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Are We in a New Secular Bull Market but Nobody Believes It?


Since the election, the SPX has lost 6.28% from its intraday high to last Friday's intraday low. Take a step back, however, and a different picture emerges.

I also believe the Payroll Tax comes back because nobody knows what it is anyway; as well, most of the mandated spending cuts will probably be postponed. Other potential breakthroughs would be a tax holiday for the $2 trillion worth of profits residing outside the country (a win/win for everybody), a fix for the broken entitlement programs, tax reform, well you get the idea. But, last week the equity markets did not embrace such thoughts as all of the major indices, and all of the macro sectors, that I monitor were down last week. The biggest losers were the Dow Jones Transportation Average (INDEXDJX:DJT) and the S&P 600 SmallCap Index (INDEXSP:SP600) off 2.53% and 2.30%, respectively, while the industrials (-2.34%), materials (-2.27%), and technology (-2.22%) were the largest losing sectors.

By Friday's close, the weekly wilt left all of those same indices below their respective 200-day moving averages (DMAs), as well as way below the lower band of their Bollinger Bands. It should be noted that prices typically don't reside outside their Bollinger Bands for very long (read: rally attempt). Such antics also saw the McClellan Oscillator about as oversold as it ever gets before Friday's intraday reversal to the upside alleviated some of that oversold condition (see below chart). The reversal was driven by the more conciliatory tone out of both sides of the political equation referenced earlier in this letter.

The question then becomes: "Was Friday's intraday print low, and subsequent upside reversal, a real bottom?" While I would like to think it is, the fact we knifed through my all-important 1390 "energy level" like it wasn't even there suggests not. As stated in last Monday's missive:

I am still in Europe and unable to really follow the markets closely due to my travel schedule. But there is no way to escape it, the SPX fell through the 1390 level and if this really is an undercut low like the one we identified on October 4, 2011 the SPX needs to recapture 1390 quickly and then sprint above it. If not, it probably means we have to go through some kind of bottoming process in the 1300 – 1350 zone. Quite frankly, I don't see how the SPX can travel much below that given President Obama's reelection and with that the guarantee of low interest rates for as far as the eye can see.

Unfortunately, the SPX has yet to recapture the 1390 pivot point, which is not a good sign. If this was going to be an undercut low, like the one we identified on October 4, 2011, the SPX should have already recaptured 1390 and sprinted above it. So rather than ignore the market's cautionary warning I am going to operate using Ben Graham's sage advice, "The essence of investment management is the management of risks not the management of returns. All good portfolio management begins with this premise."

The call for this week: Obviously, I am back from Europe and y'all have done a pretty poor job of holding the markets together in my two-week absence. Indeed, since the election the SPX has lost 6.28% from its intraday high to last Friday's intraday low. The biggest losing sectors over that timeframe have been energy (-6.2%), financials (-5.9%), and technology (-5.9%). Given the president's views on energy and banks, the weakness in those two sectors should not come as a surprise.

Still, I think the surprise is going to be a more cooperative environment from our leaders going forward. And maybe that is what the stock market sniffed out last Friday with its intraday upside reversal on heavy volume. If the SPX can travel above 1362 it may be able to recapture the 1390 level that I have deemed to be critical. However, until that happens, I am going to err on the side of caution.

No positions in stocks mentioned.
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