Friday, November 1, 2013

ISM Manufacturing Index UP

Some published reports picked up a preliminary number (24 Oct 2013) for the ISM report and stated the PMI was down; ignore them.  Today’s 1 Nov report is summarized below:

“The ISM Manufacturing Index increased to 56.4 in October from 56.2 in September. The consensus expected the index to fall to 55.0…The common adage throughout the government shutdown was that the manufacturing sector would suffer from lost orders and demand. If the ISM index is an accurate gauge of manufacturing activity in October, then the expected weakness never occurred…[For perspective,] This is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse.”  Full story at…

Yesterday’s good news on the Chicago PMI led to some significant late day selling – the entire 0,4% loss was due to action in the last hour.   (Late-day selling is attributed to the pros, since that is when the experts get busy.)    The Pros know that the stock market is probably mispriced due to tapering. Late day selling has been going on for about a month, but not drastically.

Remember, good-news on the economy is now bad-news for the stock market because it will bring tapering of QE.  I’m ignoring today since it’s the first of the month.

“The Economist’s American Finance editor Tom Easton…declared [at the The Economist’s annual Buttonwood Gathering] that he had recently moved to the U.S. from China, but “didn’t leave a state-run economy.”… “The Chinese government “directs capital, controls the banking system and the ‘highlands’ of important industries. I’m still in China when I came back to America… China and America really are on the same page now,” he says. “In both cases, to stay free you have to lobby too. It’s not a rule of law, really, it’s a rule of trying to influence influential people to get preferential terms so you can make an economy work.”  Video and story at…

Friday, the S&P was up 0.29% to 1762 (rounded).
VIX was fell about 3% to 13.33. (No fear in optionland.)

Today was up for the S&P 500, but down for most stocks with only 45% advancing on the day.  That’s probably a first-of-the-month effect as new money was invested by automatic purchases into the major indices. 

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

New-highs outpaced new-lows, Friday, leaving the spread (new-hi minus new-low) at + 70 (it was +108 Thursday).  The 10-day moving average of change in the spread fell to minus-37.  In other words over the last 10-days, on average, the spread has declined by 37 each day.

I went through my market internals data for 2013 and back-tested for gains following the protocol that all indicators would have to agree to generate a Positive or Negative value.  Any disagreement generates a Neutral reading.  Assuming I traded the indicators as Positive=Buy and Negative=Sell, the back tested gain was 16% for 2013 so far, underperforming the S&P 500. A strategy based on internals will underperform most of the time (I think) since it is a trend following system, and is made worse by my assumption that all changes are at the close, i.e., if the system  issues a Negative/Sell reading on Monday, after the close, the sell isn’t executed until the close on Tuesday.

Using the internals guidance to short was not successful at all with a 6%-loss so far.  The loss is not a surprise since the dips have been so short that this short strategy has little chance of success.  (These results wouldn’t hold for 2xETFs or Options.) 

I’ll work on this some more to see if I can refine a short-term strategy.   As it is, my back testing does show that the Market Internals are a decent trend-following analysis of current market action, but are not be suitable for trading decisions by themselves.





All indicators are now “Hold”, except for the Sentiment indicator that has shifted to sell. On Wednesday, 77% of invetsors were betting long in the Rydex long/short funds I track.  Going all the way back to July 2009, there was only one day in 2012 when sentiment was that high.  This can keep going though.  What is unfortunate is that many are getting in now who missed the gains of the past 5-years.  If they aren't careful, they may be seriously burned. 

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.