PRE MARKET

Futures down off of weak Europe and Asia. China down even though they eased again. Not thrilling news.

Markets short-term oversold but as we stated, oversold can become more oversold.

Earnings start to come out in droves late this week with a few important FINANCIAL names like BLK, C, JPM, WFC. PNC.

WEEKEND NOTES

Last week, we wrote this:

While the DOW goes into new highs, nothing else is.
While the DOW goes into new highs, advance/declines have made relative lows.
While the DOW goes into new highs, the RUSSELL 2000 and the MID-CAPS have broke initial support and are woefully under-performing.
While the DOW goes into new highs, new yearly lows have expanded markedly while new yearly highs have contracted. (Many muni-bond funds are on this list. While they are non-operating companies, it tells you the state of interest rates!)
While the DOW goes into new highs, a slew of leading growth names have topped with a decent amount of names breaking down.
While the DOW goes into new highs, OIL PRICES continue to soar.
While the DOW goes into new highs, LONG BOND YIELDS have broken out to new yearly highs.
While the DOW goes into new highs, FINANCIALS continue to meaningfully under-perform.
While the DOW goes into new highs, FOREIGN MARKETS continue to meaningfully under-perform.
While the DOW goes into new highs and nothing else does, tons of froth and speculation pervades the market as “no sales” marijuana stocks get market caps in the tens of billions and 80% of this year’s IPOs lose money.
SO THE RECENT DROP DID NOT COME OUT OF THE BLUE. The internals of this market have been deteriorating. As soon as the growth started to gag, most followed the lead. The NASDAQ and NASDAQ 100 broke the 50 day, The RUSSELL has been so weak, it got all the way down to the 200 day before bouncing.

The market is oversold on a near-term basis but oversold can get more oversold. (We are hearing China eased again over the weekend !). Leave no doubt that the ice got even thinner last week. Many are calling this a blip. After all, the DOW and S&P are only down a few percent off their highs…but they are not telling you that underneath the surface of the DOW and S&P, the action is much worse.

We just go slower here. We also get excited. Why? It is in the corrections that the cream rises to the top. It is in the corrections that it is easiest to isolate the strength. If this is nothing more than a correction of unknown price and time, ultimately, the relative strength will show up. Just know as we head into earnings season, markets look like it needs some more price and time.

The only areas emerging are ENERGY areas as prices have moved out to new highs. After that, not much new. On the other end, we continue to watch the SEMIS closely. The SOX remains very wide and loose while trading below the 200 day. There is a decent chance the past few months are tracing out a gigantic top. If that is the case, look out.

IT’S NOT THE NEWS. IT’S HOW MARKETS REACT TO THE NEWS.

It’s not the news. It’s how markets react to the news.

Many are saying markets have to go up because economy is strong, earnings are strong, unemployment is low and consumer confidence is through the roof. They are correct on all those accounts except one. The market DOES NOT have to go up on good news. Yes…markets do go down on good news every now and then. This is because markets look forward, not backwards. Markets factor in what is ahead, not before. So careful. Everything was wonderful as markets topped in early 2000. Real estate was strong as banks started to top out in early 07.

We are not saying the end of the world is at hand. We are saying this is a market that has been deteriorating from an already very narrow market. This is a market where foreign markets have woefully under-performed with some markets already in the 20% bear market mode. This is a market that with indices at the highs, there were many more new yearly lows than new highs indicating a masking of trouble. And now, many leading names have topped with some totally broken down. Healthcare, which has led recently, is getting serious distribution. The small and mid caps have already moved below support/50 day moving average.

The good news remains that the DOW and S&P remain above the 50 day. But the NDX now sits on the 50 day and the NASDAQ now hangs below. The good news is that higher rates on the long end stopped the ugly in the financials…for now. In the past, deterioration has led to pixie dust stopping the downside and then leading to a narrow upside. We are open to anything. Just know, the ice has been getting thinner.

PRE MARKET- DIVERGENCES ALL OVER THE PLACE

The hope was if we could get past September and October earnings that we could have a good end of year rally. We have already had a decent rally and a bigger rally could still happen but:
While the DOW goes into new highs, nothing else is.
While the DOW goes into new highs, advance/declines have made relative lows.
While the DOW goes into new highs, the RUSSELL 2000 and the MID-CAPS have broke initial support and are woefully under-performing.
While the DOW goes into new highs, new yearly lows have expanded markedly while new yearly highs have contracted. (Many muni-bond funds are on this list. While they are non-operating companies, it tells you the state of interest rates!)
While the DOW goes into new highs, a slew of leading growth names have topped with a decent amount of names breaking down.
While the DOW goes into new highs, OIL PRICES continue to soar.
While the DOW goes into new highs, LONG BOND YIELDS have broken out to new yearly highs.
While the DOW goes into new highs, FINANCIALS continue to meaningfully under-perform.
While the DOW goes into new highs, FOREIGN MARKETS continue to meaningfully under-perform.
While the DOW goes into new highs and nothing else does, tons of froth and speculation pervades the market as “no sales” marijuana stocks get market caps in the tens of billions and 80% of this year’s IPOs lose money.
A couple of other notes:
For every 10 cent move in gas prices to the upside over a year’s time, estimates are that it takes $10.6 billion out of the pockets of consumers. That’s a lot of cake. Considering prices are up 50–60% in the past year, this must be watched. This does not include the costs to truckers, airlines, cruise lines and any gas-centric business…in fact, all of business…as the cost to move everything goes up and the cost to make a lot of things go up.
As rates continue to move up, affordability goes the other way for home buyers. Is it any wonder that one of the worst acting groups in the market is housing as well as many housing-related names? On top of that, costs on all loans go up…and let us not forget the gargantuan, monolithic, over-the-top, blame both parties debt and deficits…which will certainly continue to explode.
We know! The DOW just hit new highs…but for us, it always is the weight of all the evidence that gives us a leg up. We do not just look at the DOW. We scan almost 2000 names, 200 sectors, all the commodities and all foreign markets. The weight of all this evidence says underneath the surface, not so great. Markets, as well as the economy, may not be used to these higher rates or higher energy prices. Keep in mind, we will not turn overall bearish until the DOW, S&P, NASDAQ and NDX break support…and right now, not there yet.

PRE MARKET

We cannot begin to count all the negative divergences. But first…NEGATIVE DIVERGENCES DO NOT HAVE TO BE THE DEATH KNELL FOR THE MARKET…BUT IT BEARS WATCHING!

New highs vs new lows…horror show.

Small and mid caps vs large caps…bad. Just go look at the charts of the russell (iwm) and mid caps (mdy) vs the dow.

A ton of growth names under distribution.

FINANCIALS very weak…though, felt like yesterday they were trying to take a stand…and go look at AMTD, ETFC, SCHW.

A/D figures topped out a while ago.

Add in froth, speculation, the continuation of NO SALES and NO EARNINGS IPOs continuing to come out…

But…THE DOW, S&P, NASDAQ, NDX still look fine with the DOW at highs. Until they break,..they don’t. Just know it is narrower and narrower.

We do want to mention that the SEMIS “feel” like they are finally getting a bid. The SOX looks ok but so many individual names look terrible.

Also, GOLD as well as GOLD stocks may be waking up out of a coma.

Futures up nicely. Just because.