Dow’s March Low Breached But Bulls Getting Ready

There is not a lot different from what I wrote two days ago. Stocks continue to digest, pullback or whatever else you want to call this current pattern of behavior. The only difference on Thursday morning is the one of the major stock market indices, the Dow 30, breached its March low as IBM’s poor revenue number took the stock down almost $10.

The S&P 500 is hanging in, but the S&P 400, Russell 2000 and NASDAQ 100 are all quietly performing much better. The longer this behavior continues, the more bullish it is. Many of the shorter-term indicators I watch, like the TRIN and sentiment surveys are approaching oversold levels within a bull market. That’s typically a recipe for strong returns going forward over the ensuing 3, 6 and 9 months.

While the pullback continues, the bears need to really step up their game sooner than later if they have any chance at further weakness. If not, I believe the bulls will ready their charge before the end of the month and move the stock market to all-time highs later this quarter.

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Getting Closer to a Bottom

StocksĀ  begin the week on their heels after a relatively ugly day on Thursday. The pullback and selling are not over just yet, but the market is certainly closer to the end of the decline than the beginning. With Thursday’s price action closing at the low of the day and the March bottom only a few points away, I would think that the major indices are heading for a quick trip below the March lows before the bulls put up a real stand. That should occur before the end of the month.

While the stock market was closed on Friday, economic data was still released. Inflation came in a lot lower than expected and there were some downward revisions on previous months. That is exactly what Janet Yellen and the Fed heads do not want to see as they raise interest rates and float trial balloons about beginning to reduce the Fed’s massive $4.5 trillion balance sheet. Interestingly, reaction looks to be muted to start the day. Remember, it’s not what the news as much as it is how markets react.

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Banks Looking for a Bottom Amid General Market Strength

With earnings season in full swing and estimates ramped up by Wall Street, companies will really need to impress for stocks to get a boost. Banks are front and center right now. With the banking index down 10% since the early march peak, I am looking for a bottom in this sector and revisiting of the old highs later this quarter. However, the most important hurdle will be for this group to close above the 93 level, which will effectively negate the most negative scenarios.

With stocks continuing to trade in a small range, there has been strong selling beneath the surface as measured by a technical indicator called the TRIN. This indicator has been relatively high for the passed few weeks. However, the NYSE A/D Line which you can see below and I wrote about the other day, just hit a fresh all-time high this week. Bull markets have never ended with this kind of broad participation and strength. Normally, there is at least three months and as much as 21 months of weakening before the bull market ends.


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Two Favorite Canaries Looking Fine

The final two canaries are probably my favorites because I believe they are the most powerful and predictive. In every bull market of the modern investing era, both of these canaries gave 3 to 21 months notice that trouble was brewing. However, that doesn’t mean that every time these canaries warn, bear markets occur. It just means that they haven’t missed any.

The first chart is that of New York Stock Exchange’s Advance/Decline Line which simply measures participation in the stock market on a cumulative basis. What we want to see is this indicator making new highs along with the major stock market indices. When it stops making new highs and the indices continue to do so, that’s a warning sign. As you can see, the NYSE A/D Line last peaked in early March with the stock market.

A proxy for the high yield bond market is below and I use it the same way as I do the NYSE A/D Line. It gives the same kind of red flags. Right now, we see that its last high coincided with the rest of the stock market.

These last two canaries, while off their early March highs, are not flashing any warnings signs that the bull market is ending anytime soon.

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Sector Canaries Healthy with Some Small Wounds

Turning to the four key sectors I follow, we don’t have as strong a picture as the major indices, but they are still okay. Semis are first and they have been the strongest for some time, almost too strong, but that’s a topic for a different piece. While they have yet to eclipse their Dotcom bubble high from 2000, they continue to make new highs for this bull market.

Banks are next and after a dizzying pace following the election and prospects for reduced financial regulation, they leveled off and are now under pressure from the potential for less rate hikes. Banks should do better in a tightening cycle as rates move farther and farther from zero where their net interest margins improve dramatically. Their early March peak is in line with where it should be, worst case and this is not flashing warning signs just yet.

Consumer Discretionary is next and it looks somewhat similar to the semis with a series of new (and healthy) highs.

Finally, the Dow Transports are below. They peaked with the majority of the stock market in early March, but have since shown the most weakness of the four key sectors. This is the one I would most keep an eye on for future warning signs.

All in all, the sector canaries remain alive but a tiny bit wounded.

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Bulls Not Ready Just Yet

As we head into the holiday shortened week, the bulls don’t seem ready just yet for that next assault higher. Last Wednesday’s reversal still looms and there are small wounds that need to be healed. Don’t forget that our markets are closed on Friday for Good Friday and liquidity may be a touch lower because of the first two nights of Passover on Monday and Tuesday.

All of the major stock market indices experienced sharp reversals last Wednesday and while I do not believe they are significant, they should offer a little bit of hesitation over the short-term. The true “all clear” sign won’t be confirmed until they close above last Wednesday’s high which I think may take a week or more, even though the stock market is in a seasonally strong period.

On the sector front, the defensive ones like staples, utilities and REITs continue to quietly deliver, but I don’t think they will lead the next rally. I am now watching for signs that energy might finally be ready to step up and help after basically stinking it up all year. With transports also percolating nicely, wouldn’t that be interesting and unexpected to see!

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Index Canaries Breathing Nicely

It has a been long while since I last updated the Canaries in the Coal Mine, a semi-regular piece which has a very long-term focus on the health of the bull market. The analysis is only relevant at or near new bull market highs as I look for divergences in the major stock market indices, sectors and two other indicators. While helpful, it does not insulate bull markets from corrections; it just says that the final high hasn’t been made yet.

Let’s begin with the five major stock market indices. We are looking for warning signs that new highs are not being made by the majority. It is okay that they all don’t have the same behavioral pattern, but we want to see them march in the same direction.

The Dow is first and you can see the last all-time high was made in early March of 2017.

The S&P 500 (large cap) is next and it pretty much mirrors the Dow with its last high in March.

The S&P 400 (mid cap) is below and just like the previous two indices, the early March peak was seen.

The Russell 2000 (small Cap) is below and while it looks a bit weaker than the first few indices, its last high was in line, early March.

Finally, the NASDAQ 100 (tech) shows a much stronger pattern, having just made its all-time high. That’s not a warning sign as we have the lone outlier being stronger than the rest, not weaker.

The canaries are definitely all alive and healthy in the major stock market indices.

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Little Tantrum Beginning

The bulls began Wednesday with high hopes (and higher prices). By lunch time, it looked as if the market was ready to test its early March, all-time highs although the NASDAQ was already at new highs. But a funny thing happened on the way to Dow 21,000; the Fed released their minutes from the last meeting and the market did not like what they had to say.

In essence, the Fed was preparing to test the markets on unwinding their massive $4.5 trillion balance sheet later this year. It’s already been leaked and talked about, but it still poked the market a bit. At this point, the Fed plans on raising rates one or two more times and then halting the hikes to test selling some assets. Frankly, I did not believe this would happen in 2017 or even 2018. I thought the Fed would complete their tightening cycle and let the assets roll off organically over the years after they stopped reinvesting the proceeds. Clearly, I was wrong and the markets are a little cranky.

As long as this little tantrum continues, I would expect the banks and dollar to be under pressure with gold, euro, yen and treasury bonds firming. Downside risk in the Dow looks to be roughly 20,300. Let’s see if high yield bonds can hang tough this week.

Before someone asks, no, the bull market isn’t over.

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Q2 Begins with Higher Expectations

Stocks closed the first quarter without much fanfare and they head into Q2 with a strong seasonal tailwind. The major stock market indices are still not all in gear to the upside, but I expect that to correct itself this quarter with new highs across the board. Semis and discretionary are still very strong and I expect transports and banks to reassert themselves. Junk bonds had a very strong close to the quarter and they will need to continue that run this quarter.

Earnings season begins next week and the comps from this time last year will be very easy to surpass. However, analysts have really increased their expectations so companies need to blow out to the upside or those stocks will suffer.

My theme remains unchanged. The bull market is alive and reasonably healthy. Dow 23,000 is my next target. Weakness should be bought.

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Bulls Put Up A Stand

Yesterday, I wrote about the pullback getting a little old and the opportunity for stocks to find a low and rally. I offered that Dow 20,200 to 20,400 could provide some cushion. The Dow hit 20,400 yesterday morning and rallied nicely into the close with some follow this morning.

Was that it? Pullback over?

I am not certain, but we did do some buying yesterday to take advantage of the biggest bout of weakness this year. And it wasn’t much. Stocks could rally for a few days and then rollover one more time or the rally could have already started. I am okay being a little early, just as long as we don’t see a full scale melt down below 19,800.

As I mentioned the other day, high yield bonds bottomed last Wednesday and are now leading stocks over the very short-term. That’s a good thing. Defensive sectors are lagging with my four key sectors, banks, transports, semis and discretionary stepping up again.

Finally, I am keeping an eye on the Japanese yen as it has rallied the most during the stock market’s pullback. If that comes under pressure, I will feel better that the little low is in and new highs are coming.

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