Bulls in Charge. Oil Corrects

With the elevator pattern broken, stocks have enjoyed a nice rally since Friday. The Dow Industrials are FINALLY getting off their rear end and seem poised to visit 25,100. All of the other major indices are well above that comparable level with the Russell 2000 and NASDAQ 100 at new highs. The S&P 500 and S&P 400 are gearing up for new highs. Markets are much healthier with the Dow lagging than leading.

Sector leadership is strong and improving. The NYSE A/D Line continues its new highs ways. Even stinky junk bonds are participating a little bit. If I had to pour some cold water on the rally, I could say that we saw one single day where option traders were on the euphoric side, but that’s really it.

Crude oil is now down more than 10% in two weeks, but no one seems to be noticing, certainly not the transports. One of the great market myths is that energy and transports move in opposite directions. Yet another myth that data don’t support.

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Follow Through???

Stocks ended last week with a solid up day, completing four days of down, up, down, up. The elevator ride may try to end today as stocks are poised to rise at the open. We will have to see if we get a run throughout the day or if they fade and end up in the red. With earnings season over and the biggest economic report of the month already in the books, only the inflation data are left before the Fed meets to hike rates next week.

Taking a peak at the major stock market indices, the Dow Industrials remain the weakest. They need to close above 25,100 to set the stage for a run towards the old highs. The S&P 500 looks charged up for at least another few percent rally, if not a full run towards the old highs. The S&P 400 and NASDAQ 100 are but one good day from new highs while the Russell 2000 continues its run in blue skies territory. In short, stocks have paused, regrouped and want to move higher. That doesn’t reconcile some of my short-term models being negative, but price is always the final arbiter.

On the sector front, all key sectors except banks are behaving very well and should rally towards their old highs next quarter with semis leading the way. Energy should also follow suit. I am not liking the action in materials, industrials and healthcare, but it is very late in the bull market and I won’t be surprised if some sectors have already peaked. Before stocks finally peak, I do expect to see much better behavior from the defensive groups, staples and utilities.

In case you’re wondering, the NYSE A/D Line continues to score fresh all-time highs. Remember, I may be a broken record (remember vinyls???), but 90% of bull markets do NOT end with strong participation like this!

And finally, yes, junk bonds still stink. I am concerned that this vital sector has seen its bull market peak.

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Trump’s Foot in Tweet. Strong Jobs Report & Fed

If it’s the first Friday of the month, it’s the “all-important” jobs report. I opened Twitter to find the president tweeting about the still embargoed report and that was “looking forward to it”. Trump has many communication and information faux pas in his short tenure, but this one may be his biggest blunder. The President of the United States hinting at the content of market moving confidential information scheduled to be released is certainly precedent setting and idiotic.

Anyway, as Trump hinted, the May employment report was strong, much to the chagrin of his detractors. 223,000 new jobs, well beyond expectations. Revisions over the last two months added another 15,000 jobs. Unemployment rate down to 3.8%, the lowest since 2000. Wage growth up .3%. Unemployment for African Americans plummeted to 5.9%, the lowest on record which began in 1972. Only the labor force participation rate mildly disappointed, falling another .1%.

Hard to argue with anything in this report.

And as I have said all year, I am looking for 3.5 rate hikes from the Fed with the risk to the upside with the next rate increase on June 13. Every time there is an event which takes the odds down below 50%, I laugh at the pundits who opine that perhaps only one more hike is coming this year. Now, that’s nonsense.

The elevator looks to continue today with a big up opening. Down, up, down, up. As I mentioned earlier in the week, the NASDAQ 100 and tech have resumed leading. Thank you semis and internet. Transports and discretionary following as well. I am keeping an eye on biotech as a possible risk on catch up play.

Yes. Junk bonds still stink. Very disappointing.

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Like an Elevator

Down big. Up big. It’s like riding the elevator at the Empire State Building. Italy’s banking system goes from being on the verge of collapse to all is hunky dory in 36 hours. The past few days looked a little bit like BREXIT almost two years ago. While I did not believe BREXIT was going to be a huge event at the time, I still think that Italy has the potential to be that sub prime mortgage canary in the coal mine for the next global crisis. We should not stop focusing there.

The bottom line is that stocks remain in the trading range established from the January all-time high peak to the February bottom in the Dow Industrials, S&P 500 and S&P 400. The Russell 2000 and NASDAQ 100 have already exceeded their January highs and I fully expect the others to follow next quarter.

The short-term remains murky. Our shorter-term models are negative. Semis, transports and discretionary behave well. Junk bonds act like something is brewing on the horizon. Both may be right.

The government revised Q1 GDP growth to +2.2%, slightly lower than expected. For the past decade, the first quarter of the year has been weaker, even after adjusting for seasonal tendencies. It’s been somewhat of a head scratcher for economists. However, that weakness does not change my own forecast for much stronger growth in Q2 and Q3. As you know, I am looking for recession beginning between mid-2019 and mid-202, but it should from higher levels of output by the economy. I do not think it’s beginning right here.

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Italy Definitely Matters. Canary in the Coal Mine?

Stocks were “supposed” to rally on Friday ahead of the long weekend. While they did put in a good performance, they still ended in the red. That adds further weight on the short-term negativity of some of our models when stocks don’t behave as the odds say they should.

This morning we woke up to more troubles in Italy. Anyone surprised by this hasn’t been paying attention. In my year-end report to clients as well as in my Fearless Forecast, I listed Italian and Spanish banks as things that will keep me up at night in 2018. Too big to fail, too big to save. I think this remains on the tip of the iceberg. Investors should worry a whole lot more about European banks than anything Trump is going to tweet and saber rattle.

Although I do not think this is anything like the financial crisis and 2007-2009, I do think these banks may be a canary in the coal mine. Remember sub prime loans in early 2007? How about those two Bear Stearns mortgage hedge funds that blew up in July 2007?

Early in the year, you were hard pressed to find many pundits who didn’t think Europe offered better risk/reward than the U.S. And most believed that European banks had much more upside than U.S. banks. While I couldn’t argue with their fundamental conclusions, I also couldn’t join the overwhelming majority in these trades.

Anyway, stocks look to open almost one percent lower, taking their cue from European markets. I wouldn’t read so much into it until we get past the first hour. We have upside and downside reversals still in play. Let’s see if which gets closed above or below first. The NASDAQ 100 and technology are poised to resume leadership as I mentioned last week.

Semis and internet look like they want to break out higher. The same with transports and discretionary. We will have to see about the banks. Energy stocks are oversold in the short-term. They are “supposed” to find a low this week. Junk bonds still stink.

Bonds continue to quietly rally which means lower rates. What happened to all of the bond armageddon pundits who drew all of those absolute and fancy lines in the sand?!?!

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Double Reversal of the Reversal

On Tuesday, Wednesday and Thursday we saw three separate reversals in the major stock market indices. First, there was a “key” downside reversal after a nice little rally, followed by back to back days of stock selling off early and closing strong. Long time market analyst, Walter Deemer, very aptly replied to one of my tweets that it’s not so much the reversal itself, but the action after those wilder, more emotional days.

People love to cherry pick and and point out reversals at major market tops and bottoms because they worked so perfectly. However, there are many others which see no follow through and the market quickly resumes its trend. My point is that when you see a reversal, it’s time to pay a little closer attention and look for other indicators that support that position.

Stocks are basically chopping sideways with the NASDAQ 100 looking to have the best opportunity for an upside move. The Friday before a long weekend typically has an upward bias so I am watching to see if that fails to materialize and what Tuesday holds. Semis and discretionary are already breaking out and transports are close. Oil looks tired after an epic run but I don’t think the rally is over. After the pullback, energy should see new highs. The energy stocks are a different story. Most bonds are very quietly rallying nicely although junk bonds continue to look like garbage. You already know about my concerns there.

Wishing you a safe and enjoyable long weekend full of family, food and fun.

Thank you to all those who have served our country so courageously, especially those who gave their lives for our freedom.

Paul

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“Key” Reversals. Junk Bonds Still Stink

Let’s start with junk bonds. While they don’t really stink, they are not participating at all in the stock rally. As I mention time and time again, that has little value in the short-term and no predictive power. However, it does matter, and sometimes a lot, over the intermediate-term. My fear, well I am really not scared but rather concerned, is that the final peak in high yield bonds has already been seen. If that’s the case, it doesn’t bode well for the bull market in stocks passed 2019 which would fit in with my thought of recession coming.

On the equity side, while stocks jumped out of the gate on Monday on temporary aversion of the trade war with China, the stock market certainly did  not trade well that day with no index closing at or near the high of the day. On Tuesday, we saw another one of those “key” reversals where stocks open at their highs for the day and close near their lows. It looks ugly on a chart as you can see below in the Russell 2000 Index of small caps which has been the leader. While stocks typically do see weakness after reversals, it’s nothing like the gloom and doom so many technical pundits call for after this one day pattern triggers.

A few of our short-term models turned negative on Monday and Tuesday so I am going to temper my enthusiasm for now. While I remain steadfast that fresh all-time highs are ahead above Dow 27,000, I think some caution is warranted here.

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Pause Ending?

With news out that Trump Tariff Tantrum has been delayed, stocks around the globe are rallying roughly 1%. That’s the expectation when trading begins for the new week. It will be telling to see if all five major stock market indices can score new highs for the month which would give the bulls more credibility. I would really like to see another index besides the Russell 2000 see all-time highs right now.

Additionally, on the far right side of the chart, it’s important for the former technology leader, NASDAQ 100, to at least keep pace on the upside if not lead outright. It will go a long way if this index can close above the light blue and dark blue lines which will set it on a course to all-time highs next month.

On the sector front, semis are doing “fine” but could be doing better. Banks seem poised to lead and score new 2018 highs before long. Ditto for discretionary. Transports, as I mentioned last week, look “juicy” and are also in a strong position to take off to the upside and lead stocks on an assault higher. As I continue to mention, only junk bonds give me cause for concern over the intermediate-term.

Stocks should move higher this week into the unofficial beginning of summer. If they do, I will watch to see if sentiment gets on the giddy side or if skepticism remains. That should tell us a lot about the rally’s duration.

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Small Caps Still Leading But…

The mild pullback/consolidation continues although you wouldn’t know from watching the Russell 2000 small cap index below. This index sits at all-time highs as seen above the dark blue horizontal line as well as breaking higher above the light blue line which has contained price since the early Q1 correction. On the surface things look really good for small caps as they are leading. However, I do think their leadership is close to ending with the other major indices about the step up.

Even beneath the surface with the NYSE A/D Line, things are just fine. Stocks should be insulated from any major carnage for a while. Only the continuing plight of junk bonds has me a little concerned. They just cannot seem to lift their heads at all. While that doesn’t mean much in the short-term, it does have implications the longer this behavior lasts.

I was planning on doing a post on the recent spike in bond yields, but that will have to wait until next week as I am way past my self imposed deadline on an important report to clients.

Have a great weekend.

Hoping that we get two straight days without rain sometime soon!

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Pause to Refresh. Transports Looking Juicy

It looks like Monday’s failure by the bulls put in a short-term peak and stocks will either trade sideways for a bit or pullback below Tuesday’s low. There shouldn’t be too much price deterioration. We have some overbought readings in the major indices so if stocks can resist much weakness, that could speak volumes about the next move which should be to new  highs.

On the key sector front, banks and discretionary are quietly stepping up while semis appear to need a rest. Transports may be the most interesting of the lot as this week was the fourth time they tried to get through 10,850 on that index. My sense is that on the fifth try, this key sector will blast through and head to new highs, perhaps in July or August.

The only significant concern I have now is the same one I have had, high yield bonds. They are not leading and barely rallying. While this behavior can sometimes warn falsely or even warn for more than a year, it’s something to keep front and center as my favorite canary in the coal mine.

In Friday’s piece, I will spend some time on the recent spike in yield on the 10 year Treasury note which has everyone’s attention.

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