Monday, October 28, 2013

Stock Market Top: Soon…Companies Reporting Falling Revenue…Manufacturing Slows

Finally, here is an analysis predicting a correction with a reasonable methodology and an actionable timeline. 

TOP SOON (McClellan Financial Publications)
Tom McClellan writes:
“Gordon Scott, CMT, co-author of the book Invest to Win…has noticed an interesting phenomenon in the movements of the overall stock market which he relates to the 12-month holding period for long term capital gains taxes. If an investor holds a share of stock or other investable asset for more than a year, and has a profit, then the income tax owed on that profit is at a lower rate than for ordinary income. So an investor has at least some incentive to hang onto a winning trade until the 366th day after entering that trade.

Gordon Scott finds that this incentive shows up in stock price indices with a meaningful selloff appearing about 13-14 months after an important price bottom…Coming up just ahead, we are now almost at that same 12-13 month point following the selloff in October and November 2012.”  Interesting analysis with a lot more detail at…

While Tom McClellan presented an opinion above from his web site, the below article (from another site) suggests that Tom doesn’t necessarily share that negative view, at least in the longer run.

“Tom McClellan, Editor of McClellan Financial Publications. Tom believes the market is technically ready for a big run into next summer. He also notes there is a lot of liquidity coming into the market from the Fed (see charts).” Analysis at…

“With 49% of the companies in the S&P 500 reporting actual results, the percentage of companies reporting earnings above estimates is above the four-year average, while the percentage of companies reporting revenue above estimates is below the four-year average.”  Factset Earnings Insight available from Factset at…

CMT: The bar was set low by analysts so it’s not a surprise that earnings are beating the lowered expectations.  I am surprised that revenues are below estimates.  Revenues have been dropping so I had expected that analysts would have it right by now.

“At this stage of Q3 2013 earnings season, 57 companies in the index have issued EPS guidance for the fourth quarter. Of these 57 companies, 49 have issued negative EPS guidance and 8 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 86% (49 out of 57). This percentage is well above the 5-year average of 63%.”  Factset Earnings Insight available from Factset at…

APPLE MISSES (Minyanville)
“Apple (NASDAQ:AAPL) reported fiscal fourth-quarter earnings and revenues that beat both its own guidance and Wall Street's expectations. It also delivered very impressive iPhone unit sales. However, Apple's first-quarter gross margin guidance was weak, prompting a sell-off.” [The sell-off was in after-hours trading, but as I write this Apple is only off a few points].” Market news at…

If you see good-news headlines that Industrial Production improved... forget-about-it.  Industrial production improved, but mostly because of weather-related utility production.  There were issues with the manufacturing numbers inside the Industrial Production.  Here’s the real story…

“U.S. manufacturing output slowed in September as the production of computer and electronic goods fell, suggesting business spending ended the third quarter with less momentum.

Manufacturing production edged up 0.1 percent last month after advancing 0.5 percent in August, the Federal Reserve said on Monday. The report comes on the heels of a report last week showing a gauge of business spending tumbled in September…In September, a rebound in utilities output [weather dependent] lifted overall industrial production 0.6 percent, the largest increase since February.”  Story at…

Monday, the S&P was up 0.1% (2pts) to 1762 (rounded) for another new high at the close.
VIX was up about 0.2% (2pts) to 13.31.

Let’s look at some divergences occurring today.  S&P 500 was up 0.1%, but…
(1) VIX was up 2% (and that correlates negatively with the markets).
(2) Only 45% of stocks advanced.
(3) Only 44% of volume was up.
(4) Cyclical stocks were down 0.3%.
(5) The S&P 500 sold off a couple of points in the last hour.

The divergences were not huge, but behind the scenes, we see that most stocks did not fare well on Monday.  The S&P 500 was up slightly, but it represents a narrower part of the market in number, if not size.  Usually, the indices will follow the majority, so I expect the S&P 500 to decline Tuesday. 

The 10-day moving average of stocks advancing dropped again to 59 %.  (A number above 50% for the 10-day average is generally good news for the market.) 

New-highs outpaced new-lows, Monday, leaving the spread (new-hi minus new-low) at +167 (it was +221 Friday).  The 10-day moving average of change in the spread fell to +1.  In other words over the last 10-days, on average, the spread has improved by +1 each day. 

Market Internals remain Positive on the market for this short term indicator, but just barely.

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 things improve.

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.