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State of the Markets: This Bull Is Strong
I mentioned last week that we are still stuck in high-level range and to me, that means we stick with a bullish bias until that lower part of the range breaks. Pulling back the zoom a little bit, let’s check the markets on a larger time frame and via sectors. The S&P 500 (via SPY) is hovering above the old breakout zone and is well above the intermediate trend line. Still a bullish bias in my view. Banks (KBE)- broke their uptrend and have been going sideways to down since. This is the most concerning thing that I have seen. I prefer them to lead, so this divergence could be a harbinger of things to come, but nothing yet. Retail (XRT) – broke its recent down trend, then checked back into it from above. A good sign and a clear positive trend change. Bullish here. Transports (XTN) – They were stuck in a downward channel, but broke through to the upside and have consolidated there for a while. Bullish again. The bull still seems strong here, and I don’t see the need to play for the downside until we break the lower end of this range. BP
Continue Reading -->All-Time Highs on the Table?
Happy Friday! We’re less than a day away from a much-needed weekend, so let’s try to go out strong… though I’ll settle for making it out alive. I’m picking Runaway Child, Running Wild by the Temptations as my morning pick-me-up since coffee wasn’t enough. Asian markets are slipping and Europe is slightly green following yesterday’s down day in the US. Japan is down on Governor Kuroda’s stated opposition to “helicopter money.” Markit’s euro area PMI hit an 18-month low at 52.7, while its UK PMI showed what they’re calling a “dramatic deterioration” in business activity. This is disappointing because UK economic data has actually been fairly strong relative to low expectations recently. On the plus side, Germany’s PMI was strong, though interestingly, the DAX is the worst performing major market this morning. Crude oil is off the lows but still down for the week as traders remain concerned about seasonably high gasoline inventory levels. In earnings, GE (GE) beat expectations despite a sluggish global macro picture, though fellow industrial Honeywell (HON) is off on light guidance. SPX futures are up fractionally on the boost from GE, so we could see the 7th new all-time high in the past 10 days. Sentiment continues to lean positive, which is probably best illustrated by the low VIX and steep VIX curve. However, bulls are not quite leaning “all in.” The ISE Sentiment Index has read bearish in 2 of the past 3 days and the AAII survey showed neutral sentiment. On my own personal back-of-the-envelope sentiment meter, I’d say that on a 1-10 scale, we’re at about a 7 out of 10 in terms of sentiment. (with 10 being ecstatically bullish) Near-term, the best course forward for the bulls seems to be a sideways grind like we saw in April-May. That horrendously boring lull tricked the bears into wasting all their money on put options, which ultimate provided the fuel for this recent streak of record highs. The economic calendar is more or less empty today — we’ve got just the Markit US Manufacturing PMI and Baker Hughes Rig Count, so odds are the news flow will be pretty light. I try to stear clear of politics here, but there is chatter that Democratic candidate Hillary Clinton will appoint a running mate today. If she happens to appoint Massachusetts Senator Elizabeth Warren (I see a less than 25% chance of this myself), the banks could get hit short-term. I wouldn’t mind seeing a modest down day today to digest gains Good luck out there friends.
Continue Reading -->Jeff Cooper: Today Sets Up as a Key Day
Follow Jeff Cooper on Twitter: @JeffCooperLive Has anything really changed that justifies the extreme levels of bullish sentiment — other than stocks going up? Is the stock market discounting something favorable that bulls are chasing? I don’t think so. Rather, my sense is that after the Brexit vote, players were poised to pounce and short the Brexit Bounce — especially within the context of a tedious 18 month trading range punctuated by several sharp downdrafts. In other words, I think the way we got here was with an extraordinary level of players set to lay out shorts around a 50% retrace of the June trading range — to wit, SPX 2120 to 1992, which gives a mid-point of 2056. A funny thing happened on the way to collecting on those bets. The SPX rocketed through the 2056 like the proverbial knife through butter. In fact as the below daily SPX from June shows, the SPX closed at 2070 on day 2 off the Brexit low — above the monthly equilibrium pivot. The next session, the SPX cleared its 50 day line with authority. The bottom line: the perception that the impact of an exit vote could mean the breakup of the EU was prevalent, which caused an extraordinary level of bearish sentiment. In short, too many market participants were leaning to the short side of the ship; there was no shortage of players ready to short the Brexit Bounce which perpetuated a contrarian move. The Brexit Bounce morphed into the Brexit Bungee. Extreme bearish sentiment on the surprise vote has quickly shifted to extreme bullish sentiment. This is borne out by put/call ratios, the smart money/dumb money index and a decade high in the Greed/Fear Index. While some may chalk up this speedy shift from a selling panic to a buying panic to our modern era of twitterpated, computer driven information and hence this can only provide us with insight as to the short term, as in a few weeks, I am mindful of the market maxim that volatility precedes price. Be that as it may, assuming that the current upside spike in sentiment only speaks to a pullback over the next few weeks, I think the takeaway is that a picture perfect, pat pullback to the breakout pivot of 2110-2120 may be undercut leading to a push below the big psychological 2100 level. A decline below 2100 would raise red flags as to a failed breakout. If this plays out it would not surprise me to then see an contrarian bounce that tests current levels and perhaps nominally exceeds them. But if this scenario plays out, the damage will have been done. The damage I am referring to is the inherent structure of a blow-off. Blow-offs typically do not pullback for more than 3 days before resuming their runaway trajectory. So a meaningful pullback indicates the blow-off has culminated. Strategy. A 10 min SPX below shows a spike to 2170 on July 15 followed by a little decline to 2156. The index has been trading inside since. This morning’s the futures are indicating a push into yesterday’s gap window which if exceeded will likely satisfy our idealized 2174 level today, on the idealized July 20 turning point day. As a refresher, 2174 aligns/vibrates off this week on the Square of 9 Wheel and is opposite January 20, the primary low in 2016. So today sets up as a key day. Click here to read more about how Jeff is crushing the market with the Daily Market Report.
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