As we begin this week's article, it is imperative to note that the major averages are acting very well in both the intermediate and long term.
In the short-term, the market is pulling back as it pauses to digest its latest (and very strong) rally. In the short-term March-June has been a weak period for US stocks over the past few years.
Intermediate & Long Term Picture Remain Strong:
Only a few short weeks ago, the Dow Jones Industrial Average, S&P 500, Mid-Cap S&P 400 and small-cap Russell 2000 were all trading at new record highs (very healthy). Meanwhile, the tech-heavy Nasdaq composite traded above 5k for the first time since early 2000! All this clearly shows that the bulls remain in clear control of this market - for now.
An Aging Bull...
In early March 2015, the current bull market celebrated its sixth anniversary, making it one of the oldest bull market in decades. Since the 1980's, the average age of each bull market lasted around five years and each bear market lasted approximately two years. Clearly, this bull market is aging by any normal definition and is way overdue for a normal correction (decline of 10% from a recent high). In fact, the S&P 500 has not fallen 10% since June 2012 which in and of itself is very bullish. The fact that every pullback has been shallow in size (small percentage decline) and scope (short in duration) bodes very well for this very strong bull run. For years, we have argued that the primary bullish backdrop for this entire bull run has been easy money from global central banks (a.k.a the Central Bank Put) and at this point that backdrop remains alive and well.
Dark Clouds Forming...
In normal healthy bull markets, volatility remains relatively low and stocks steadily advance. During market tops and bottoms, the market behaves differently. Most of the time, volatility spikes across the board, the major averages and leading stocks begin to act "sloppy" and there is a lot of Jell-O moving on the plate (not a technical term). Having said that we are beginning to see a few dark clouds emerging in the periphery which causes us to exercise caution up here- after a big move. First, the bull market is aging. Second, global macro markets are trading like penny stocks, which typically is not healthy for the bulls. Over the past six months, we have seen a big change in the way global markets are trading. In October 2014, when QE 3 ended, the S&P 500 plunged -8% in the first two weeks of October and then vaulted over +14% over the next three weeks! Typically, that's not ideal - especially after a big move. But since the Central Bank Put remains alive and well, buyers showed up and continued buying stocks. Over the past few months, we have seen insanely large swings in major global currencies as the world piles into the US dollar in anticipation that the US Federal Reserve will become the first major central bank to raise rates. Over the few weeks, we are starting to see that volatility spread into global commodity markets. After falling to a fresh multi-year low, crude oil vaulted over +22% in the last 9 trading days! Meanwhile, gold surged over 6% in the past 7 trading days and sugar plunged 12% over the past few weeks! Keep in mind that these are major global markets, not thinly traded penny stocks.
Follow The Leaders
Leading stocks (high beta, biotechs, semiconductors, etc) are also beginning to pullback a little. For whatever reason, they did the same thing March-May in 2014 and 2012. At this point, we do not think the bull market is over (we need to see a lot more damage occur) but we just want to share with you what we are seeing in real-time. At this point, history shows us that we are getting closer to a market top, not further away from one. That doesn't mean that a top is upon us right now, just that we are mindful of what is happening and ready to play defense, if/when necessary. The bottom line, this is a very strong bull market and weakness should be bought, not sold-- until it ends. We will look to be buying if/when the market bounces. Conversely, if it decides to roll over, we will be well prepared.
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