Is it Crash Helmet Time???

For the past three weeks, my message has been one of a little short-term concern against the backdrop of much higher prices to follow. That remains unchanged. Market sentiment had become frothy, meaning that too many people had become too confident in the stock market. We saw that in both the individual investor and newsletter writer sentiment surveys. Options traders were betting overwhelmingly on higher prices over the short-term. Corporate insiders were selling much more than they were buying. Traders using the Rydex mutual funds had become heavily invested on the “risk on” side. The short-term trading or ARMS index showed excessive buying pressure.

Combined together, we had stock market sentiment at potentially bull market killing levels. However, excessively bullish sentiment has never single handedly killed a bull market. There needs to be a poor monetary and/or valuation landscape as well, which we do not have today. So let’s not even begin the discussion about the bull market being over. I know I am beginning to play with fire as I have said that during every single pullback since 2012 began, but I continue to feel the same way today.

Anyway, the pullback is here. It looks and feels nasty. The bears are coming out of the woodwork calling for a bear market, a 20% decline, even the 10% correction. As always, I could be wrong, but I view this bout of weakness as yet another single digit pullback that can be bought and will lead to fresh all-time highs next quarter.

Yes, sentiment was really bad, but go back and reread my two pieces on Canaries in the Coal Mine. The big picture did not look unhealthy a few weeks ago and certainly does not today. The market was due for some cleansing and the job is getting done now. Stocks should begin to probe for a low shortly between current levels and 4% lower. Technical damage has been relatively mild so far and it’s time to make our shopping list.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

Sector Canaries Singing but Quietly

With the major stock market indices all in good shape beyond the short-term pullback, let’s take a look at the key sectors and two other important canaries.

The banks are first and they remain mired in a trading range for the past year. Before the last bear market, banks peaked a good nine months before the major indices did. In the Dotcom bear market, banks topped a full 18 months before the overall market did. As a bull, it would be very positive to see the banks exceed the level last seen at the end of 2014, roughly 5% higher.

 

Semiconductors are below and happily sitting at fresh 14 year highs. They are a vital sector because so much technology starts with a semi chip. As go the semis, so goes tech. And as goes tech, so goes the rest of the market. As I mentioned in my 2015 Fearless Forecast, I believe semis finally see all-time highs this year, exceeding the Dotcom bubble peak from 2000.

 

The transports are next and can be viewed both positively and negatively depending on your bias. They are entering their fourth month in a trading range with lower band much more defined than the upper. I downgraded them to neutral in early December (and sold them) when they stopped rallying as crude oil collapsed. That shouldn’t have happened in a strongly bullish scenario. While they still look a bit sloppy, given my more long-term positive outlook, I expect them to resolve the trading range to the upside in a big way by summer. For now, you would have to rate their divergence or inability to keep pace with the Dow Industrials above as a small negative.

 

 

My two favorite canaries are next. The first one is the cumulative New York Stock Exchange Advance/Decline line, which is just a fancy name for keeping track of the numbers of stocks going up and down on a daily basis and put on a chart. Using words like “always” and “never” are not prudent in this business, but the NYSE AD line is as close to a “never” as it gets. The stock market almost never tops out with this indicator at or near all-time highs as it is today. Before a bear market begins, we usually see this indicator peak 3-20 months before the major stock market indices, which signals that fewer and fewer stocks are participating in the rally.

 

 

Finally, you can see a chart of the PIMCO High Yield Fund, which for full disclosure we own in two strategies. I use this a proxy for the junk bond market along with the exchange traded fund JNK. Junk bonds are among the lowest credit quality in the fixed income space and are acutely sensitive to ripples in the financial system’s liquidity stream as well as the economy. They are the ultimate canary in the coal mine. As the economy very slowly and slightly begins to weaken, investors start to worry about these companies defaulting, long before the GDP numbers roll into recession. While high yields bonds may give too many early warnings, they typically don’t miss the big one.

 

 

Overall, the sector canaries are neutral to slightly positive, but the NYSE AD Line and high yield sector are strong. The likelihood of a bear market from here is very small.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

Canaries in the Major Indices Singing Loudly

With stocks scoring new highs lately, it’s a good time to pay a visit to the canaries in the coal mine and see if we have any dead ones. For newer readers, Canaries in the Coal Mine is a semi-regular piece when stocks are near fresh highs or lows to signal a potential major trend change or warning sign. This analysis is not good at identifying routine and regular corrections or intermediate-term rallies.
In this first piece, we are going to look at the major stock market indices with the Dow Jones Industrials being first. As you can see below, after a multi-month period of digestion with more than a few pundits calling for the end of the bull market, the Dow gathered itself and saw all-time highs this

Almost the exact same comments can be made regarding the S&P 500 which is also sitting at an all-time high. Hard to argue with that!

The S&P 400 mid cap index is below and like the previous ones, it sits at yet another all-time high. Do you smell a trend developing here???

Just like with the others, but even more impressive, the Russell 2000 small cap index is next and sitting at all-time highs. This is probably the biggest “stick in the eye” to the bears because they were hanging their hats on the fact that the small caps performed so horribly last year, which would portend problems for the rest of the market in 2015. That scenario, which I totally discounted in my 2015 Fearless Forecast, was not to be had and the bears will have to find fault somewhere else.

Finally, the NASDAQ 100 is below and while it is not YET at the all-time level last seen in March 2000 which I forecast it will in the 2015 Fearless Forecast, it is, nonetheless, at fresh highs 14 year highs and still a bullish sign.

The takeaway from this section is that all canaries are happily signing loudly from a long-term perspective. We can and should see pullbacks and corrections along the way, but those should lead to more all-time highs down the road.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

Blue Skies

Another day, more blue skies for the major stock market indices. The pain for the bears has to be strong and growing, but I have yet to see evidence that they are throwing in the towel en mass. And price action has done absolutely wrong to suggest anything more than a trading pullback.

As I mentioned the other day, I think it pays to be a little more vigilant here, not that I think we are going to see a full fledged correction or the need to make outright sales to raise cash. Sentiment has grown a little complacent and stocks are at all-time highs, sometimes an ingredient for a quick pullback. However, the plan remains the same. Until proven otherwise, pullbacks are buying opportunities.

The longer the market can go without giving up significant gains, the more likely the resolution will be sharply higher. As a bull, it would be great to see some sideways action for a week or so and then another blast higher to really squeeze the bears. Ultimately, I still believe that stocks will experience a major blow off to the upside before the bull market ends, however, it doesn’t look like that’s right here.

Sector leadership continues to rotate in an intermediate-term positive fashion with REITs, utilities and staples all ceding to consumer discretionary, semis, biotech.

Gearing up to visit Jeff Macke and the good folks at Yahoo Finance tomorrow and then see my old friend Melissa Francis at Fox Business on her show MONEY.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

Time to Be Careful

Before I dive in, let me be very clear, I remain bullish over most time frames. Nothing has changed. Five straight closes above 18,000 as I spelled out on CNBC last week and many times over the past six months may create a slingshot to 20,000 this year. The bull market is old and wrinkly but not dead. Same old lines from me.

The headline about being “careful” is more about the short-term and because stocks just broke out to all-time highs where risk usually increases. The major indices had been in a trading range for three months and just hit fresh highs over the past few days. Historically, this can lead to a quick surge higher as bears scramble to cover losses and bulls pile in. However, it can sometimes lead to a fast and sharp downside reversal which usually happens sooner than later.

At this point, I am not concerned yet that a double digit correction is here, just a little warning not to be complacent. The window of opportunity for the bears to make a stand is now, meaning over the next week. The longer stocks remain at new highs, the less likely a sharp reversal can take hold.

I will talk about sector leadership rotation tomorrow, but suffice it to say that it’s very encouraging! My position in the long dated treasury is not.

REMINDER: I will be on Fox Business’ Making Money with Charles Payne tonight from 6 pm – 7 pm. Tune in for a fast paced hour we talk markets, economy and a random group of topics.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

 

Lines in the Sand

The bulls are back to pressing against the upper end of the short-term trading range and should attempt to close above those lines in the sand. On the Dow, the level is 17975 on a closing basis while it’s 2073 on the S&P 500. Both are just a one day rally away. The S&P 400 already saw all time highs last week while the Russell 2000, long left for dead by the market, has a line in the sand at 1215 which is one good morning away. Finally, the Nasdaq 100, dominated by Apple and few other mega tech stocks, is breaking out of its multi-month period of digestion and is poised to see fresh highs shortly.

Unless the major indices fail to exceed their lines in the sand this month and rollover to new 2015 lows, the ball is firmly in the hands of the bulls and they will need to run with it.

On the key sector front, while the banks and transports continue their slumber, the semiconductors are starting to wake up. Fresh bullish leadership is emerging from the consumer discretionary sector and homebuilders while the defensive leaders like utilities and REITs are lagging. If this new trend continues, it would have very bullish implications over the coming months.

On the flip side, long-term treasuries have quietly taken it harshly on the chin with the exchange traded fund TLT down more than 5% from the highs. The are supposed to step right here…

If you would like to be notified by email when a new post is made here, please sign up, HERE.

Bulls Trying to Step on Bears’ Throats

Earlier this week, I spelled out three possible scenarios for stocks with one very bullish, one mildly bullish and one bearish. I gave most weight to the mildly bullish one and least weight to the bearish one. Right now, stocks are marching more towards the very bullish scenario although the Dow breached the lows I had discussed in the mildly bullish scenario.

Looking at the five major indices, the Dow needs to close above 17,850 to set up a run to new highs and break the backs of the bears. The S&P 500’s number is 2065 while the S&P 400 is hitting fresh all-time highs as I type this. The Russell 2000 is already above its line in the sand and just needs to close well to stomp on the bears. Finally, the Nasdaq 100’s number is 4295, still more than 1% away and playing catch up.

Unless the major indices immediately reverse, and there is the employment report on Friday, the bulls should have enough juice to push higher with most indices scoring all-time highs this month.

Anything to worry about? With the bull market being 71 months old and more than 3 years without a full fledged correction, risk is there. The three key sectors, semis, banks and transports are not leading and don’t look powerfully constructive. Defense remains in charge, not exactly a ringing endorsement.

However, if the Dow sees 5 straight closes above 18,000, that will set up 20,000 as the next target in 2015.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

Bears Pulling a Pete Carroll?

The bears began Monday’s trading with the ball, seemingly just needing to breach the lows to force a wave of technical selling. It shouldn’t have been that difficult. After multiple intra-day reversals by the bulls stocks ended sharply higher on decent internals. While that all looks very nice and neat on a chart, I would have still preferred to see a clear breach of all recent key lows by at least the majority of the major indices. All we saw on Monday were the Dow’s bottoms being cleaned out.  Interestingly or curiously, the S&P 500 essentially saw the exact same level as in December while the S&P 400, Russell 2000 and Nasdaq 100 weren’t even close.

All this together, the bulls have a little advantage here but must use it right away. If and when Monday’s lows are breached on a closing basis, that would likely set off a sharp “whoosh” lower of several percent across the board as I mentioned in Monday’s three scenario piece. For now, keep an eye which sectors are leading and lagging for signs of change. Eventually, the short-term “all clear” signal comes when the S&P 500 closes above 2064.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

Bears Trying to Run It In

Congratulations to the New England Patriots! I didn’t root for you, but a win is a win, even in the face of the single worst offensive play called in the history of  big game sports.

Stocks begin the week with the bears in mild control even following Thursday’s reversal. Early this week should be very key to see which way the short-term winds blow. On the S&P 500 and its weaker cousin, the Dow, price has declined to the same general area for the fourth time since early December. While not impossible, it’s unlikely that a “quadruple” bottom will hold.

The scenarios end up being:

Most bullish – stocks hold the lows from last week and the bulls take over control right away and begin and advance to new highs

Modestly bullish – stocks see further selling of 2-3% before bottoming and beginning a solid rally to the end of the quarter towards the old highs

Bearish – stocks knife right through the lows of the past two months and plummet straight to the levels seen at the October “Ebola Bottom”

At this point, I think scenario number two is the most likely  with number three as the least likely.

Sector leadership remains defensive and we really need to see that change before talk of Dow 20,000 begins again. High yield bonds are showing a very bullish short-term pattern and they should be watch closely, especially if energy continues to bounce from the last week.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

Heading into the Weekend

Some of the pop in volatility this week is starting to be wrung out as the markets close the week. On Thursday we saw a nice reversal across the board, however the internal numbers were nothing to write home about. Additionally, I would have much preferred to see the lows from at 2015, if not December 2014 breached before the reversal took hold. That would have given a good flush to weak handed holders.

For now, the major indices remain in the two month trading range without a huge edge either way. Sector leadership is also unwavering and favoring the defensive areas like healthcare, biotech, utilities and REITs. Homebuilding is the outlier leader on a short-term basis.

Unless something changes dramatically by 4pm, the stock market will close down for the second straight month with the “all important” month of January being negative…

If you would like to be notified by email when a new post is made here, please sign up, HERE.