Vicious Rotation and Wicked Reversals Dominate

2017 has been the year without volatility. Who would believe that stocks haven’t declined even 5% on a closing basis, let alone 10%. It’s crazy! And once the calendar gets to November, downside volatility becomes that much more difficult to see as potential catalysts for a decline go down significantly. Yes, of course, there is always that stray geopolitical event, like the infamous “Fiscal Cliff” in 2012 which I dubbed the equivalent of the Y2K hoax. The 2012 chart is below.

2017 has a potential government shutdown looming as well as some fairly fierce sector rotation as the proposed tax reform gets through Congress. I guess stocks could get a tiny bit cranky if the House and Senate cannot successfully get the bill out of conference this month. I just cannot believe there will be a December government shutdown.

Much  more importantly, we have seen a rush into the banks, discretionary, homebuilders, industrials and transports at the expense of technology, utilities and REITs. This is exactly what we saw after Trump won, but so far, on a much smaller scale. Interestingly, this time around, bonds are not plunging like they did 13 months ago.

Remember, stocks have a bit of a seasonal headwind for another week or two. We saw wild action on Friday with the erroneous Flynn announcement and then the largest downside reversal since 2000 on Monday, according to sentimentrader.com. Rather than show my usual daily chart, below is a 15 minute chart so you can see just how volatile the action has been.

In the end, the bull market isn’t over. This rally isn’t over. A small dose of vol is here. Semis ceded their leadership position, but banks, discretionary and transports have stepped up. We just need to see high yield bonds score new highs to further insulate stocks from a correction.

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Pullback Remains But Transports…

The Dow and S&P 500 are still lagging the other major stock market indices in pullback mode, but contrary to what you may think, this remains a very healthy environment for stocks. In the strongest markets, the more “risk on” indices are the ones charging ahead. That’s the case now with the S&P 400, Russell 2000 and NASDAQ 100. The NYSE Advance/Decline Line which measures broad participation recently scored yet another all-time high and high yield bonds are hanging in well.

That’s not the landscape ever seen when a bull market ends or even a correction.

Stocks remain in pullback mode and I expect to hear some noise from the bears today and early next week. We should be on the lookout for talk from the “floor traders” that stocks are breaking down at key levels and that could mean the end of the post-BREXIT rally. That’s the same chatter we have heard since mid-July and I don’t give it much credibility. We haven’t even seen a 2% decline since BREXIT which I continue to say that it shows tremendous underlying strength. This little bout of weakness may become 2%, 3% or even a little more. And if so, I remain firm that it will be yet another good buying opportunity on the way to Dow 19,000, 20,000 and perhaps much higher.

On the sector side, think of how many pundits left the transports for dead earlier this year. They said the collapse called for an impending recession with a nasty bear market. Talk was renewed post-BREXIT; yet now, that group is leading the market and is close to breaking out. While all-time highs are almost 20% away and unlikely to be seen anytime soon, the transports recent surge is definitely a positive development for stocks.

Finally, the perma dollar bears seem to be waking up again as the end of the month approaches with calls of collapse, calamity and doom. More on this next week.

Have a great weekend!

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Still in a Pullback

Over the past few trading days, stocks gathered a little steam, but I still think the markets are in the midst of yet another pause or tiny pullback. It is amazing, however, that we have not seen a 1% in either direction since the post-BREXIT rally in early July. I have been saying nonstop that we saw historic strength coming out of the Y2K like BREXIT and that strength would not dissipate so quickly. Frankly, I thought we would have seen at least a 2-3% pullback by now and I have been the most ardent of bulls. The underlying power has been more than impressive.

On Tuesday, the NASDAQ scored a fresh all-time high. (Is that redundant?) Coupled with the S&P 400 at new highs, you may be questioning how that’s still a pullback. The other major indices are lagging a bit and there has been much power behind the recent little rally. Don’t get me wrong. I am very happy that the bears remain at bay. The longer stocks can stay up here, the more likely we will see an upside resolution.

Leadership remains strong and diverse with semis, software, internet, financials, industrials, materials and energy on top. As discretionary rests, the transports are really stepping up here. Defensive groups have moved to the back seat and high yield bonds continue to resist selling. It’s hard to argue with what’s going on although the vast majority of pundits continue to disavow and hate this bull market. That makes me comfortable over the intermediate-term as Dow 20,000 remains attainable later this year or early next. I don’t how these people who are paid to be in stocks and make money can be so wrong for so long. Remember, it’s okay to be wrong. It’s not okay to stay wrong.

The clown parade just continues to grow. Soros, Druckenmiller, Icahn, Zell, Trump, Fink, Gundlach, Gross, Faber, Auth, Faber, Yusko, Singer.

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