Date: June 26, 2017

Fakeout or Breakout

Friday saw the most constructive market action of the week with the little pullback seeming to come to an end. Early indications are that the bulls will continue moving stocks higher today. Starting with the NASDAQ 100, for now, until the June high or low is closed above or below respectively, I am going to remain in the neutral camp although I continue to believe that new highs will be eventually seen. It looks like the index’s leadership role has been diminished, again, for now. On the flip side, the Dow and S&P 500 continue to behave very well, however, the real story would be if the S&P 400 and Russell 2000 become leaders again. That could and should give the bull market another shot of energy to eclipse 22,000.

On the sector front, as technology has stumbled, industrials, healthcare, biotech, REITs, utilities and transports have all stepped up to pick up the slack. Without much of a decline, this kind of sector rotation is very healthy and usually portends higher prices for the major indices. Energy and energy related instruments are probably the biggest concern in the short-term with crude oil down to $43. I can easily make a case that sub $40 crude is right around the corner. That should further hurt high yield bonds, however, I do not believe we are seeing anything close to what happened in 2015 and early 2016. You should expect to hear cries of a global demand collapse putting the economic expansion in jeopardy. I totally dismiss that.

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Paul Schatz, President, Heritage Capital