Thursday, October 31, 2013

Chicago PMI Treats Market to a Trick

The following good news from the Chicago Purchasing manager’s Index should have been a treat for the markets. 

“Chicago PMI, a gauge of manufacturing in the Midwest, surged to 65.9 in October, from 55.7.  This is the highest level since March 2011, and the biggest monthly increase in over 30 years…’The government might have shut down, but Chicago area companies powered ahead in October as orders and production surged,’ said Philip Uglow, Chief Economist at MNI Indicators.”  Full story at…

This is a concern to the markets because as we noted yesterday, “Tapering” of QE represents a significant threat to the stock markets.  In this environment, Good news (treat) is bad news (trick), because good economic news brings tapering sooner.

“The fact that many current health-care plans do not offer all the benefits required under Obamacare means that many premiums are likely to jump dramatically, Aetna CEO Mark Bertolini told CNBC…"Aetna alone will pass through to its customers over $1 billion in taxes and fees associated with the Affordable Care Act that need to go into the pricing," Bertolini said….The Aetna chief went on to say increased costs to the plans include new taxes and fee implementations, including new changes in ratings to things such as pre-existing conditions as a result of expanding policy benefit requirements.” Story at…

"The recent trading environment has felt something like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen or when. “QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying."  -Paul Singer, Elliott Management Story at…

“The game of Earnings Expectation Conflation continues. It’s a bit like limbo - with a twist. Though the bar gets lowered every round, the goal is to make it over the bar, rather than go under it…third quarter index earnings growth is now expected to be half of what was forecast in June. Of course, when earnings are announced in October and they “beat” the guidance set in July, everyone will celebrate…
…The index is no longer cheap…There is evidence of much more (and increasingly creative) speculative behavior…
…We never expected to find ourselves in an environment like this again, given the savings that were lost when the internet bubble popped.”  Excerpted from David Einhorn newsletter of last month from ZeroHedge at…

Thursday, the S&P was down 0.4% to 1757 (rounded).
VIX was up about 1% to 13.78.

The 10-day moving average of stocks advancing fell to 53%.  (A number above 50% for the 10-day average is generally good news for the market.) 

New-highs outpaced new-lows, Thursday, leaving the spread (new-hi minus new-low) at +108 (it was +185 Wednesday).  The 10-day moving average of change in the spread fell to minus-20.  In other words over the last 10-days, on average, the spread has declined by 20 each day.




All indicators are now “Hold”, although the Sentiment indicator was 69% as of the close Wednesday. (I don’t get the data on this until later tonight.) Currently, my sell indicator is calculated at 70% as a multiple of standard deviation based on the past 200-days of data.  (This is for the sentiment only and it takes more than 1-indicator to give a sell signal in the NTSM system.)  I looked back to the highs in 2009 and found that at the first significant top in July of 2007, the %-bulls (my sentiment indicator) never got higher than 59%.  This isn’t really too surprising since the Financial crisis was never a valuation issue.  As I noted yesterday, the funds I currently use for sentiment were not around in 1999/2000 so we don’t have good data for comparison.  That’s too bad because the dotcom crash was a valuation bubble.

In all of 2009, 2010 and 2011 sentiment did not get as high as it is now.  There were only 2-days in 2012 when it got above today's value.  So far there have been 12-days in 2013 when the level exceeded today's value.

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.

I still lean toward getting back in, after a pullback, to speculate on a final ride to the top.  NTSM did give several buy signals last week, but the market just looks too frothy to rush back in…we’ll see if the market will pullback so I can join the insanity.  If not, cash is fine.