Stocks have gone essentially nowhere for a month. Bulls, like myself, view this as a healthy period of digestion or consolidation before the next leg of the rally begins. Bears argue that stocks have peaked and they are headed much lower. As I have mentioned for months and months, I don’t think the bull is over or close to that point. There have been too many strong indications of more upside that typically do not occur as a bear market is about to begin.
Pullbacks come in various forms but are usually limited to either moving sideways for a period of time or seeing a shorter and sharper bout of weakness. The current pullback looks like a combination. The major stock market indices have been long overdue for at least a 2-3% pullback and this looks like it’s it. However, I wouldn’t be so aggressive to play this to the downside as it should be one that ends quickly and without much notice.
Leadership remains strong and healthy. The NYSE Advance/Decline Line as well as high yield bonds just saw new highs. More all-time highs for the major indices is ahead. Stocks may be a bit tired here and with the monthly employment report being released tomorrow, there are enough good excuses for the stock market to continue to pause. This is a good time to prune portfolios into the new leaders and prepare for the next leg higher.
Finally, as I have discussed before, the real elections that matter for the markets are next year in France and Germany. Our own election should not have a significant impact on our markets. Current odds favor Clinton 70-30 over Trump.
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