American Pharaoh Begins the Week at the Highs

The bulls begin the new week a little higher than this time last week and within striking distance of all-time highs in the Dow, S&P 500 and S&P 400. Not a single thing has changed in my bullish intermediate and long-term outlook. The stock market should continue higher on its way to Dow 20,000 with periodic bouts of weakness to keep everyone honest. As I have been writing about since early 2012, any and all pullbacks should be viewed as  buying opportunities until proven otherwise.

Depending on how you view the last six months, stock have either been digesting since early February or as far back as November. Ultimately, the market should resolve itself to the upside. In a perfect world, we would see sufficient negative sentiment build up to give stocks enough juice to blast higher, but it doesn’t always work out so neatly. While they certainly could run higher from here, I don’t believe this is blast off time just yet. That day is coming though. Rather, I think we’re stuck in this mean reversion market where buying weakness and selling strength (breakouts) is the name of the game for now.

Leadership continues to evolve and the banks seem poised to finally take the torch for the next leg of the bull market. If the semiconductors and transports can also step up, we could see the makings of a very powerful move across the board with consumer discretionary already driving the bus. That would be the best of all bullish worlds, but it’s putting the cart before the horse.

Speaking of horses, what an amazing performance by American Pharaoh at the Preakness on Saturday. Once the skies opened up and the torrential rains hit, I thought for sure that she would really struggle on the muddy track. And in the middle of the race, it looked like she was starting to run out of gas. But as she turned for home and came down the stretch, it looked like she kicked it into a gear no one had ever seen before and ran away with the race. We all know the people at the Belmont couldn’t root any harder as a win at the Preakness means a windfall day for New York in a few weeks.

Could American Pharaoh have some similarities to the stock market???

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Portfolio Impact from Jobs Report

The question now for portfolio managers like myself is, “does one good employment report turn the tide?”

Since I already mentioned that I all but dismissed the poor Q1 GDP number and I am not giving much weight to the weak March employment, I do believe that Friday’s report is the start of the next upward swing in our frustrating but positive post financial crisis recovery. With that, the intermediate-term outlook for stocks has brightened for many although unchanged from my already bullish vantage point. The three or six month trading range in the S&P 500, depending how you view it, should be resolved to the upside, whether that’s convincingly this quarter or next. Sometimes, in order to end a trading range, markets move violently from one side to the other, often breaching key levels and forcing traders to take action, only to immediately reverse course in a sustained move in the other direction.

Regardless of how the current trading range resolves itself, I anticipate sector leadership coming from some familiar names as well as two fallen angels. Semiconductors, long a canary in the coal mine for the tech sector, are poised to resume their rally. Consumer discretionary, left for dead countless times during the bull’s six plus year reign, continues to confound the bears and lead.

One of my top sector picks for 2015, home builders, are getting ready for another run higher, even in the face of potentially higher rates. On the surprise side, the transports, leaders from previous years appear to be ending their six month plus period of digestion and poised for another assault on all-time highs. Finally, the banks and diversified financials, with several nails in their coffin, are at last finding fertile ground for leadership status after five years of being pulled along. This fallen angel could really shock and surprise the masses and give this old and wrinkly bull market new life later this year as net interest margins significantly increase.

Not surprisingly, defensive sectors like REITs, consumer staples and utilities (another sector pick for 2015) should continue to struggle and potentially be dragged up by the market, best case, rather than lead it higher.

In the very short-term, I do have some concern from the usual post employment day hangover effect on stocks. Data miners can provide a stream of historical examples, but in plain English, when the stock market opens much higher and closes well with volatility falling sharply, the next few days to a week are often, 75% of the time, challenging and down.

Overall, Friday’s employment report, while just meeting expectations, essentially threaded the needle and reaffirms my view that the economy remains in a typical, uneven, post financial crisis recovery. The aging bull market is far from over.

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April Employment Report Turns the Tide

One of my long held beliefs is that it really doesn’t matter what the news is, only how the markets react. In almost 27 years of trading, investing and watching, I have seen it too many where the news is so powerful in one direction, yet the market reaction is the exact opposite. Hence, the terms “buy the rumor, sell the news” or “sell the rumor, buy the news”. And sometimes, the news is as expected, yet markets see a more violent reaction. That was the case on Friday with the April employment report.

Since the economic recovery began in 2009, my thesis has been that the U.S. will have your typical post financial crisis recovery, seen many times previous after the Great Depression part I, South America, Latin America and Japan. Growth teases and tantalizes on the upsides, yet ever fully reaches escape velocity where GDP feeds on itself. Historically, it takes two full recessions to return the economy to its previous “normal” state. After six years, that’s where our economy remains.

After another brutal winter in the eastern half of the country first quarter GDP growth was borderline recessionary, just like we saw in 2011. We have now seen the “seasonally adjusted GDP” show some odd negative seasonal tendencies in Q1 that are not being adequately adjusted since the recovery began. Since I remain sanguine on the economy and bullish on the stock market, that leads me to believe that our economy will bounce back strongly in Q2 and Q3, just as it’s done over the past few years.

Getting back to Friday’s jobs report, non-farm payrolls grew by 223,000, equaling expectations while the unemployment rate came in at 5.4%, the lowest since May 2008. The U6 unemployment rate, which measures the unemployed and underemployed came down to 10.4% from 11% in March. Keenly watched hourly earnings only increased by 0.1%, keeping any wage inflation concerns solidly under wraps.

The best description I can give of this report is Goldilocks, not too hot and not too cold although some in the perma-bear (continually wrong) camp are hanging their hats on the older ages of those filling new jobs rather than how well dispersed the new jobs were across sectors. Stocks soared and bonds bounced back. Anyone left hanging on to a June interest rate hike by the Fed has to be convinced that is has barely a puncher’s chance of occurring and that while September may be on the table, it’s looking less than 50-50. The jobs market is solid and stable, but far from overheating. I think the Fed needs to see a very good Q2 GDP print in a few months coupled with at least two or three straight employment reports showing a minimum of 250,000 new jobs created.

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Tug O’ War Continues

Like a seesaw or maybe a pinball machine, the major stock market indices continue to bounce from the low end of the trading range to the upper end and back. Remember, that for the past month or so, I have written about the short-term looking somewhat murky, but the intermediate and long-term remain solid. Market pullbacks come in two forms. The first is that price declines somewhat sharply and quickly, which shakes out some of the weak handed holders. The weakness also serves to build up the necessary pessimism to launch the next rally.

The other form of pullback is what we are seeing right now, sideways digestion or consolidation. This ends up frustrating both bulls and bears until both sides pull back high conviction positions in the market and wait for a clear resolution. Oftentimes, the market will exceed one end of the trading range, force action and then immediately reverse and head to the other end of the range where the real break out occurs.

My point right now is that the market is digesting and short-term volatile. It’s during these periods when buying rallies and selling declines is the worst plan until the skies clear. Just two days ago, it looked like a run to the upside was possible. Now, it looks like lower prices lay ahead.

Sell in May and Go Away? I will dive into that tomorrow.

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Apple’s Good Earnings Impacting Market

Earlier this week, Apple released a very solid earnings report beating analysts estimates on the top and bottom line, meaning the company had more revenue and profits than forecast. On the surface that should be a good thing and intuitively, you would think a boon to the stock. Apple opened at fresh all-time highs on Tuesday only to sell off immediately and close in the lower end of its daily range.


Data miners have uncovered a solid trend that when the NASDAQ 100 is at or near new yearly highs when Apple reports, it becomes a selling opportunity for  both the stock and NASDAQ 100 index over the short-term. This further supports what I have written about for several weeks that the short-term is somewhat murky for stocks, but the intermediate and long-term remain solid.

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Fed Statement Day

Today ends the Fed’s two day meeting with no action taken. Analysts will parse that statement for clues about a possible September rate hike, but as I have said for a long time, the Fed should absolutely  not raise rates anytime soon. Oil is tame. Inflation is non-existent. Our economy is mediocre at best. Europe is teetering and Japan is, well, Japan.

Raising rates to have some ammunition for the future is the single most absurd argument I can recall. The Fed has plenty of outside the box tools to combat whatever monkey wrench is thrown our way. Ben Bernanke’s unprecedented are proof of this. Leave rates alone.

Trading wise, the model for today is +/- .50% until 2pm and then some strength, but the trend is a weak one now as opposed to a strong one six weeks ago.

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Short-Term Murkiness Continues

While I continue to be intermediate and long-term positive on the stock market, there remains a small cloud over the markets in the short-term. That usually means a pullback, which equals weakness to the tune of 3-7%. Market sentiment has become slightly less bullish, but not to the degree where I believe the next launch to all-time highs can begin.

Recent price action shows the S&P 500, S&P 400 and NASDAQ 100 poking to all-time highs and then being rejected by the bears. While that looks really ugly on a chart, historically, it usually just leads to some short-term weakness.

Additionally, the semiconductors have always been one of the better canaries in the coal mine for the tech sector and the overall stock market. Of late, we have seen all-time highs in the NASDAQ, finally eclipsing the Dotcom bubble nosebleed levels from 2000, but the semis are pinned roughly 100% away from the same level. That’s not troubling to me and won’t get repaired for years and years and years.

The short-term concern, which has been written about by data miners all over the Internet, is that the NASDAQ 100 has been rallying with the semis closing lower. Some days, we have seen the semis down more than 1% with the NASDAQ 100 higher and at yearly highs. Historically, that’s not healthy action and usually leads to a two to four week period of digestion or consolidation or sometimes outright weakness. However, I continue to believe that all dips and bouts of weakness are buying opportunities until proven otherwise. The climate for the bull market ending is simply not there.

This is the time to make a little market shopping list in case there is a small sale in May.

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Bears Having Their Day

Not even half a day of weakness and talk of the big C is out. The dreaded correction! It’s amazing that after a 73 month secular bull market, it’s still the most hated and disavowed bull ever. Yes, it’s now been 42 months since the last 10% correction, but markets don’t fall just because of age. Corrections occur to repair breaks and right now, there aren’t enough things broken to warrant a full fledged correction.

The most glaring concern is that the Dow Industrials continue to divergence from the Dow Transports and the Dow Utilities are even weaker. Coupled with sentiment, it makes the short-term murky as I have written about lately. Before you jump on the bears’ bandwagon, we have seen this picture before and it doesn’t end well for the bears. Weakness to the lower end of the trading range continues to be a buying opportunity until proven otherwise.

Don’t ignore the recent strength in banks, consumer discretionary and my very contrarian play in energy going forward. That’s not the kind of leadership you typically see if the stock market was in real trouble.

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Only Sentiment Holding Back Bulls

The markets begin a new week with a huge stream of earnings on tap including Intel, JP Morgan and Goldman Sachs. The European Central Bank is scheduled to meet and there are a number of important economic releases with inflation being front and center. On Friday, it’s April options expiration.

The major indices look neutral to positive as the S&P 400 and Russell 2000 are a whisker away from all-time highs while the S&P 500, NASDAQ 100 and Dow are in the middle of their ranges, but still looking good. New highs should be seen across the board before long.

Stock market internals continue to show strength which should insulate the market from anything more than a single digit pullback. Sentiment on the other hand is stubbornly optimistic and that’s the only short-term concern now which could lead to a pullback. I do like the famed investor Mohamed El Erian publicly spoke about being all in cash and that the Wall Street Journal and USA Today both ran stories about the first earnings decline since 2009. But we still need to see more improvement from the overly bullish options traders and sentiment surveys before another big leg higher can launch.

On the sector front, consumer discretionary and its sub sectors, retail and housing, remain market leaders. Once again, the banks are at the top end of their range and will try to break out. However, over the past year, attempted breakouts have selling opportunities as the bears successfully rejected attempt.

While treasury bonds are stuck in neutral with a lower bias, high yield bonds look constructive and that bodes well for the economy and stocks over the intermediate-term.

Finally, I am going to be on Fox Business’ Making Money with Charles Payne on April 14 from 6-7 pm as well as on CNBC’s Closing Bell at 3 pm on April 16.

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Dow Theory Warnings Continue

Several months ago, I wrote back to back articles about the Dow Theory trend change. You can view them below.$marts20141103.pdf

Simply put, this analysis holds that the Dow Jones Industrials and Transports should move in lock step to confirm each intermediate-term move in the stock market. When one index see a relative new high, so should the other. The opposite is true at lows. When one index diverges from the other, it is a possible sign of a trend change. When both indices closes below a previous significant low that is considered confirmed change of trend.

Let’s look at the two charts below for some real life, recent examples. At the far lower left of both charts you can see the Ebola October lows where both indices closed below previous significant lows. By early December, they both went right back to new highs where the party began to fizzle.

Since early December, the transports have seen a progression of peaks that were each lower than the previous one where the industrials saw a clear trend of higher highs through February. With one index lagging the other, this is called a non-confirmation or divergence and warns that all is not perfect healthy. Of course, if and when the lagging index rallies to confirm the leader, this Dow Theory warning completely goes away. Right now, we have a series of caution flags since late 2014 without much in the way of price weakness.

Beyond the Dow Theory non-confirmation discussed above, the more serious warning is the Dow Theory trend change. This occurs when both indices close below previous significant or above previous significant highs. On the left side of the chart in October, both indices saw Dow Theory trend changes to the downside that were immediately reversed. In other words, the October warning failed.Today, the transports are getting close and should breach the low points seen from December through February. The industrials have another 600 points to go, but don’t dismiss that as out of the question. I do believe, however, that if the industrials fall much more to signal a negative Dow Theory trend change, it will be short-lived like we saw in October.
Although the Dow Industrials and Transports are not and have not been perfectly in sync for many months, the broad stock market has been acting okay and lacking most of major signs that the bull market is ending. More than likely, any weakness this quarter will be of the ending nature, completing the divergence seen in the two major indices as the Dow Industrials prepare an assault on 20,000.
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