Thursday, October 3, 2013

ISM Non-Manufacturing Number Disappoints…No Taper

The non-manufacturing sector expanded at a slower pace in September, according to the Institute for Supply Management. The services index came in at 54.4%, below expectations and below August's reading of 58.6%. A reading above 50 signals expansion. This was the 45th consecutive month above that level…the non-manufacturing index (in blue) continues to hover around the mid-50's, which is where it has been for the last 3 years: In other words, the Muddle Through Growth economy continues.”  Full story at…

REVIEW OF THE MANUFACTURING ISM REPORT (Wall Street Journal print edition) and NO TAPER
“Earlier this week the ISM Manufacturing Index registered a reading of 56.2 for September, the highest in 29-months.”  The article went on to suggest that the Manufacturing number was more closely watched because it has a longer track record and the Manufacturing number seems to track GDP. The article further predicted that the ISM non-Manufacturing number would fall slightly to a “still-stellar” 57 and the FED would have to begin tapering QE. 

With today’s poor Non-Manufacturing report, we may conclude that the Taper is probably on hold.  Numbers aren’t improving.  

"The bottom line is simple...First, we view market valuations as obscene, and likely to result in a market loss on the order of 40-50% over the next few years. Second, we view the recent inaction by the Federal Reserve as creating a risk … a risk, of resumed speculation that might create a speculative blowoff over a period of weeks.…The dominant risk is that of deep and extended market losses. A possible speculative blowoff would simply make the market’s subsequent losses that much worse.” John Hussman, PhD, Weekly Market Comment, 30 nSeptember 2013,  from Hussman Funds at…

John Hussman is using the Shiller PE or the Cyclically adjusted PE (CAPES) methodology.  (Here is my previous discussion of CAPE from 2 Apr 2012, titled, "Stock Market Advice from Darth Vader."  In a nutshell, the data is quite compelling that CAPE is a predictor for future market returns; however, CAPE alone does not provide a good timing model for exiting the markets. 

“Don’t run for the hills b/c of the shutdown or the debt ceiling – Run b/c the economy is slowing by itself.” – Bill Gross tweet reported by…

Thursday, the S&P finished down 0.9% to 1679 (rounded) at the close.
(The 50-day moving average of the S&P 500 is now 1680.  Back in the end of August the index close about 2% below its 200-dMA so this, by itself, isn’t cause for great alarm.)

VIX was UP 6% to 17.64.

The 10-day moving average of stocks advancing on the NYSE fell to 45% Thursday from 47% Wednesday.  (A number below 50% for the 10-day average is generally bad news for the market.) 

New-highs outpaced new-lows Thursday, leaving the spread (new-hi minus new-low) at +55 (it was +80 Wednesday).  The 10-day moving average of change in the spread is minus 26. That just means that over the last 10-days, the spread has been getting worse.

Market Internals are negative on the market for this short term indicator.
Today was a statistically significant, down-day based on NTSM analysis of price and volume.  That usually suggests an up day tomorrow and a possible short-term reversal.

Thursday, the overall long-term NTSM analysis remains HOLD at the close, but the system is now nearly a sell.  (A “Sell” now would be almost meaningless since the sell in this cycle was 15 April.)  The "near-sell" does indicate that market conditions are deteriorating, but it doesn’t take a complex system to know that. 

The VIX indicator is now a negative due to rising VIX. Volume is borderline negative.  Price is positive.

The 5-day, percent-bulls (bulls/(bulls+bears) in the Guggenheim/Rydex funds I track was 68%-bulls as of Wednesday’s close. That is an extreme bullish value that is usually a negative for the markets.  “USUALLY” is the key word here.  I suspect the crowd is betting that the political impasse will be resolved easily. 

If it is, the bet might be right.  On the other hand, it is not clear to me that the market is falling solely due to political wrangling.

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.