Nice Jump...Will it End in the Thrill of Victory or the Agony of Defeat?

Table of Contents:

1)  “The third time is a charm”….or “Three strikes and you’re out”???

1a)  The October lows/highs are the only support/resistance levels that really matter.

2)  We were happy to hear that Stan Drunkemiller agrees with us on a KEY issue.

3)  The consumer isn’t the leading indictor many people think he/she is.

4)  The direction HD’s next big move should be extremely important…for ALL investors.

5)  Update on the charts of the major indices.  (They’re still at critical junctures.)

6)  Falling bond yields help the stock market…until they don’t. (Then, things get really bad.)

7)  The big rally in the high yield market last week was a very bullish development.

8)  Crude oil is testing resistance, BUT natural gas is breaking out!

9)  The rise in antisemitism in the U.S. and around the world is an absolute travesty.

10)  Summary of our current stance.

1)  The stock market had a great week last week…and thus the “critical juncture” we discuss last weekend involved a nice bounce.  However, the market is not out of the woods.  We’ve had two other nice bounces since the summer highs.  In the next two weeks, we should know whether this one will be “the third time is a charm”…or “three strikes and you’re out.”

 Last weekend, we said that the stock market was at a critical juncture…and that the major indices would have to bounce in an immediate, sharp, and sustainable fashion to avoid confirmation that the intermediate-term trend in the stock market had changed to the downside.  Well, the stock market DID bounce in an immediate/sharp fashion.  Now, we have to find out if it is sustainable.

 What we’re thinking right now is that after such a strong rally last week, the market will likely see at least some sort of pullback early next week for a couple of days…or at least a sideways “breather.”  It will likely be AFTER this pullback/breather that we’ll find out if this most recent bounce is a sustainable one…and not the kind of head fake we got in August and October. 

 The strong bounce we saw last week was definitely a good one.  The volume/breadth was mediocre early in the week, BUT both improved very nicely towards the end of the week.  So, the internals were quite good.  We’d also note that the Russell 2000 outperformed the S&P with its late-week surge.  (It was only playing catch-up mid-week, but by Friday’s close, the Russell had outperformed quite nicely.)….We’d also note that the tech sector bounced in a big way, but it was nice to see that many other groups jumped higher as well.  Thuy, it was not a narrow rally either. 

 We’d also highlight how much of a difference the direction of interest rates had on the markets.  Not only did the drop in long-term yields help the stock market rally…but it also completely changed how stocks (especially tech stocks) reacted to their earnings reports.  When yields were rising in the second half of October, a lot of strong earnings reports were met with selling by investors.  However last week, those kinds of positive earnings reports were followed by very bullish reactions. 

 Investors NEED to avoid breaking out the champaign, however.  We have experienced two other nice bounces since the summer highs…only to see them fail and roll-over and make lower-lows rather quickly.  Yes, this bounce has been bigger than the previous two pops, but they’re still not strong enough to reverse the trend of “lower-highs/lower-lows” that has existed over the past three months…..We also have to remember that as good as things looked on Friday afternoon…they looked very rough at the end of the previous week.  In other words, we learned last week that things can change very, very quickly.  With the conflict in the Middle East still growing, things could reverse back to the downside very quickly next week…just as quickly as they did to the upside last week……..The good news that last week’s action was the kind that is rarely reversed immediately.  The bad news is that it’s not always followed by a further advance over time. 

1a)  The lows and the highs from October are still the most important support/resistance levels to be watching right now on a technical basis.  A breakout above the October highs (either now…or after a breather) will be quite bullish.  A failed rally…that is followed by a break below the October lows…will be a disaster.  Therefore, no matter what happens near-term, the stock market is still going to face some important headwinds over the next 6-9-12 months.

 We’ll have more details on the technical picture of the stock market (and other markets) in later bullet points.  However, we just want to reiterate what we said in our “Morning Comment” Friday morning.  If the S&P 500 can break above its October highs in a meaningful way, it will not only change the trend of “lower-highs/lower-lows,” but it will also take the SPX above its trend-line from the summer highs.  Since it has already bounced off its 200-DMA…and broken slightly above its 50-DMA…that kind of development would bode well for those looking for a  year-end rally through November and December. 

 This potential upside/follow-through move does not have to happen immediately.  The stock market could (and even should) take a breather next week.  Whether that comes in a sideways “breather”…or some sort of pullback…doesn’t really matter.  Either one of those moves would be considered the kind of healthy moves that would help stocks digest their big gains from last week.  However, if that kind of pause is followed by a move above the October highs, it’s going to be very bullish.  Having said that, if any decline becomes a more serious one…and signals that last week’s bounce was just a great big head fake that took place to work-off the oversold condition in the market…and turns into a substantial decline, it’s going to be quite bearish.  (If it drops below the late-October lows, it will “Katie bar the door.”)

 This is a long-winded way of saying that the week or two is going to be critically important for the rest of the year.  Of course, there’s also a chance that the market might just die-down and trade sideways into the end of the year, but that doesn’t seem overly achievable.  Therefore, we’ll be looking at the high for October and the low for October as our most important support/resistance levels going forward.  Any significant break of one of those levels will give us a clear indication of which trend will prevail for the rest of 2023.

2)  As good as the rally in the markets (plural) was last week, it did not change the divergence that has developed between the bond and stock market.  This divergence will still have to be resolved eventually…and we’re glad to hear Stan Drunkemiller agrees with us on this issue. 

 It was great to hear that Stan Drunkenmiller agrees with what we’ve been pushing for many months now.  In interviews this past week, Mr. Drunkenmiller said that the bond market is adjusting to the post QE world, but the stock market hasn’t done that yet.  We have been pounding away at this thought since the late-spring/early-summer timeframe…when the Treasury market rolled over is a serious manner (and thus bond yields have jumped much higher). 

 Not only did the stock market avoid following bond prices lower, but it also actually rallied even further for four months that bond yields exploded higher!  Yes, those stock prices did finally begin to drop more recently, but as the first chart below shows, it never came close to narrowing the divergence that had developed during the summer…because bond prices kept falling (and yields kept rising).  In fact, since the stock market has rallied strongly in the last week…while bond prices did the same, the divergence remains clear. 

 At some point, one of three things is going to have to take place to rectify this situation.  Either bond yields are going to have to plummet in a major way while the stock market stays relatively stable…or the stock market is going to have to fall in a meaningful way while the bond market stays relatively stable…or bond prices are going to have to fall at the same time that stock prices fall!.....History tells us that when the divergence becomes as big as it has in recent months, it doesn’t last very long.  Eventually, the divergence is resolved one way or the other.

 History also tells us that when the bond market declines in a major way, like it has this year (and thus bond yields rise in a substantial manner)…the divergence is pretty much always resolved with the third scenario we just highlighted taking place.  In other word, when bond yields jump in a major way, this always causes the economy to slow down significantly, or causes something to “break”…or both.  When either of those two things take place, the bond market rallies (yields fall)…and the stock market drops in a big way.  Significant slowdowns/recessions and/or having something “break” in the system are not good for the stock market.  So, even though bond prices and stock prices tend to be highly correlated much of the time, the correlation completely reverses after bond prices drop (and yields rise) in an major way.  (Second chart below.)

 We have been saying for some time now that if bond yields dropped any time soon, the initial response in the stock market would likely be a positive one.  However, we have also said that this would probably be short-lived…because bond yields are still extremely high compared to the last 15+ years…AND because the drop in yields would likely be the kind of flight to safety play that will not be good for the stock market.

 This does not mean that the stock market will roll-over immediately.  This “initial” response could last for several weeks…especially if we get any upside follow-through movement in the stock market at some point between now and Thanksgiving.  In fact, as we stated above, it could last into December.  However, we do not think it will not move into 2024 (and we’re not so sure that it will last much into December if we do get more upside movement)……We believe that as it becomes more evident that the huge rise in bond yields over the past 22 months (even the last three years) is finally having a negative impact on the economy (and maybe even the system)…this rally in stocks will stall out very quickly.  Thankfully, that will not be the end of the world.  It will present some fabulous opportunities, BUT it will be much more of a stock pickers market than it has been in quite some time. 

3)  Even though the employment data from last week was softer-than-expected, the picture remains quite strong.  However, the fact that the consumer remains strong is not as bullish as some might think…because the consumer is a coincident indicator, not a lagging one.  Since there are some signs of stress in the consumer already, anything that signals problems in the employment picture will impact the consumer…and the economy…VERY quickly.

 When you see the kind of huge rally in the bond market like the one that took place last week, it’s fair to say that there was some “forced buying” going on (a short squeeze).  Given how bearish sentiment was a week ago, this is not a surprise.  However, at least part of the catalyst for the rally was some data that showed the economy is slowing even more than it was over the summer.  This means that investors will need to be very careful about assuming that any further decline in bond yields will be positive for the stock market. 

 If this data means that a recession in 2024 is a likely outcome, the stock market is not going to be able to hold up…EVEN as bond yields decline.  (History tells us that whenever bond yields rise is a significant way…like they have in recent years…and then they reverse to the downside…it is a signal that growth is about to slow in a material way…and thus that stocks are about to decline in meaningful way as well.)

 In fact, there are quite a few reasons…beyond this past week’s weaker-than-expected data…why we believe the U.S. economy is indeed (finally) going to feel the effects of the Fed’s SIGNIFICANT tightening policy of the past 20+ months.  There is little question that the employment picture is still quite solid, but let’s put that issue to one side for a moment (and we’ll get to back to it later).  Maybe our biggest concern has to with the complacency surrounding the consumer.  If we had a penny for every time we heard the phrase, “The consumer remains strong,” we could buy an NFL team.  Don’t get us wrong, the consumer IS still strong right now, BUT there are signs that this might not remain the case going forward.  MORE IMPORTANTLY, it can be easily argued that the strength of the consumer is not a leading indictor for the economy or the markets!  They tend to be more of a coincident indicator! 

 Let’s begin by talking about the signs that the consumer might be fading right now…before we talk about the thought that the consumer is a coincident indicator……The issues that we’ve been talking about for a while is the big rise in credit card delinquencies and the more recent big rise in auto loan delinquencies.  However, on top of this, we’d also note that the consumer confidence numbers are not particularly good.  Yes, they’ve moved up nicely since the lows of last year, but they have rolled back over in the second half of the year.  Besides, they did not reach very high levels on an historical basis to begin with.  In other words, consumer confidence is not high compared to historical levels.  (First chart below.)……Sure, it would be one thing if they were ultra-low…and we could see this data as so extreme that it has to bottom soon.  However, the fact that it’s just relatively low…and falling…is not a good sign.) 

 We’d also note that the NFIB Small Business optimism data has rolled-over once again…and remains at a very low level.  In fact, except for the years during the Great Financial Crisis, small business optimism has not spent much time lower than it is today!  Again, it would be one thing if it was low as it was at the extremes we saw in 2008 or 2009…it could be seen as a bullish issue on a contrarian basis.  However, since it is not at extreme levels, it’s something that concerns us greatly.  This is especially true given that small businesses employ almost half of U.S. workers. 

 Moving to the issue of whether the consumer is a good leading indictor for the economy or not, take look at the chart on personal spending.  This shows that consumer spending is NOT a leading indicator.  At best, it’s coincident indicator…and might even be considered a lagging one.  The last three times personal spending fell in a significant way was in March of 2020, July of 2008, and August of 2001.  No, these were not the LOWS for personal spending…it’s when personal spending turned down…and eventually fell in a significant way.  In other words, personal spending did not fall in advance of a recession, it took place after it was obvious that a recession was in the offing.  Put another way, a decline in personal spending did not CAUSE the recession…it only exacerbated the situation AFTER the meaningful downturn had already begun. 

 To reiterate, even though we saw some weaker-than-expected data on the employment front this past week, the numbers were a long way from sending up any warning signals about the employment picture.  Let’s face it, the UAW just got some big concessions from the auto companies…and other unions have received big pay hikes this year as well (just ask UPS, UAL, etc.)  HOWEVER, the data on delinquency rates and consumer confidence are telling us that the stress on consumers is growing.  Therefore, the employment picture won’t have to change in a drastic manner for it to have an outsized impact on the consumer…very quickly. 

 4)  The stocks we highlighted last weekend as being very oversold and ripe for a bounce did very well last week.  If this bounce is the beginning of a bigger rally, these stocks should do very well…and most should outperform on the way up.  On a fundamental basis, BRK/B looks great…….However, we’ll be watching HD VERY closely going forward.  Its next move should be very important on several different levels. 

 As we highlighted briefly earlier in this weekend’s piece, there was likely some serious short covering going on in both the stock and bond markets last week.  It was actually pretty remarkable how, in the case of the bond market, we seemed to go from some significant “forced selling” two weeks ago (when the 10yr note jump to 5% for a NY minute)…to “forced buying” (squeeze)…so quickly last week in the bond market.  This gave us a lightning-fast move from 5% to 4.5% on the 10yr yield.  However, given that these markets were oversold…and sentiment was so bearish, we guess it shouldn’t be a surprise just how strongly things reversed last week.  In fact, we did say that a short-term reversal was very possible in these markets…but we readily admit that we didn’t think it would be as big as the one we saw last week. 

 We did however, say that it could be something that lasts for a little while…and thus we highlighted several stocks that had become very oversold…and thus should be ones that investors should consider on the long side.  All of those stocks did indeed bounce…and most of them bounced in a significant way.  Home Depot (HD), UPS (UPS), Berkshire Hathaway (BRK/B), Johnson & Johnson (JNJ), John Deere (DE) all bounced strongly…with HD, UPS, & BRK/B outperforming the S&P 500.  We’d also note that the XLV healthcare ETF that we highlighted in our daily report on Tuesday bounced very nicely as well last week as well.  Therefore, we were not caught completely off guard by last week’s action by any means. 

 The bounces in these names were all so strong that they’ll likely take a breather early next week.  However, none of these names are overbought by any stretch of the imagination.  Therefore, if (repeat, IF) the broad market is going to continue to rally in the coming weeks, these stocks should continue to act quite well.  (We also believe that two other stocks we mentioned last weekend…Chevron (CVX) and Ford (F)…will bounce even more, and play catch-up with some of these other names that are already jumping in a more meaningful way so far.) 

 On the fundamental side, our favorite name is BRK/B.  They reported good earnings this weekend…and since we’re still worried about the economy & the market on a longer-term basis (the next 12 months), the fact that Mr. Buffett has a record level of cash on the sidelines makes this an easy one for us to chose as our number one pick. 

 On the technical side, we’ll be watching HD the most closely.  That stock was the most oversold of all those names on a weekly (intermediate-term) basis.  Also, last week’s bounce took the stock back up to its 200-week moving average.  As you can see from the chart below, the 200-week MA provide incredibly strong support in 2022 and 2023, but it broke below that line this year.  Last week’s bounce took it right back up to that moving average.  If it can regain that line in a significant way, it’s going to be very bullish on the technical side of things.  If, however, it fails at this line, and rolls back over in a big way, it’s going to be very bullish for the stock.

 HD is an important stock in the home construction group…and the home construction group is very important to the U.S. economy.  Therefore, whatever happens in this stock in the weeks ahead should be very important on several different levels……Again, if it pulls back a little bit early next week, it won’t mean anything after such a big short-term bounce.  However, its next significant move…and thus whether it breaks back above that 200-week MA…or fails at that level…is going to be very important for ALL investors over the next several weeks.

 Moving back to what this all means for the broad market, we are worried that the huge rise in bond yields (which STILL remain VERY high) will create problems for the stock market going forward.  We’re also worried that the economy is showing signs that the Fed’s massive rate hikes are finally going to cause a meaningful slowdown in growth.  HOWEVER, the “squeeze” we saw last week could last for a while longer.  Also, we’ve now moved into the last two months of the year, so FOMO (and “performance fear”) will become very prevalent for institutional investors.  Therefore, if the upside momentum from last week continues, it could feed on itself.  SO, even though we believe the upside potential from current levels is probably limited, we could be wrong.  If that’s the case, the stocks/groups we highlighted last weekend should continue to do well into the end of the year.

5)  Update on the charts of the S&P 500, NDX Nasdaq 100, and the Russell 2000…..The SPX & NDX both went from critical junctures by testing KEY support levels…to new critical junctures by (now) testing key resistance levels.  They’ll both need more upside follow-through to signal the worst is behind us for the recent correction……As for the Russell 2000, its rally was extremely impressive last week, but it’s not out of the woods yet.

 We talked about the chart on the S&P 500 in point number 1, but we want to do a deeper dive into that chart here…AND talk about the charts on the NDX Nasdaq 100…and the Russell 2000.  Like the SPX, the October high will be the key resistance levels, but there are several other levels to be watching next week.  As for the Russell 2000, the squeeze was particularly strong…and the way people are suddenly jumping on the bandwagon is astonishing.  It is getting close to a key resistance level, so it’s going to be very important to see how it acts between now and Thanksgiving.

 The bounce in the S&P 500 from its oversold condition last week was obviously a very good one.  It took it back above its 200-DMA and its 1-year trend-line.  This is exactly what the bulls needed…and it’s exactly what they got.  As we mentioned earlier in this piece, the most important resistance levels is its October highs.  If it can break above the 4,400 level, that will take it meaningfully above that October high.  Yes, 4,377 is the October high, but a move above 4,400 would take it meaningfully above that level…AND it would ALSO take it above its short-term trend-line from the July highs…AND above the Fibonacci 61.8% retracement of the entire decline from the summer high to the late-October low!  Thus, that’s the key level we’re watching right now.…..As for support, the 200-DMA is now the new support level…which comes in at 4247.  Below that we have the late-October low of 4117.  If last week’s big bounce turns out to have been just a big head fake…and the SPX rolls back over and takes out its those October lows, it’s going to be incredibly bearish for the stock market.

 The NDX Nasdaq 100 rallied even more strongly than the S&P last week…with a 6.5% advance.  However, unlike the SPX, the NDX has not regained its trend-line from last year’s lows.  Therefore, this index has a bit more work to do than the SPX to return to the kind of upside momentum we saw earlier in the year…but not lot more work.  Like it is with the entire stock market, it won’t be surprising if the NDX takes a breather early next week.  However, if it can break above the October highs…and move back above its trend-line from January…it’s going to be quite positive for those looking for a year-end rally…..Needless to say, if it rolls back over in a significant fashion soon…and takes out its October lows…it’s going to be extremely bearish.

Finally, the Russell 2000 saw a huge bounce last week.  This was badly needed.  As we highlighted last weekend, it had broken slightly below its “line in the sand” support level (its 2022 lows), so it NEEDED to bounce immediately…and in a significant way.  The 8% jump certainly qualifies as a big/immediate bounce…but now comes the hard part.  The RTY is now trying to break back above its one-year trend-line from the 2022 lows.  We wouldn’t be surprised at all if it pulls back early next week, but that won’t signal a failure to break above that trend-line.  After such a strong rally, it would be normal and healthy for it to take a breather and digest its recent gains before it tried to make a definitive break back above that line.  However, if it can break above that line before too long (which stands at 1760), the next resistance level will be the 200-DMA of 1,835.  That was also the old neckline of an H&S pattern, so a move back above that level in the coming weeks would be quite positive. 

 Of course, if it cannot hold its gains, it’s going to pose some big problems.  If this small-cap index rolls over in a substantial manner in the coming days/weeks…and takes out its late-October lows, it’s going to be extremely bearish.  (It would also be a very negative sign for U.S. growth…given that the vast majority of the revenues for the companies in this index come domestically.)…..However, the strength of last week’s rally is the kind that is rarely reversed on a dime.  No, it doesn’t always see upside follow-through after the kind of bounce we saw last week, but an immediate reversal is not common either….….In other words, it’s probably going to take a little while before we know how this situation is going to playout, but we should have a good idea by the time Turkey Day comes around.

 6)  If the bond market rallies too far, too fast (and the stock market continues to run with it), the thought that the markets are “doing the Fed’s job for them” will go out the window.  What’s that going to mean for those thinking the Fed is definitely done.  (Put another way, how much does the Fed want the market to rally?)….The 10yr yield is close to very important support, so it’s something we’ll be watching closely going forward.

 Talk about a big change in narrative, just over a week ago, everybody was looking for the yield on the 10yr note to move pierce the 5% level and stay there…and even push up towards 6% before too long.  Now, the number of people saying the top is in for bond yields/interest rates has jumped in a major way!  Amazing!......We have been saying for a little while now that the Fed has probably done with raising short-term interest rates, but we’re not so sure that last week’s move signaled the top for longer-term bond yields.  It’s great that the Treasury Department has changed the composition of its Q4 refunding package, but adjustment wasn’t THAT dramatic…and it’s not like the supply issues are going to get any better. 

 Also, we’re not so sure the Fed’s narrative is going to be overly dovish going forward.  If the stock market rallies in a big way into the end of the year, it’s going to take away a lot of the tightening efforts that have been done by the Fed over the last 20+ months.  (We keep hearing how the big rise in yields has done a lot of the work for the Fed recently.  Well, if those yields drop in a big way…and the stock market rallies in a big way…that situation is going to change very quickly…..Put another way, how much does the Fed want the market to rally?)…..Thus, it’s not out of the question that the Fed will soon ramp their hawkish tone back up if last week’s advance becomes a bigger one. 

 Of course, yields might drop due to a slower economy, but that’s not a reason to get excited about the stock market.  In other words, investors need to be careful what they wish for.  As we have pointed out many times, whenever bond yields reverse lower in a significant way…after a very large rise…it’s pretty much always negative for the stock market.  (This is because a big decline in yields in that particular situation usually involves a “flight to safety” play.) 

 On the technical side of things, we’ll be watching the 50-DMA and the trend-line from the springtime in the days/weeks ahead.  The 50-DMA has been very important support for the 10yr yield since July…as it bounced off that line twice over the summer.  It actually fell below that line briefly on Friday, but it closed above by the end of the day.  When it broke below that 50-DMA, the drop was stopped dead in its tracks by the trend-line from the spring.  Therefore, even tough we’ll be watching the October lows of 4.55%, the 50-DMA and the multi-month trend-line will be what we’ll be keeping a very close eye on going forward.  If those lines are broken in any meaningful way, it’s going to be very bullish for the bond market. 

 Whether that kind of move will be bullish for the stock market is another question.  If a further material decline takes place because of a flight to safety play (due to the Middle East or some other development)…or if it happens because the odds of a recession grow significantly…it won’t be positive for stock at all.  However, there’s no question in our minds that a definitive break below those lines will be very bullish for bonds on a technical basis.

 7)  The rally in the high yield market last week was an extraordinary one.  It is likely that short covering played a big role, but when this market rallies as much as it did last week, it usually doesn’t roll back over immediately.  No, it doesn’t always rally further, but it should hold up for a least a little while.  In other words, last week’s action in the high yield market was positive for risk assets in general.

 Speaking of the fixed income market, one of the most bullish developments from last week was the extraordinary bounce in the high yield market.  The HYG high yield ETF bounced 3% off its Wednesday morning lows by Friday’s close.  A 3% bounce isn’t much if we’re talking about a tech stock, but it IS a very big move for the high yield market!  We also saw a nice drop/shrinking of high yield credit spreads…with a nice negative cross on their MACD chart.  (Negative crosses on spread charts are positive.)

 To be honest, we worry that it might have been TOO MUCH of a bounce.  There is very little doubt in our minds that the move in the HY market had a lot to do with a short-squeeze.  It’s not like we got any fabulous news on the economic front.  Therefore, we are concerned that once the “squeeze” is over, the HY market will face some rough seas once again.  Having said this, we also saw a very sharp shrinking in investment grade credit spreads as well last week.  Thus, unless these spreads widen out rather quickly…and in a compelling way…this action in the kind that is usually (repeat, USUALLY) followed by the high yield market staying calm for at least a little while (even if it’s going to face more trouble in the future).  Therefore, this is another issue that deserves to be put on the bullish side of the bull/bear ledger right now. 

 Needless to say, we’re NOT saying that last week’s action was so good that we can now ignore this market for a while.  Just the opposite is true.  We’ll be watching this market like a hawk…because there HAVE been a few instances when bounces like the one we saw last week reversed themselves immediately.  However, those are few and far between…but we’ll still be watching this market closely going forward.

8)  The complacency surrounding the situation in the Middle East is astonishing.  In fact, crude oil is so complacent that it’s close to breaking an important support level.  However, we believe this will be a reason to wait a bit longer to add to positions…not to trim positions.  Not only should crude oil bounce back, but natural gas is showing signs of an important upside breakout!

 We must admit that we continue to be very surprised by the complacency surrounding the situation in the Middle East.  It’s not just last week’s rally in the global stock markets that surprised us.  The oil market is back below where it was trading before the early October attacks in Israel…even though the tension in that part of the world is not dissipating at all! 

 The technical action in this commodity has got us concerned.  If oil falls much further, it will confirm a change in the multi-month trend…which will be negative for the energy stocks.  However, if this takes place, it will only cause us to suggest holding off on adding to energy stock positions.  It will not lead us to suggest selling them.  If the situation in the Middle East explodes suddenly, it will be too late to act….However, there is another reason to avoid getting too negative on the energy stocks:  Natural gas is showing signs of breaking out once again! 

 Let’s begin with the situation concerning crude oil.  WTI has already broken below its trend-line from its June lows.  As we just mentioned, the pop that took place in reaction to the crisis in the Middle East was not long-lived…and it created a “lower-high.”  Therefore, if we get a more material move below the early October lows…and thus give WTI a “lower-high/lower-low” sequence after already breaking below its multi-month trend-line…it’s going to be negative on a technical basis for this commodity. 

 The XLE energy stock ETF faces the same exact situation on the technical side of things.  It’s bounce off the early October lows was a stronger one…and came closer to testing the September highs than its underlying commodity, but it still made a “lower-high”…after it has already broken below its trend-line from June.  We’d also note that the XLE was able to bounce more than WTI in the second half of last week (when the broad stock market bounce)…unlike WTI.  So, it’s not testing its October lows anymore, but it’s not very far from those lows.  Thus, if (repeat, IF) the XLE breaks below those lows in any meaningful way in the days/weeks ahead, it’s going to be a negative development on the technical side of things.

 On the fundamental side of things, it still seem evident to us that the Saudis want to keep the price of oil elevated.  We also worry that the situation in the Middle East is going to be with us for a quite a while…and thus the complacency surrounding this issue when it comes to the oil market is unfounded.  Therefore, we don’t think that the downside potential for crude oil is large.  However, the action in the energy stocks…and the commodity itself…are sending up some warning signals right now…and it’s important that we highlight them at this time. 

 As always, we HAVE to wait to see if the October lows are broken in a meaningful way before we send up any important warning flags on this group.  If we get a strong bunce from current levels (which in the case of the XLE, would give it a bounce of its 200-DMA), it’s going to be very bullish.  However, as the old saying goes, if the facts change, we’ll have to change along with them…and thus we might have to adjust our bullish stance on this group at some point soon.  Therefore, we’ll be watching crude oil and the XLE very closing over the coming days/weeks.

 When it comes to natural gas, it’s showing some real signs that it is breaking out of the sideways range it had been in for much of this year.  If you’ll remember, it broke above its sideways range in early October.  In the second half of the month, it came back down and tested the top end of that old range.  The good news is that this turned out to be a successful “test”…and nat gas bounced back an made a slight “higher-high” last week.  Therefore, if this “higher-high” can become a more compelling one, it’s going to be very bullish for this commodity. 

 In other words, the breakout of the sideways range will have been followed by a nice “higher-low/higher-high” sequence…which included a successful retest of the old multi-month range.  THAT is something that will be considered extremely bullish on a technical basis.  So, this is another reason to hold onto your energy stocks…even if this is not necessarily a good time to add to them.

9)  It is my opinion that the rise in antisemitism in the U.S. and around the world is an absolute travesty.  Maybe this is not the right platform for such a statement, but I just cannot help myself………..I’ll leave it there.

10)  Summary of our current stance……There is no question that the bounce in the stock and bond markets last week were very impressive ones.  In the stock market, it was a broad advance that came on good volume, so it has the potential to move even higher before long (but probably after some sort of short-term breather).  However, there is no guarantee that further gains are in the offing. 

 On the technical side of things, the key resistance levels have not been broken yet…and the last two bounces have failed badly. On the fundamental side of the equation, we’re starting to see a slowdown in growth…and even some cracks in the employment picture.  It’s nice that long-term bond yields are coming down and the Fed may have stopped raising short-term rates.  However, if this is due to slower growth, it’s not going to be good for a stock market that is still expensive…and that has not “normalized” to the degree that would be justified by yields that are still VERY high compared to the past 15+ years. 

 Thankfully, even though we were worried that this past week might be a very bad one, we did acknowledge that the markets were quite oversold and could bounce at any time.  Therefore, the picks we made on the bullish side of the ledger (HD, UPS, BRK/B, JNJ, DE, and the XLV healthcare ETF) all worked out quite well….with several of them outperforming the SPX.  We believe these names have more upside left in them…especially if the broad market can advances some more.  (We’ll be keeping a particularly close eye on the action in HD.)

 It is amazing how quickly the narrative and sentiment around Wall Street has changed.  A week ago, we were hearing about price target cuts on the major averages all around the Street, but that all changed by the end of last week.  Not only were strategists declaring the end of the stock market correction, but many of them were raising their year-end price targets…less than a week after many price targets were cut around Wall Street.  Also, the bullish reading among futures traders jumped from just 10% a week ago…to 45% on Friday (and over 50% on the NDX).  Yes, these are merely neutral readings, not bullish ones…but they are a far cry from the extremely negative readings we were looking at just one week ago.  Therefore, this quick/dramatic change in sentiment makes us less sure than many people that we’re going to see a strong year-end rally after last week’s action.

 In our opinion, too many people are still way too used to thinking that somehow the end of rate hikes equates to a drop in those rates down towards zero…and the re-ignition of a QE program.  Neither of those are going to happen unless we have a serious crisis…and if that happens, the stock market will fall in a significant way before rates are slashed that much and before another QE program can be instituted.  Therefore, it is our opinion that the normalization process that has taken place in the bond market (which has meant that the bond market has gone a long way to adjusting to the post QE era)…will have to continue in the stock market until its valuation levels fall back in-line with the pre-QE era…and more in-line with bond yields that are MUCH higher than their 0.5% lows (even though they’ve come down a little bit recently).   

 This does not mean that investors will not be able to make money in the stock market.  It’s just that the situation is going to be what we’ve been saying for many, many months now:  Stock picking is going to be paramount to success.  However, as we move forward, successful “picking” will be determined more by deciding which stocks are undervalued.  (It’s great that a lot of big-cap tech companies have lots of cash & great balance sheets, but they are still very expensive.)  The stocks of these fabulous companies are going to have a tougher time than many people think…now that the era of free money (or the “post QE era”) is over.

 We’ll finish by stating that we still believe that the marketplace is too complacent about the situation in the Middle East.  With the comments from the leadership of Hezbollah and the actions by Turkey this weekend show that the world is facing a treacherous predicament.  It does not mean that this will spread into a serious regional conflict, but we believe investors should be treating it with more caution than they are right now.