TGIF! July 15, 2016

This week was another sad reminder of the dangerous world we live in.  The violent attack in the south of France on Thursday is the 4th mass killing in just a month. 2 of them were on US soil.  It comes just 8 months after the attacks on Paris last November.  The increasing rate of terror and open borders was a key issue in the British referendum vote.  It’s a key issue in our Presidential election.  It’s a key issue for planet Earth.  France has been particularly vulnerable.  The implications for global relations are so critically important.  Stability and Predictability have been no-shows in many regions around the globe this year.

Naturally, with all of the global challenges in play right now, you would no doubt expect the US Stock Market to hit new, all-time highs, right?  It happened this week.  I imagine many of you shaking your heads in disbelief. It’s been a complete melt-up since the Brexit vote, which instantly sent shockwaves throughout the financial world.  The rally has caught most everyone by surprise.  In the face of so much confusion and skepticism, another rally ensued.  Stocks have essentially gone straight up in July. The DOW reached 18,500 for the first time in history.  The S&P had never before seen 2,150.  New highs are definitely bullish, especially when difficult to explain.

Stocks are in uncharted waters right now.  Earnings season has just begun, which will provide the necessary evidence to gauge the true health of Corporate America.   This Market is completely overbought on a short-term basis, and needs to consolidate the recent move.  However, stocks tend to stay overbought much longer than oversold.  Selloffs are much swifter.  We entered the Summer on the defensive again, and the Brexit vote brought the selloff we anticipated.  It just happened so fast, we hit levels in 2 days we thought would take 2 months.  Our plan was to defend first then buy the weakness, anticipating a year-end rally post-election.  Our recent newsletter spoke to new highs coming, we just pointed to 2017.  The new highs came much sooner.

When the facts change, so do we.  Our Market meteorology suggests there are higher levels ahead for this Bull Market.  We study charts, trends and data very methodically.  The volatile price action in 2016 is due to so many different forces and cross currents converging.  There has been a great deal of activity below the surface of the Market.  Leadership has changed quite often.  Last year it was Tech and Health Care that were strong.  Early on this year it was Consumers, then Energy, then Gold.  Now it’s Financials.  The DOW and S&P are at all-time highs right now, but so many individual stocks are so far away from their all-time highs.  It has not been a broad based rally. That could change.

The stock market is a discounting mechanism, and it prices in anticipated future events. The US economy is growing faster again. Fundamental earnings growth would make things better.  Political clarity and collaborative action would help too.  Low interest rates and more stimulative monetary policies have been the magic elixir for this Bull Market.  Central banks have kept a floor under stocks for years, and appear ready to do it again.  This helps explain the recent move higher.  International markets have underperformed the US for years, and are poised to play catch-up.  We are finding compelling value selectively overseas.

Back in January, I quoted legendary investor Sir John Templeton at our 2016 Outlook events.  He said: “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”   We see no evidence of euphoria anywhere in this Market.  There’s plenty of life left in this maturing Bull.  We do expect the volatile price action to continue.  Keep those belts buckled.

Enjoy the weekend.  Despite all of the negatives in the world, there is plenty of reason for optimism.  We have your back.  We’ll be back, dark and early on Monday.


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