Semis Strong, Shouldering the Burden. Other Sectors Stepping Up.

The stock market continues to quietly drift higher, at least on the surface. The Dow, S&P 500 and NASDAQ 100 have seen new highs this week while the S&P 400 and Russell 2000 look constructive but still well below their peaks. I do expect them to play catch up and see blue skies before any meaningful downside is seen.

I wrote about the banks earlier this week as being a concern. Discretionary is a bit stronger but also not firing on all cylinders. Transports have rallied strongly and seem poised for new highs. Semis, as I wrote about before, have shouldered most of the leadership burden and are just shy of new highs. That’s been an impressive run and I don’t think it’s over.

Outside the key sector group, I see some really encouraging behavior by healthcare, biotech, industrials, materials and energy. While some analysts question market participation, this behavior counters that argument. Furthermore, although the percentage of stocks above their long-term trend (200 day moving average remains in a downtrend as you can see in the first chart, the second one is a longtime favorite, the NYSE Advance/Decline Line. For me, the latter is a better representation of what’s going on beneath the surface.

Here’s the bottom line. While the stock market is not without short-term concerns and I am still looking for some weakness next month, the majority of the key indicators are in good shape. Bull markets do not end with behavior like we are currently seeing.

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Banks Warning, Hold Key to Bull Market

Since late July I have been in the camp looking for a trading range with a mild/modest pullback. I remain of that opinion today. Should stocks gather themselves and score fresh new highs this month, I think it will be a good opportunity for the  nimble  to sell for a modest move lower into October. All along, I have written about a mid single digit pullback and that’s still my target. I do not believe we will see a 10%+ decline and certainly, the bull market is not over.
I am not going to rehash my rationale for why a trading range/pullback and why so modest right here, but I do want to add color to a previous concern, the banks. As you know, the banks/financials are one of my four key sectors to a bull market’s health. The others being semiconductors, consumer discretionary and transports.
Remember that the banks peaked in February 2007, long before the stock market did in October as you can see below. A 2 1/2 year, 50%+ debacle followed suit.

Before the Dotcom Bubble burst in 2000, the banks double topped in July 1998 and April 1999 before the bull market ended in March 2000. A 50%, 2 1/2 year collapse ensued.

Last week, the banks were at their lowest level in three months while the S&P 500 was one good day from all-time highs. That’s not exactly healthy behavior and can lead to some kind of trouble for stocks. Additionally, the banks had also sunk below their long-term trend, more popularly know as the average price of the last 200 days (200 day moving average). However, let’s also remember that not all poor behavior by the banks leads to a 50% or even a 20% stock market decline.
As the new week began and Hurricane Irma’s ferocity did not cause the damage expected and certainly not the worst case scenario, stocks opened with a relief rally that ended up powering higher all day. The banks were a leader. This morning, as I type this, banks are once again leading and have rallied right back to the pink line or their long-term trend, giving a sigh of relief to the bulls. You can see that important chart below.
However, nothing has changed fundamentally, not a single thing, or really technically for that matter. And the Fed is still slated to announce their balance sheet taper plan next week with the likelihood of one more rate hike in December. Bank earnings are unlikely to accelerate from here. The economy’s output has improved as I have been writing about all year, but a recession still looms in President Trump’s term.
The three month low does not look the a low of significance or not the ultimate bottom. It appears to be just a spot for a bounce before moving lower. It will be interesting to see how price behaves now that it has bounced. Bulls really want to see the group close above the pink line below (long-term trend) for a week straight. Failure to do so will likely result in the pink line beginning to trend down with price beneath it. That’s a bad set up. Also, the price lows for 2017 are at the blue line, another line in the sand the keep a close eye on.
The final area of the chart above I want to point out is the far right side where I have red and green lines with question marks. I am being the master of the obvious to say the banks can go in either direction, but I really do think there is a binary outcome from here although it isn’t likely to be in straight line fashion. I just don’t see the sector staying in that trading range. It’s either going to breakout to the upside or breakdown. The next few days and weeks are likely key although a massive breakout of significance will oftentimes begin as a fake out in the opposite direction first.

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Remembering 9-11

September 11th seems to sneak up on me each year. With summer vacation, kids going back to school, Labor Day and the start of the NFL season, it feels like I wake up and realize 9-11 is either the next day or very close by. We all remember where we were and what we did on September 11th, 2001. I was sitting in my office and saw the World Trade Center on TV with the media reporting that a plane had it one of the towers. I kept thinking that didn’t make sense. Where was the little plane? Who ever could have thought that it was a huge jet. I kept wondering why the camera didn’t show the ground where this supposed plane would be in bits and pieces.

Teri & I were engaged at that point and we vividly remember exchanging AOL emails on what we thought was just a little “accident”. The stock market index futures were selling off after the news broke. I thought, “what a great buying opportunity”! I mean, why would people sell stocks because a little Cessna plane had accidentally flown into one of the towers.

Then the second plane hit and people immediately had footage. I remember standing in my office in disbelief. Speechless. Shock. I had friends in the WTC.

As the day continued to unfold, people in my office park kept coming in to my office as we were the only ones with TV. I think everyone felt comforted to be surrounded by others. “I can’t believe this” became the refrain of the day. Over and over and over.

I later learned that I lost my childhood and high school friend, Chris Murphy, along with a college fraternity brother, Charlie Dolan, whom I did not know well. We all lost someone directly or indirectly.  The stories began to pour out of those who were supposed to be in the WTC that morning or who turned around because something else happened. My good friend Alison got out of the taxi a little before 8:30am on that day for work in front of the towers.  She realized she forgot important work at home and turned right around and headed back to her apartment. She was one of the lucky ones. Her boyfriend worked for Cantor Fitzgerald and he was tragically not.

In my travels over the years, I have met a number of people who got out. They talk about being covered is dust and debris, struggling to breathe and running for their lives. Few went back to work in New York City. All were profoundly changed forever.

One thing the terrorists miscalculated, the American spirit and resolve. This unspeakable attack brought the country together like hadn’t been seen in many decades. No one was prepared to let evil win.

Never forget…

In remembrance of those who perished at the cowardly hands of murderers, we will be donating what amounts to today’s firm profits to a fund for the benefit of those families directly impacted.

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The Misconception About September’s Ire

Academics and the media do a pretty good job of warning the investing public of September’s historically poor performance. In fact, many investors become alarmed each year as August comes to an end and the various dire studies are paraded around. After all, since 1928, September is by far the worst month of the year with an average return of -1.1%. 39 have been up while 49 have been down. The other 11 months are basically flat or up with all showing more ups than downs.


Most analysts stop right there and find no need to dig any deeper. After all, September is factually proven to be the worst month and investors should proceed with caution. But do those 39 months where the month is up have anything in common? How about those 49 down months?

With some help from Oppenheimer & Co., I went back and found that much of September’s negativity is dependent upon the position of price as the month begins. You can essentially use any long-term trend here to determine that. In this case, I looked at the 150 and 250 moving averages and Oppenheimer used the 200 day moving average. There is nothing magical about any of the numbers.

When September begins with the S&P 500 trading higher than its long-term average (trend), the month turns a negative 1% performance into a plus .50% performance which is very average. Stop and reread that again. When stocks were generally in an uptrend, September’s nasty bite was gone.

Since the bull market began, here is how Septembers have fared when beginning in an uptrend.

2009 – up

2012 – up

2013 – up

2014 – down

2016 –  even

Looking at September a different way, let’s take a look at Septembers the year after a presidential election.

2013 – up

2009 – up

2005 – up

2001 – down

1997 – up

1993 – down

1993 was the only down month which also began above its long-term trend. In other words, a failure in terms of the studies. 2001 was a large loss of 8%, obviously exacerbated significantly by 9-11. The other down months were relatively mild.

While the masses often fret about September, a closer look reveals that all Septembers are not created equal. September 2017 began with the S&P 500 in an uptrend.

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Small Caps, Semis & Junk Leading. Banks Looking Sick

Stocks ended last week on firm footing as the bounce saw four nice days. With more North Korea tensions in the air, it will be interesting to see if the stock market finally cares or just uses this as an excuse to open mildly lower. Very quietly as I have mentioned before, the Russell 2000 has been leading the major indices. That does have bullish implications if it holds on.

Additionally, the semis which have been the only key sector leading, are one strong day from new highs.

One sector that has me particularly concerned is the banks. They look sick. While that isn’t likely to have a short-term impact, it’s something that must be watched over the intermediate and long-term.

Turning to my favorite canary in the coal mine, high yield bonds are behaving more like semis than banks, trading just one good day from new highs. It would make me feel a whole lot better if this key group can score new highs before rolling over again.

Once again, we have a number of crosscurrents. If stocks gather themselves and rally, I think there will be a good opportunity to sell at new highs. Should stocks rollover first, I will become more concerned about the downside. In either case, I do not think stocks are blasting off higher until next quarter.

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Crosscurrents Abound. Enough for Bulls & Bears

Stocks continue the bounce they began two weeks ago and the same one I have been discussing. Tuesday was the day where the acceleration started. That could be slowing today. The NASDAQ 100 sits an all-time high but it’s lonely up there. The Dow and S&P 500 are within striking distance but the ever improving S&P 400 and Russell 2000 are not close. With the monthly jobs report out this morning, any strength will create a little short-term headwind for stocks into next week.

Speaking of the employment report, it was a little weaker than expected and last month was revised down a bit. This data will be very important to watch for signs of a possible peak. Topping out this year could put us on recession watch sometime in 2018 if the Fed doesn’t pull back their tightening cycle.

I have been writing about the importance of the semis to put the market on its back and lead as it’s the only key sector that is strong right now. This group is now within a good day or so of new highs, chalking one up for the bulls. On the flip side, discretionary, banks and transports are nowhere near that strong, creating a vacuum of good leadership. Healthcare and biotech are cranking at new highs, but those are not usually the sectors that can lead a new leg in an old bull market.

On the flip side of the flip side, high yield bonds have quietly been strong for two weeks and doing their best to recoup Q2 damage and remove themselves from being a concern. Basically, we have lots of crosscurrents right now. Let’s see if the NYSE Advance/Decline Line can make a new high.

If you missed my segment on ABC in CT yesterday regarding market reaction to Harvey, here it is.

Analyzing stock market behavior after disasters

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Q2 GDP Baby. Stocks Like It!

This morning, the government reported that the “second look” at Q2 GDP grew by 3%, higher than the original 2.6% first reported. 3% is even higher than any of my most bullish models and it continues to show that the US economy is re-accelerating higher this year.I would love to hear from all those people who challenged my bullish view of the economy or called me out Twitter. They kept telling me that 3% was a pipe dream.

My theme all year has been reality over rhetoric and this epitomizes it. You can call it coincidence. You can credit Trump or Congress or the global central banks. I would say it’s probably all of the above. The fact is that the economy is doing better than at any time over the past three years and should continue to improve with some slight adjustments and volatility from Hurricane Harvey.

Stocks opened sharply lower on Wednesday after North Korea fired a missile over Japan. However, by the end of the day, the bulls stepped up and regained all that was lost and then some. While I still believe stocks are in an intermediate-term trading range, short-term action is certainly strong and the rally that began at the open on Wednesday should continue. With banks, transports and discretionary still not leading, the rally may very well rest its hopes on the semis. Let’s see if they can score a new high for this quarter and possibly challenge their 2017 highs. That’s a stretch, but don’t count them out.

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Insurance Sector Around Disasters

If any sub-sector should be impacted by disasters, you would think it would be the insurance group. Similar to what I did above, let’s look at how the Dow Jones Insurance Index behaved around the events.

Sandy is first and you can see that it was already pulling back when Sandy hit and continued to weaken for two more weeks before blasting off to the upside. This was basically in line with how the stock market did although a little earlier.

Reaction to Katrina was surprisingly strong as the sector did not have much downside immediately following although the S&P 500 was much stronger. And when the S&P 500 declined into October to new lows, the insurance group made a higher low, indicating possible future leadership which came to fruition through November.

Northridge is next and I had to use the stock of Allstate as my data on the insurance index did not go back far enough. While the S&P 500 rallied and then declined, Allstate was literally straight down for several months with barely an intervening rally.

With Andrew, I used the stock of Travelers since Allstate wasn’t public yet. Similar to the S&P 500, Travelers rallied a little and then declined although it wasn’t perfect.

Today, we see that the insurance group has been under pressure for a few weeks, oddly upticked on Friday and now is declining today where I have the arrow and “Harvey”. If history is any guide, we should see a good buying opportunity in this sector sometime in September.

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Stock Market Behavior Around Other Disasters

With Hurricane Harvey and the associated historic, catastrophic flooding the area is experiencing and the country is watching in real time, it got me thinking about how the stock market (S&P 500) and insurance stocks fared during previous disasters. I decided to leave energy out because there haven’t been many hurricanes that directly impacted oil and gas. I did not include the Deepwater Horizon disaster in the gulf.

Let’s start with the S&P 500 during Superstorm Sandy, Katrina, the Northridge Earthquake and Andrew. Then we can look at today for any clues at to what lies ahead. Although Ike was on an equal loss plain, I excluded it because it occurred in September 2008 during the height of the financial crisis. Price action from the crisis certainly overwhelmed any impact from Ike.

As you can see below Sandy hit when stocks were already pulling back. They rallied for a day before falling to their ultimate lows two weeks later. From there, it was straight up.

Katrina is next and it’s a different story as the hurricane had two landfalls, first in Florida which people forget and then in Louisiana. Katrina was also a category 5 storm in the gulf which somewhat led to the pullback into its second landfall. The media and weather experts were consumed with how a cat 5 landfall would devastate. Thankfully, we never found out!

Stocks opened lower on Katrina day and then rallied for two weeks before rolling over again to the final low in October. Then it was up, up and away.

With earthquakes, there isn’t a warning so this is a different type of catastrophe for the markets to deal with. As you can see below, the market barely skipped a beat and the impact was essentially nothing.

Finally, Andrew is below and like the other hurricanes, stocks had already been pulling back when this monster made landfall in 1992. Similar to Katrina, stocks rallied immediately for two weeks before rolling over to their ultimate lows in October before soaring again.

Finally, take a look at where we stand today. The stock market has been in pullback mode, which has been a theme of mine all month. It’s not really conforming to any of the previously mentioned disasters.

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Bounce to Continue. Yellen, Draghi & Harvey

We have several crosscurrents to end the week. Before I get to them, while I believe that stocks remain in pullback mode, I do not think that the bounce I wrote about on Tuesday is over just yet. There should be some more upside left. I am slightly encouraged by the very short-term strength in the Russell 2000 although it is about to test the underside of its long-term trend, also known as the 200 day moving average. That could cap the rally. Semis continue to hang in and refuse to tip their hand. On the other hand, transports broke down yet again this week and that’s a drag.

This is all within the context of the slowest activity of the year next week. “Slow” does not mean quiet nor lack of action. There have been many market events when participants have been on vacation. Russia’s debt default in 1998 is among the worst. It pays to stay vigilant.

The Fed’s annual retreat in Jackson Hole Wyoming is happening now. Chair Janet Yellen and ECB Chair Mario Draghi are both set to speak today. If any major policy moves lie ahead, I would expect a little hint in their speeches. Additionally, Yellen could/should offer some clues on the expected tapering of the Fed’s $4+ trillion balance sheet.

On the weather front, Hurricane Harvey is set to hit the Texas coast shortly. The worst forecasts have it making landfall and then pulling back offshore for another assault on land. Weather events are very short-term and quickly reversed market events. The energy sector is where we typically see the highest impact. I wrote about energy yesterday and I still feel the same way, storm or not. Thoughts and prayers are with all those in harm’s way! Stay safe!!

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