Wednesday, August 28, 2013

Not Much News; but Plenty of Negative Analysis

“Despite our grave concerns about market risk here, we also have to allow for the possibility that the recent bull market will carry further. Yet it’s critical to understand that allowing for that possibility has rarely been successfully achieved by ignoring overvalued, overbought, overbullish syndromes or deteriorating market action. Rather, the most useful opportunity to respond constructively is on an early improvement in market action, after overvalued, overbought, overbullish conditions have been cleared" - John Hussman, PhD, Weeky Market Commentary for 26 August.  Full commentary at...

“[There is a belief]…that foreign investors have no choice but to perpetually support the U.S. debt market at any price and at any yield.  But … the latest data show weakening demand in overseas purchases of Treasurys….When the Fed stops buying Treasurys, foreign and domestic investors will do so as well. This means for a period of time there won't be anyone left to buy Treasurys unless prices first plunge.

The effects of rising rates will be profound on currencies, equity prices, real estate values and economies across the globe. It would be wise to prepare your portfolio…”  Full story at…

As always…when?  The timing of this sort of negative call is the key and it’s anyone’s guess.  How soon is “soon”?

“Company debt loads in the U.S. are approaching the highest level since the aftermath of the financial crisis as borrowing to finance mergers and shareholder payouts exceeds earnings growth.  Debt levels have increased faster than cash flow for six straight quarters, boosting the obligations of investment-grade companies in the second quarter to 2.09 times earnings before interest, taxes, depreciation and amortization, according to JPMorgan Chase & Co.  That…compares with 2.13 in the third quarter of 2009, when it peaked after the deepest recession since the Great Depression.”  Story at…

Leverage is just a distortion associated with the Fed QE policy of driving interest rates down.  It doesn’t look particularly worrisome unless earnings completely fall off a cliff. 

The issue is earnings though, because any reduction in earnings is likely to be punished.  It won’t take a huge drop in earnings to cause some real problems for the stock market.

Wednesday, the S&P was up 0.3% to 1635 (rounded) at the close.
VIX was down 2% to 16.49. 

The 10-day moving average of stocks advancing on the NYSE was 44% at the close Wednesday, a slight improvement over yesterday.  Any number below 50% suggest trouble for the market.

New-lows outpaced new-highs today leaving the spread at -43 (it was -61 yesterday), with the 10-day moving average of change in spread now slightly up.  The change in 10-day spread was slightly down yesterday.   

Today’s reading of Internals is negative on the market, but not strongly.

Wednesday, the overall NTSM analysis was HOLD at the close.

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!)  I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.