesday looks to be equally nasty or worse. This is unusual behavior for Thanksgiving week, but not without precedent.

The bulls are now in “hope” mode as liquidity is beginning to dry up and they will need a herculean effort to accomplish some time kind Turnaround Tuesday. After the open, the day should be very volatile and very interesting. I certainly did not see this kind of damage being done this week. I envisioned mild strength or weakness with the possibility of the final leg down after the holiday.

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Seasonal Tailwind This Week

Stocks begin the holiday-shortened Thanksgiving week with an upside reversal last Thursday and a little bit of follow through on Friday. Stocks continue the process of repairing the internal damage done by the October correction before assaulting Dow 27,000 in the New Year. However, I want to be clear; at this point I do not have strong conviction that last week’s reversal is the final nail in the market’s bottom. I can still see two diverging paths to new highs as I wrote about last week in Bulls Making a Stand.

This week has another seasonal tailwind with the week of Thanksgiving on top of the November & December tailwind which is on top of the November through April tailwind after a mid-term election. Remember, they are all just tailwinds and not market drivers. The market is SUPPOSED to rally this week. I think the most important thing to watch is if it doesn’t rally. That would give some credibility to the case that more downside lies ahead before the drive to new highs gets going in earnest.

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Bulls Making a Stand

Thursday saw upside reversals in all of the major indices which means that stocks opened lower, traded a little lower and then rocketed higher into the close. That should comfort the bulls, at least into next week as a solid seasonal tailwind blows into the holiday.

Is it possible that we just saw the final low on Thursday? Sure. It’s POSSIBLE. I am not pounding the table with high conviction like I would or will if stocks revisit the lows from the last month, but I am also not going to ignore what the market tells me either. Regardless, as I offered the other day with my two scenarios, I think stocks are going to new highs before any bear market settles in.

As I finish this up it looks like a moderately lower opening is setting up. If the bears can accelerate the selling, it could create some despondency among the bulls. However, if the bulls can fight off any afternoon downside momentum, that could ignite lots of short covering and a decent rally for a few days.

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THE Bottom Right Now or Soon. ALL Paths Lead to Dow 27,000

Last week, I wrote about the chart below, Battle Lines Drawn, which had one more horizontal, blue line at the time. That was exceeded on the upside, so I removed it. We are left with the upper blue line that once exceeded and closed above will be late confirmation that the bottom is in and new highs are on the way. That’s going to take some time to develop. Stocks are at the first blue line which creates an opportunity.

After correctly calling for a mid to upper single digit decline as well as the potential for a bounce near the lows, it has become a little muddier for me. I did not like how stocks behaved at the October low. It didn’t look complete. However, there is no rule that says the market must accommodate my analysis and ego. Both the second part of the rally and current decline have been more difficult for me to get my arms around in advance which is all that matters. Anyone can analyze after the fact.

Since the correction unfolded, I made two very strong statements. First, I said that I did not believe the bull market was over and that Dow 27,000 would be seen late this year or in Q1 2019. The second statement was that if stocks raced right back to new highs from the October lows, I thought the 10-year bull market would end during Q1 2019. I don’t think we have to worry about any racing here.

At this point, there are two scenarios (yes, I love my scenarios) which look to be most probably. And for you bears out there, they are both bullish. The first one is in light blue above and it has the decline ending right now, plus or minus a day or so. The second one has stocks go all the way down to the October lows, perhaps even breaching them for a day or so and then bottoming. Regardless, both paths lead stocks to new highs although the duration will be different.

Finally, I have a Canaries in the Coal Mine all done and ready to email. It was supposed to be in this update, but it just became too long. I will get that out this week. I know. I know. You are waiting with bated breath!

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Bulls on Shaky Ground Today

After a fast and furious rally by the bulls, we saw a little change on Friday as “too far, too fast” became my theme. I thought the best case would be for a pause to refresh or some backing and filling. That appears to be the case as the new week begins. I am very keenly watching for the market’s reaction if and when it gives back all of last Wednesday’s huge, post-election gains. That should speak volumes about the next week or so. On the Dow, that’s roughly 25,600 and 2750 on the S&P 500.

Not a single thing has changed in my thinking that an immediate return to new highs could very well spell the end of the 10-year bull market. That remains in play, however, as I have been discussing, the odds do not favor that behavior. Rather, stocks are “supposed” to see another decline to build a better launch pad for the next rally to 27,000.

Where is leadership, you ask?

It certainly isn’t in the banks or semis. That’s a little troubling. High yields bonds are about to make new lows. The NYSE A/D Line isn’t much help at this point as it basically looks like the stock market. As I keep offering, the defensive sector is standing out. Utilities, staples and REITs. It’s great if you own them, but not comforting for the overall stock market. Another fun week ahead!

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Pause to Refresh

I had such a great time joining the good folks at Yahoo Finance on Market Movers yesterday morning, especially since I stayed put in my office and joined via Skype. I didn’t think it was possible to look worse than I do on TV without makeup, but yes, I got scared watching the replay!

After stocks huge sure on Wednesday, I thought that the market would pause to digest or refresh, perhaps back and fill. The Dow had been leading, but I am expecting leadership to change starting essentially right now. Semis and banks continue to disappoint me but transports and discretionary are acting better. Retail and materials, along with defensive sectors like telecom, utilities, staples and REITs are also behaving constructively.

Do not ignore my last comment. That may be very telling for things to come. Defensive sectors typically lead into a bear market and recession. More on that later.

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