Wednesday, October 16, 2013

Retail Sales Slow…Time to Buy Stocks?

As I have discussed in the past [and as shown in the below chart] - economic strength appears to have peaked in early 2011. Since personal consumption expenditures makes up a little more than 68% of the current GDP calculation the weakening trend is retail consumption is the real culprit behind the sluggish economic growth…
...With real final sales plugging along at 1.9% and the output gap above 6% the slack in the economy is huge. As a reminder these numbers are generally levels more associated with recessions and not four years into a recovery.…
…the fact the economy can run at such subpar growth rates without technically being in a recession is a function of the 'new normal' of an economy supported by trillions of dollars of stimulus. This also goes a long way to support the idea that recent claims that the economy is on the verge of acceleration in growth are likely based more on 'hope' than 'reality.' The economy will likely continue to "muddle along" only as long as the Federal Reserve continues to support it by artificially suppressing interest rates and flooding the system with liquidity."” – Additional charts and interesting commentary by Lance Roberts at…
Chart from at…

This sort of information shows a problem with the economy, but there is no way to know if the problem is now or further down the road.

The issues that have spooked the bears remain.  Let’s run some of them down:
1. Corporate Profits are at record highs and have nowhere to go but down.
          2. The Cyclically Adjusted PE (CAPE/PE10/Shiller PE) remains at extreme high values.
          3. The economy is creeping along at levels normally associated with recession leading many to suggest the US is already in recession.
          4. Unemployment remains at a high rate.
          5. Housing is not rebounding well and recently, builder sentiment has declined.
          6. Household income and spending is declining and has been for several years.
For me, the high sentiment values along with steeply climbing (or an aimlessly drifting) VIX, and volume that can’t seem to consistently move to the buy side have been technical indicators that prevent buying.

Issues that suggest it is time to increase investment in the stock market follow:
1. The FED is unlikely to taper its QE program for significantly longer than was thought just a few weeks ago.
2. While the economy is slowly growing, the key point is that it is still growing and has defied all predictions of collapse, so perhaps we should learn to love slow growth.
3. Market internals (that are Short term indicators) look good.

In the past, my system has corrected my emotional mistakes by indicating a buy not too long after a bottom, but during this cycle, signals have not been strong. They still aren’t.  I’ll just have to wait and see, so for me, the answer is: Not now.

Wednesday, the S&P finished UP 1.4% to 1722 (rounded) at the close, near the all-time high of 1725.  
VIX fell 21% to 14.71...that’s a lot and suggests new highs are possible.

The 10-day moving average of stocks advancing bounced back to 50%. (A number below 50% for the 10-day average is generally bad news for the market.) 

New-highs outpaced new-lows Wednesday, leaving the spread (new-hi minus new-low) at +218 (it was +93 Tuesday).  The 10-day moving average of change in the spread is plus 14.

Market Internals are now positive on the market for this short term indicator.

The overall long-term NTSM analysis remained 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.