-- Weekly Market Summary --
Bears Growl but Midcap Stocks Could
  Lead the Next Leg Up

I’ve said it several times lately , this is not a bear market. Specifically, the stock market remains in an uptrend despite – or perhaps due to the rising bearish commentary- even after the Fed’s recent and fourth in an ongoing series of interest rate increases. No doubt, if you read the weekend market stories, you might have seen Marc Faber’s prediction of a possible 40% decline in the S & P 500 that could be around the corner.

I can’t say that it won’t happen, since I don’t have a window to the future; thus Mr. Faber’s prediction is plausible. He certainly has a point; with his basic message being the world is a mess and that at some point all the bad things going on will come to roost. And yes, if history is a guide, one of these days the Federal Reserve will raise interest rates to a level that triggers major selling in stocks. So, in the macro sense, history and past market behavior are on his side.

That being said, the message of the market’s current technical underpinnings to the bears seems to be: not yet. Above all, the best thing about Mr. Faber’s bearishness, with regard to the stock market, is that he is not alone. Consider the CBOE Put/Call ratio over the last ten days which has averaged a reading of 0.91, where any reading above 0.9 is considered a bullish contrarian indicator. What this number, along with the very loud bears calling for the end of the world means is that the wall of worry, the fuel that pushes bull markets higher is still intact.

In fact, the market’s step sister/middle child macro sector, the midcap stocks, could be ready to become the next hot money attractor, if some current technical signs prevail. Indeed while the tech stocks have swooned and the large cap stocks have pulled back slightly, the S & P Midcap 400 Index (MID) notched a huge volume day last Friday, which was confirmed by a breakout in its On Balance Volume (OBV) indicator. And while the index did not deliver a breakout, and some of the volume could be related to an index rebalancing, volume is well known to precede price. So if this tried and true market principle holds true, we could see a major move of money into the midcap sector since it’s been a very steady performer of late.

Uptrend Remains Intact – Big Move Likely

Meanwhile, despite the market’s recent large cap tech related stumble, the Standard & Poor’s 500 Index (SPX) remains in a well defined uptrend with the index within reach of its recent new high and prices remaining above their 20, 50, and 200-day moving averages. Moreover, it is likely that a big move is setting up, as the Bollinger Bands (green lines above and below prices) are closing in, signaling a drop in volatility which usually precedes a big move.

The direction of prices when these bands tighten is always uncertain, so the big move could well be to the down side. However, given the recent pullback in stock prices and the overall action in the market’s breadth (see the NYAD section below) the odds favor yet another move to the up side in prices.

Stock Market’s Best Indicator Still Signals Higher Prices

The NYSE Advance Decline line is a simple indicator which has been highly accurate over the past several years, especially since the November 2016 bottom and the subsequent rally. Moreover, aside from being an excellent indicator of the market’s overall direction, this measure of the difference between advancing and declining stocks on the New York Stock Exchange has the distinction of having called every major market decline since the crash of 1987.

And it’s done so by moving in a downward direction before the market indexes have topped out, which it is not doing at the moment. In fact, NYAD has made a new high within the last few days, it remains above its 20-day moving average, and is within reach of yet another new high, a sign that money is still moving into the market.

No Signs of Bear Market at this Point

Can we have a stock market crash at any time? Yes. Can the bears finally be right? Yes. Is it likely in the short term? Not if you believe the current message of the market’s internal health, the bullish action of the advance-decline numbers and the overall up trend visible in all major indexes. Furthermore, if the usually quiet smaller stocks start to lead the way higher as technical evidence suggests is possible, we could see this bull market roll all the way through the summer.

Sherlock Holmes always said: “When the impossible is removed whatever is left is the truth, no matter how implausible.” Following this type of logic and applying it to stocks, consider the following combination of current dynamics:

  • A less than stellar U.S. economy, including a penny pinching consumer and the implosion of the retail and commercial real estate market
  • A global geopolitical mess – Brexit, widespread terrorism, crashing oil prices, Italian banks crashing
  • A dysfunctional Washington – the GOP owns the White House and Congress and can’t accomplish its agenda
  • Daily calls for market crashes from “experts” and
  • Four interest rate increases from the Federal Reserve

In the past, any of these issues alone would have been enough to derail any self respecting bull market. But the fact is that this simultaneous combination of potentially fatal events for stocks, especially four rate hikes from the Fed, has only led to higher prices. So, remove the impossible, that the bull market is weakening, and what’s left- no matter how implausible is that: This-Is-Not-A-Bear-Market – at least not yet.

What would change my mind? If Marc Faber or another perma bear or ten throw in the towel, or the CBOE Put/Call ratio starts printing readings below 0.6 on a regular basis I would be very worried. Technically a major break below 2375 would also get my attention.

 

 

















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