Friday, October 14, 2016

America’s 50-pound ball and chain

America’s economic condition is truly a “tale of two cities.”  Upper middle class and wealthy earners have never been more flush thanks in large part to the record liquidity creation of the last eight years as well as to their financial market exposure.

By contrast, the middle and lower classes have either stagnated or are struggling as perhaps never before, due in part to their under-exposure to the financial market but also to the erosion of their real estate wealth in the last 10 years. 

The turmoil for the middle class began with the implosion of the real estate market in 2006 and accelerating with the events of the two years following.  The deterioration of home values and the loss of employment imperiled the middle class during the crisis years, and while many the middle class have since recovered their overall fortunes have never complete rebounded to pre-2007 levels.

The upper classes meanwhile have shown remarkable recovery.  One such reflection of their ebullience is the following graph which shows the New Economy Index (NEI).  As can be seen here, the NEI has made a series of new all-time highs in 2016 and this is significant.  It shows that consumers – mainly in the upper middle and upper classes – have been quite prolific with their spending.  NEI is a forward-looking measure of the retail economy based on the leading publicly traded retailers, business service, and business transportation providers. 

Notwithstanding the strength of the upper classes, there is at least one major impediment to a full-scale middle class recovery.  A heavy burden is weighing down the middle class, a tax which hangs upon its neck like a 50-pound ball and chain.  The tax in question is the healthcare mandate of the Affordable Healthcare Act (ACA).  Under this grievous yoke, individuals and married couples making middle class incomes must pay anywhere from $700 to over $4,000 per year in taxes (for non-compliance) or for healthcare coverage, even if coverage isn’t desired.  The ACA has forced millions who previously didn’t want or need health insurance (which to them is a liability) into buying it.  If they refuse, they must pay a substantial penalty.

While pundits have argued that the ACA is “working” and has “fixed” the nation’s healthcare crisis, they fail to specify for whom the law “works.”  It has certainly helped lower income individuals who had difficulty gaining access to healthcare previously.  And it definitely doesn’t hurt the rich, for whom the ACA tax burden is barely felt.  Middle class wage earners and small business owners, however, are the ones who must shoulder the burden.

A cursory examination of the middle class economy will reveal that the healthcare taxes of the last 2-3 years have acted as a drag on consumer spending among middle class taxpayers.  It has also inhibited small business hiring to a degree and has even forced some business owners to close shop.

Even for those taxpayers for whom the ACA isn’t a debilitating burden, at the very least it provides a reason to restrain their discretionary spending.  The impetus toward reduced spending is reflected in the exceptionally low monetary velocity, as well as in the diminished fortunes of several old-line retail companies.  This can be seen in the following graph comparing the share prices of three major U.S. retailers: Macy’s (M), Gap (GPS), and Wal-Mart (WMT).

An argument can also be advanced that the directionless stock market of the last two years is at least partly attributable to the reduced participation of retail investors in the middle class.  There is no denying that retail interest in equities has dwindled appreciably since 2013 with a consequent loss of momentum.  Powerful bull markets require heavy active participation from retail investors, otherwise the market turns into a veritable closed feedback loop with institutional interests trading among themselves.  The end result is a stock market that goes nowhere like the NYSE Composite chart shown here.

The first priority of the next Presidential administration in 2017 should be to reform the ACA by lifting the crushing tax burden from the middle class.  Doing so would remove a big obstacle in the path to full economic recovery.  It would also provide the stock market a reason to finally break free from its restraints of the last two years.  Here’s hoping that the next President has teh wisdom to see it and the will to carry it out.

Thursday, October 6, 2016

Will the bull market remain intact in 2017?

The question confronting investors right now is whether the lateral trading range in the major indices represents consolidation of the long-term uptrend, which precedes an eventual upside breakout from the range?  Or does it represent distribution (i.e. selling) which precedes an eventual breakdown of the trend? 

Bulls and bears have assembled evidence to support their respective take on this conundrum, but the most basic and useful evidence suggests the first outcome, namely an eventual upside resolution.  Let’s examine the evidence in support of this conclusion. 

While the bears have correctly observed that in the previous instances when the major indices have bumped up against trading range resistance – or temporarily exceeded it – the market has always had a sharp decline.  It’s also true that during the sideways range-bound market of 2015 there was definite evidence that distribution was taking place among informed investors.   This preceded the July-August collapse last year and the secondary collapse in January-February of this year. 

All through the spring and summer of 2015 the list of stocks making new 52-week lows on the NYSE was growing.  It remained elevated well above 40 – the dividing line between a healthy and unhealthy market – for much of the year.  Anytime there is a stretch of several consecutive days where new lows are above 40 while new lows are shrinking it strongly implies internal selling pressure beneath the surface of the broad market.  This was one indication that distribution was taking place last year while the Dow and S&P were churning in a sideways trend.  Finally, after several months of this internal selling pressure the market broke under the weight of it, as can be seen in the following graph.

After bottoming in February the stock market has only seen a total of nine days where the new 52-week lows numbered 40 or above.  That’s an impressive stretch of internal health and it shows that there has been little or no selling urgency or distribution since then.  The dearth of new lows argues strongly, therefore, in favor of the longer-term bullish trend remaining intact heading into 2017.  

On a short-term basis, however, there has been a definite loss of momentum.  As we’ve reviewed in recent reports the NYSE short-term directional components of our Hi-Lo Momentum (HILMO) index keep deteriorating.  Here’s what the three components look like as of this writing on Wednesday.  The blue line is the short-term directional indicator, the red line is the momentum bias, and the green line is the internal trend.

The downward-slanted trend in the above graph is indicative of a loss of forward momentum on a near-term basis and explains why the major indices have been unable to rally in sustained fashion since peaking in August.  As long as the short-term momentum indicators are declining it will also mean the market is vulnerable to negative news and may at some point experience another pullback. 

Acting as a counterbalance against this short-term downward pressure is the longer-term internal momentum indicator, shown below.  Currently this is the only one of the eight major HILMO components that is rising on a sustained basis.  My interpretation of this graph is that as long as this indicator continues its nearly vertical climb it should act as a deterrent to a serious bear raid.  That has certainly been the case since July-August when the internal cross-currents first became evident.  It’s also why any attempt at short selling among the bears has ultimately backfired due to the strongly rising longer-term momentum current reflected in this indicator. 

So while the loss of short-term internal momentum may negatively impact the near-term trend, it shouldn’t prove fatal to the major uptrend that began in March-April 2009.  

Thursday, September 8, 2016

Will Deutsche Bank collapse the global market?

The past year has seen its fair share of worries.  From the China slowdown to the Brexit, successive waves of overseas fear have rolled onto our shores since 2015, yet none of them were the Tsunamis the bears had predicted. 

The latest foreign fear concerns the possibility for a global credit crisis led by the collapse of a major international bank.  A simplified summary of this scenario goes something like this:  Deutsche Bank is on the brink of bankruptcy and its insolvency could spark a systemic European banking crash.  This in its turn could send shockwaves throughout the global financial system, resulting in widespread economic turmoil on par with the previous worldwide crisis. 

Commentators who favor this outlook tend to illustrate their dire predictions with a graph of Deutsche Bank’s stock performance since last year.  It certainly adds a spark of credence to their argument based solely on the depth of the stock’s plunge. 

One commentator has gone so far as to assert that “if Deutsche Bank goes under it will be Lehmen times five!”  Other observers have expressed a similar concern, albeit in less alarmist terms.  The International Monetary Fund (IMF) labeled Deutsche Bank as the most risky financial institution.  The argument goes that since Deutsche Bank is linked with other publicly traded banks and insurance companies, it has the potential to be the source of another worldwide financial contagion should the bank collapse.

In 2009, Deutsche Bank CEO Josef Ackermann assured investors that it had enough money to survive a crisis.  Three years later, however, some of his colleagues said bank hid €12 billion of operating losses with derivatives.  “The first warnings that Deutsche Bank could declare bankruptcy emerged in 2013 when the bank said it needed additional capital,” according to  “In 2013, it attracted $3 billion through issuing shares for its stakeholders.”

In March 2015, a stress test revealed that the bank again needed additional capital.  It was also revealed that the bank manipulated with LIBOR, and in April 2015 it was fined for $2.5 billion.  Subsequently, the ratings agency Standard & Poor’s downgraded Deutsche Bank from A to BBB+, three positions above the junk rating. 

In early June 2016, Deutsche Bank was again involved in a scandal over LIBOR manipulation.  The case involved at least 29 personnel who worked in London, Frankfurt, Tokyo and New York.  Last year, Deutsche Bank reported a net loss of €6.8 billion for the first time since 2008.

Most recently, the bank made headlines last week when its Xetra-Gold exchange traded bond failed to deliver gold upon clients’ request.  This understandably sparked grave concern from many in the financial realm that Deutsche Bank’s back is against the ropes once again.

Could a Deutsche Bank collapse serve as the catalyst for a 2008-type global credit storm?  When analyzing this question one must be very careful from making dogmatic statements since no one (especially an outsider to the international banking industry) can possibly know all the variables involved.  There are, however, some guidelines that can help us understand the position of the broad market vis-à-vis the effects of an ailing global institution.   These guidelines should allow us to at least handicap the odds of a global financial meltdown.

One important guideline is the underlying strength and internal health of the financial market, notably the U.S. equity market.  In the months prior to the 2008 credit crash the U.S. stock market was exceedingly weak as evidenced by the sustained decline in NYSE internal momentum.  In fact, this is what the longer-term internal momentum indicator for the NYSE broad market looked like just prior to the 2008 collapse.

This internal weakness, combined with growing institutional weakness in almost all major sectors of the economy, meant that the U.S. was highly vulnerable to a financial shock.  When the Lehman Brothers collapse hit the market, the shockwaves were felt immediately and resulted in a domino effect.  In other words, internal weakness makes it far more likely that an exogenous shock to the system will prove devastating, if not fatal.

By contrast, an internally strong internal condition makes it far less likely that an exogenous event, such as the collapse of a giant bank, would derail the U.S. financial system.  Consider the experience of 1998 when the combination of the Asian currency crisis, the LTCM meltdown, and the near-collapse of the commodity market hit the U.S. stock market.  U.S. equities were in a raging bull market at that time and the financial market was internally strong.  The contagion hit our shores in the summer of ’98, and while it did briefly plunge the Dow and S&P into a malaise – within three months the major indices were off to the races again and finished out the year at new all-time highs.  The U.S. essentially shrugged off what would normally have been a catastrophic event due to its internal strength.

I would argue that the U.S. financial market finds itself in a similar situation today.  Instead of chronic weakness, the U.S. market is internally quite strong.  Witness the longer-term NYSE internal momentum indicator below.  As you can see, it’s in stunning contrast to the 2008 scenario shown above.

The late great historian and author Barbara Tuchman said it best when she wrote: “Social systems can survive a good deal of folly when circumstances are historically favorable, or when bungling is cushioned by large resources or absorbed by sheer size as in the United States during its period of expansion….[W]hen there are no more cushions, folly is less affordable.”    

The “cushions” she mentions are in place and are in the form of the rising intermediate-term and longer-term internal momentum previously mentioned.  If a Deutsche Bank collapse happens in the coming months – a mere conjecture to be sure – it would be very unlikely to collapse the U.S. given the prevailing internal strength.

Wednesday, August 24, 2016

Can stocks survive without stimulus?

A fiery debate rages among investors over the question of central bank stimulus.  The question is whether the stock market needs stimulus in order to advance, and is stimulus only creating a bubble which will burst at some point and lead to depression? 

Regardless of the philosophical rectitude of central bank intervention, there can be no denying its efficacy.  The most fundamental truth of the financial market is that “liquidity, liquidity, liquidity” is the market’s lifeblood.   Financial stimulus contains the seeds of recovery and will cure any bear market in equities, as I’ll attempt to prove in this commentary.  The truth of this assertion can be found in the very wisdom of King Solomon, who in the book of Ecclesiastes wrote that “money answers all things.”  Stocks will always, without exception, respond positively to stimulus – provide there are no countervailing obstacles in the way [e.g. tax increases, margin requirements]. 

Critics of stimulus often point to Japan as an example of how quantitative easing (QE) supposedly failed.  Seventeen years ago the Bank of Japan (BOJ) led all other central banks by more than a decade with its zero-interest-rate policy, when its benchmark rate was lowered to zero for the first time during March 1999.  As Dr. Ed Yardeni recently observed:

“The BOJ lagged behind the ECB by nearly 20 months, introducing its negative-interest-rate policy (NIRP) on January 29 of this year.  The central bank was early with QE when it expanded its reserves balance starting during November 2001 through January 2006.  That was just a warm-up act for the dramatic expansion of these reserves that started in early 2011, and then went vertical since late 2012.”

While Japan’s economic troubles remain, is it fair to assume that the BOJ’s attempts at stimulus were an abysmal failure?  Let’s examine the evidence.

Following is a long-term graph of Japan’s Nikkei stock index.  Japan’s attempts at QE started in late 2001 and ended in 2006.  Given the downside momentum that had been established in the Nikkei heading into 2001 – 11 years worth to be exact – it took some time before the first effects of the stimulus registered in the stock market.  By 2003, however, the Nikkei was on the up-and-up.  Japan’s central bank let their foot off the QE accelerator between 2006 and 2001, though, and this explains why the rally didn’t continue further.  The 2008 credit crisis only added to the Nikkei’s woes.

Then starting in 2011, the BOJ once again commenced QE at an even more furious pace than before.  This led to a much quicker improvement in the Nikkei, which zoomed to its highest level in over a decade.  Undoubtedly, Japan’s second attempt at QE would have been far more successful had not the government implemented an ill-advised tax increase.  This foolish measure heavily undermined the positive impact of QE and put the brakes on the Nikkei rally.  It also put Japan’s economy back into recession for a time.

A lingering problem for the European Union countries since 2008 has been the negative impact of years of misguided austerity policies.  European Central Bank (ECB) President Mario Draghi famously pledged years ago the ECB would do “whatever it takes” to reverse the deflationary undercurrents plaguing the euro zone.  But until this year the ECB failed to live up to that promise.  Late last year Europe’s central bank finally got serious and lowered deposit rates while extending its 80-billion-euro monthly asset purchase program. 

Positive results of the bank’s efforts to date haven’t yet been seen, though there are preliminary indications that many European bourses are establishing intermediate-term bottoms.  Much depends on the ECB’s commitment to QE in the year ahead.  By keeping the proverbial pedal to the floor for an extended length of time, the ECB may yet succeed in reversing the continent’s financial malaise.  However, if the bank makes the mistake Japan made by easing up on QE prematurely, the euro zone can expect to see a resumption of the economic malaise.

By far the biggest success story of QE has been the U.S.  The Fed’s unprecedented stimulus measures in the wake of the 2008 credit crash galvanized an historic rally in the stock market which brought recovery to the major indices in record time.  Since the U.S. essentially has a financial economy, any sustained recovery in financial asset prices must of necessity lift the economy sooner or later.  Thus the improvement in many sectors of the economy since 2009 can be attributed, at least in part, to QE. 

The evidence to date strongly suggests that stimulus played an integral role in fueling the mighty asset price recovery that began over seven years ago.  The Federal Reserve’s interventionary QE program was successful beyond anyone’s wildest guess when measured by the result of the equity and real estate markets.  And while many are quick to condemn QE as having been a failure at resuscitating the economy, the data would argue otherwise. 

But after about six years of easy money, the Fed brought its QE program to a close in late 2014.  After that the stock market as measured by the NYSE Composite Index (NYA), the broadest measure of U.S. equities, entered a prolonged sideways trend, which can largely be attributed to the loss of QE.  The loss of billions of dollars per month of liquidity for stocks was gone and with it the sustained forward momentum that fueled the market’s surge from 2009 to 2014.

Keeping the U.S. market buoyant since then has been a combination of factors.  Continued low interest rates coupled with huge inflows of cash from foreigners seeking a safe haven from the global crisis have been a huge benefit for equities.  The lack of competition from commodities and other assets has also helped.  This influx of foreign “hot” money has amounted to a de facto stimulus for stocks, so in essence the market is still receiving stimulus from afar. 

Stocks need stimulus in order to advance in the absence of a strong economy.  When the economy is strong investors need no prodding to put their excess earnings into equities with hopes of greater profits.  A strong economy also breeds confidence in the present and optimism about the future; it serves as a kind of natural stimulus for the stock market.

Ironically, central bank stimulus can also serve as a deterrent for small investors since they interpret the need for stimulus as confirmation that the economy is weak and needs assistance.  Thus the public sometimes lack the incentive to take risks when QE is in full swing.  It’s the professional investor who is sophisticated enough to read between the lines and buy stocks in a weak economy, provided there is stimulus.  This is the great paradox of a stimulus-driven bull market: only the few participate, yet it eventually benefits the many as the wealth generated from higher stock prices permeates the broad economy. 

The great unknown factor concerning QE is the outer limit of its success.  Just how successful can QE be in stimulating the economy?  A satisfactory answer to this question hasn’t yet been supplied.  Just when it looked like the financial market rebound from the 2009 low was ready to explode into a full-fledged runaway bull, the Fed took its foot off the accelerator.  Eventually the generous liquidity the Fed was supplying ground to a halt and the stock market responded accordingly as its forward momentum slowed exceedingly.  

Central bankers, it seems, have an inveterate fear of inflation.  Most of today’s voting Fed members came of age during the runaway inflation of the 1970s.  The memories of that harrowing experience continue to haunt them, and its influence is reflected in their policies.  The prevailing belief is that too much QE equates to too much inflation.  This is a fallacy.  The U.S. and global economies have been so significantly altered by demographic, social and political shifts in the last two decades that inflation won’t be a major concern for many years to come. 

The Fed could have doubled its asset purchases between 2009 and 2014 without creating any appreciable increase in inflation.  Instead it decided to stop QE before inflation even registered, which was tantamount to pushing a stalled vehicle up a hill only to stop pushing before the summit is reached.  It would have been exciting to see just how successful QE could have been had the Fed decided to gun for prosperity.  Instead, the Fed chickened out and ruined its best chance at delineating once and for all the outer limits of central bank stimulus.

The other objection to a full-throttle QE initiative is the widespread fear of creating another asset bubble similar to the real estate bubble that popped in 2006 and led to the credit crisis.  History and human nature testify that a catastrophic crash of the magnitude of the ’08 credit storm takes at least one entire generation (i.e. circa 20 years) to dissipate.  In other words, it takes the advent of an entirely new generation who didn’t experience the crisis to repeat its mistakes.  At present there is a complete absence of risk-taking behavior among the generation that experienced 2008.  That deep-seated fear of risk won’t disappear anytime soon.  Thus the “bubble that broke the world” isn’t going to happen again for a long, long time. 

The simple answer to the question, “Can stocks survive without stimulus?” is an emphatic “No!”  Stocks always need fresh injections of liquidity to gain ground and surge ahead.  Whether the stimulus takes the form of QE, fiscal policy or surplus savings is a moot point.  But stimulus in all its many forms must be present to propel equity prices ever higher.  And rising stock prices in a financial economy like the U.S. always creates a wealth effect.  Thus in the final analysis, stimulus is to everyone’s benefit.

Wednesday, August 10, 2016

Why the U.S. benefits from global financial crisis

Let’s turn our attention to the global economy.  Last week the Bank of England said it would buy 60 billion pounds of government debt in order to cushion the economy against the impact of the recent Brexit vote.  England and the European Union are emulating the quantitative easing (QE) policies of the U.S. Federal Reserve but so far without any measurable success.

Meanwhile the Bank of Japan (BoJ) has begun a massive stimulus program which may already be having an effect on Japan’s bond yields.  There has also been talk of Japan initiating a “helicopter money” scheme whereby the BoJ would directly finance fiscal spending. 

Indeed, loose money policies in England, China, and Japan are all the talk right now among investors.  The attempts by the ECB, BoJ, and People’s Bank at stimulating their way out of deflation have yet to show appreciable results, but this won’t stop them from trying. 

If nothing else, these desperate attempts at re-inflating their economies are providing support for gold, U.S. Treasuries and corporate bonds.  In many countries the interest rate is negative, which means that bond investors are essentially paying the bond issuer to hold their money. As one observer put it, “Negative interest rates were unheard of a few years ago.  Now they are spreading around the world like cancer.”

The yield on the U.S. 10-year Treasury note is only about 1.60 percent (see chart below), but on a relative basis the U.S. is a veritable high-yield paradise in the eyes of yield-hungry investors.  Along with U.S. Treasury and mortgage bonds, safe haven assets such as gold, silver and even U.S. real estate are in high demand.  Gold especially is a fear-driven asset, and with growing uncertainty surrounding the economic outlook for China, Japan, the EU and other countries, gold should continue to benefit in the coming months. 

Although there has been no formal crash in the European markets, euro zone bank stocks have acted as if a financial crash is underway.  Consider the following graph.

As shown above, the STOXX index of 47 leading European bank stocks shed nearly 40 percent of its value from May 2015 to May 2016.  Bad loans along with negative interest rates have significantly eroded the banks’ profitability as illustrated in this chart. 

Here’s something else to consider: In 2014, IMF chief Christine Lagarde proposed that 10 percent of every saver’s bank account be essentially confiscated as bail-out money, similar to what happened in Cyrus in 2013.  Robert Campbell, in his latest “Campbell Real Estate Timing Letter” ( asks, “If you were a European saver, would you keep your money in a bank savings account knowing that the money could be confiscated if the bank needed capital to keep operating?  Or would you think long and hard about taking your money out of the European banks and investing it in the U.S. – in stocks, bonds, or real estate – where your money is safer?”  

Campbell suggests – and quite correctly, IMO – that U.S. financial markets have benefited from capital flight out of Europe and other countries.  “It might seem paradoxical,” he writes, “but the worse the economic situation gets in Europe, the better it could be for U.S. asset prices.”  The experience of the last several months argue strongly for this conclusion.

Thursday, August 4, 2016

Clif Droke on Financial Sense News Hour

I was recently interviewed by Cris Sheridan of the Financial Sense Network.  The interview can be downloaded at the following link:
In it we discuss the the bull market which began in February and the possible outcomes for the remainder 2016.  Special thanks to Cris and everyone at FSN.

Thursday, July 28, 2016

Is the tape being painted for Hillary?

In the old-school lexicon of Wall Street, the term “painting the tape” referred to the large scale purchase of market-moving stocks by insiders for the purpose of giving the market an appearance of strength.  Painting the tape was practiced by “pools” and large firms who were in the know; it was designed primarily to present a picture of strength when there was an undercurrent of weakness. Painting the tape was also done in some cases to trick amateur traders into buying certain individual stocks by means of manipulating the stock’s trading volume. 

While the technique of “tape painting” has changed since those days, the practice of manipulating the market is still quite common. Indeed, it happens on a daily basis and successful speculation requires the ability to recognize it and deftly sidestep its intended consequences.  That said, now would be an appropriate time to ask the question: “Is the market’s recent internal strength the result of natural demand or of manipulation?”  And if the latter is true, for what purpose is the market being given a false appearance of strength? 

Let me begin by asserting that I don’t believe the broad market’s increasing strength since February is the result of outright deception.  While there may be individual stocks, and perhaps even select industries, which are undergoing active manipulation the fact that the stock market’s recovery is nearly six months old is an argument for legitimate demand-driven buying.  Experience has taught that it’s not possible to artificially strengthen a market for that length of time, especially when the NYSE new high-new low differential is so consistently strong.  There must be broad-based demand, for no clique or coterie could possibly keep the entire market elevated for that length of time without widespread participation.    

Having said that, I’ll acknowledge the possibility that the recent breakout in the large cap indices may have been premature.  While it was accompanied with great fanfare, the breakout to new highs was unaccompanied by some of the other major indices, including the Dow Transports and the NYSE Composite Index (NYA).  The important financial sector stocks, moreover, remain stuck in their lateral trading patterns of the past year and didn’t confirm the breakout, either. 

If the tape is being painted, for what or for whom is the fireworks display being made?  The most obvious culprit would be the upcoming U.S. presidential election.  One possibility is that a large contingent on Wall Street is trying to influence the outcome of the November election.  There’s a well-known historical association which states that I the stock market rallies in the months before the election the incumbent party typically wins.  The idea in fashion among Wall Street pros is that the Democrat nominee’s policies would favor Wall Street.  By contrast, there seems to be no clear consensus among pundits that the Republican nominee would be good for stocks. 

A correlation has also been made between the periods of weakness in the financial market this year and the surges in candidate Trump’s popularity.  Trump has enjoyed his greatest campaign success when stocks have stumbled or remained subdued for long periods.  An extended rally in the major indices, however, has coincided with a drop in his positive polling.  There is, in other words, an inverse correlation between Trump and the prevailing stock market trend. 

Again I must emphasize that this is merely a speculation on my part and cannot be empirically proven as a definite reality.  If the new highs are being engineered for political or economic reasons, however, it will become clear in the months ahead.  We’ll know, for instance, if the new highs are artificially induced if the banking and broker/dealer stocks are unable to make yearly highs in the next few weeks.  Failure of the Dow Transports to confirm the new high in Industrials would be another clue.  In particular traders should keep a close watch on the chart of the NYSE Securities Broker/Dealer Index (XBD) shown below.  The best and strongest extended bull markets have always been confirmed by higher highs in the XBD.

If the tape is indeed being “painted” then we can expect to see continued new highs in the Dow and SPX in the coming months, even if unconfirmed by the other indices and industry groups.  Large cap stocks have been the beneficiaries of the informed buying of recent months and show no signs of being under distribution.  Internal selling pressure within the NYSE broad market is nonexistent right now, which favors the bulls in their attempts at pushing large cap stocks higher before the election.  There may, however, be a reckoning after the election is over.  

In the meantime traders have some fantastic opportunities to take advantage of the favorable internal conditions within several of the market sectors.  As a painter might say, one should never let a good canvas go to waste.