Friday, January 31, 2014

Is the Correction Over?...Jobless Claims…

JOBLESS CLAIMS (Briefing.com, 30 Jan)
“Initial jobless claims unexpectedly spiked to 348,000 for the week ending January 25 from an upwardly revised 329,000 (from 326,000) for the week ending January 18. The Briefing.com consensus expected the initial claims level to fall to 325,000.” Story and graphs at…
http://www.briefing.com/Investor/Calendars/Economic/Releases/claims.htm
STOCKS SLAMMED! OFFICIAL CORRECTION LOOMS (Yahoo Finance)

“Emotions are high and people are scared,” says Jeff Kilburg of KKM Financial in the attached clip. “If you’ve been part of this long, profitable, QE and Ben Bernanke sponsored rally, I think it’s time to start thinking about what profits you should book."
Video and story at…
 
IS THE CORRECTION OVER? LOOKING FOR CLUES (Lance Roberts posted to Advisor Perspectives)
Here is a good discussion of some of the technical issues associated with calling a bottom.  It deals with Bollinger Bands that are based on statistical analysis of S&P 500 moving averages.  It is geeky, but not too geeky, and I recommend the read.  It’s too long to summarize, but here are a couple of points:
“It is very likely that the recent selloff has reached a short term bottom. A rally back to the 50-dMA [1812], or an attempt at previous market highs, is entirely possible…There is one thing that is crucially important to remember - "we are all guessing." While there are plenty of individuals currently prognosticating that the current bull market is still intact, and could indeed be proven right, they are only making an educated guess. However, it is also important to remember that most of these individuals on television have an inherent bias to sell you some product or service which keeps your money invested at all times for a fee.” Commentary at D.short.com at…

MORE CORRECTION TALK
-The S&P 500 tested the December low of 1775 on Wednesday.  Volumes were higher Wednesday so there is more fear now than there was at the low on 13 December.  VIX was only 15.75 at the December low vs. 17.26 on Wednesday.  I would consider Wednesday a failed test, but the markets bounced up on Thursday anyway.  The market will need to retest 1775 on lower volume before it might begin to suggest an end to the correction.  More likely, it will break thru 1775 and head down.  A major point of hope for the bulls is the 200-dMA, now at 1706.  That is only 4% above today’s close.  Further down, the 8 October low on the S&P 500 was 1655 and that is a significant technical area of support.  Goldman Sachs called for a 10% correction and that would put the S&P 500 at about 1665.
-VIX is at a critical level. If one were to draw a downward sloping line connecting the highs in VIX from June of 2012 until today, today’s value of VIX (18.39) would be on that line. If VIX increases from here it breaks that 18-month long downward trend line.  Trends often go on for some time so this could (emphasis on “could”) be a harbinger of bad news ahead.  It might just reverse downward.
-Today’s down-day was on volume 37% higher than the average for the month on the NYSE so it looks like the beginnings of real fear.
 
Bottom line: Today, no signs of a correction end.
 
MARKET REPORT
Friday, the S&P 500 was down 0.7% to 1783 (rounded). 
VIX was up about 6% to 18.41.
 
The 10-year Treasury Note yield fell to 2.64%. Rates at 3% or above are considered by some traders to be “trouble-for-stocks”, but now rates are falling because of a flight to safety.  As bond-prices rise, yields fall.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks advancing fell to 46% at the close.  (A number below 50% for the 10-day average is generally bad news for the market.)   New-lows outpaced new-highs Friday, leaving the spread (new-hi minus new-low) at minus 26.  (It was +29 Thursday). The 10-day moving average of change in the spread rose slightly to minus 19. In other words, over the last 10-days, on average, the spread has decreased by 19 each day. 
Market Internals are a decent trend-following analysis of current market action, but should not be used alone for short term trading. (Internals are most useful when they diverge from the direction of the Index; this can sometimes indicate a trend reversal.) In 2013, using these internals alone would have made a 16% return vs. 30% for the S&P 500 (in on Positive out on Negative – no shorting).  Of course, few trend-following systems will do well in an extreme low-volatility, straight-up year.
 
NTSM
The NTSM system remained SELL today.
The four areas of analysis, Sentiment, Price, Volume and VIX are currently rated as follows:
-Sentiment is negative at 78%-bulls, down 5% from its peak.  78%-bulls means that nearly 4 out of every 5 investors are betting long in the Rydex Guggenheim long/short funds I track.  Incredible!
-VIX (tracking direction and intensity of VIX) and Volume are negative (This is a variant of on-balance-volume.)
-Price (calculates and compares the size of up and down moves) is neutral.  There are also a number of indicators designed to identify tops and bottoms such as the statistical analysis “panic-indicator” that flashed sell a week ago.
MY INVESTED POSITION
I am about 30% invested in stocks as of 20 December (S&P 500-1540) because I upped my stock holdings by 10% on the 20th of December.  30% is a reasonable level of stock holdings for a correction, so I don’t need to reduce holdings since I don’t think this will be a major crash.  Even if a surprise collapse did take the stock market down by 50%, I’d only lose 15% in the stock portfolio.  On the other hand, if I am wrong, leaving 30% invested in stocks hedges the bet since no system is perfect. 





Thursday, January 30, 2014

Correction – Where’s the Bottom?...Weak Earnings…China Manufacturing Contracts…GDP: 3.2%

CORRECTION – WHERE’S THE BOTTOM?
1750 is the lower support line for the 1-year trend of the lower lows. That is a major point of support for the current downtrend and would be 5% down for the correction or about 100 points.  So far, I haven’t seen any data that would confirm the correction is over, although the “Smart Money” indicator is hinting at an all clear. Other than up-volume, market internals don’t look good either, even including today’s good numbers.  My guess is we retrace down to 1750, after that, we’ll see.
 
LARGE COMPANY EARNINGS WEAK (Yahoo Finance)
“Earnings reports from many large companies have been weak, forecasts have often been poor and the stocks of these firms have plummeted… Apple Inc. (AAPL)… missed Wall Street's best expectations for iPhone sales and posted a gloomy forecast. …International Business Machines Corp. (IBM) -- did almost as badly. No one was impressed with General Electric Co.'s (GE) numbers. Figures released by the major financial firms were mostly lackluster. Citigroup Inc.'s (NYSE: C) shares are off 6% in the past five trading days, and shares of Goldman Sachs Group Inc. (GS) are down 4%. Also among the major components of the S&P 500, Procter & Gamble Co. (PG) disappointed as its razor customers stopped shaving. These earnings leave only a few large companies that might report strong number to turn the perception of the earnings collapse around…Looking over all the reasons for a 10% market sell-off creates the strong impression that the sell-off will continue, and probably accelerate.” Story at…
Today Google missed; Amazon missed…This isn’t encouraging.
 
CHINA MANUFACTURING CONTRACTING (Global Economic Perspectives) “The HSBC China Manufacturing PMI shows China manufacturing is back in contraction, following six months of barely positive growth…Firms also cut their staffing levels at the quickest pace since March 2009… This is yet another sign of a global slowing economy.” – Mike Shedlock Story at...
 
FOURTH QUARTER GDP GROWTH: 3.2%
Consumer spending that rose at the fastest pace in three years helped the U.S. economy grow at a 3.2 percent pace in the fourth quarter, overcoming government cutbacks and laying the foundation for a stronger expansion…”  Story aT...
Curious…We’ve heard from some of the major retailers who are laying off employees including Macy and Nordstrom, so it’s surprising that consumer spending led the way in GDP growth.
 
MARKET REPORT
Thursday, the S&P 500 was up 1.1% to 1794 (rounded).
VIX was down about 0.4% to 17.29. (That’s not much of a decline for today’s big up-day and it suggests the correction continues. Options players remain concerned.)
The 10-year Treasury Note yield was up very slightly to 2.69%. Rates at 3% or above are considered by some traders to be “trouble-for-stocks”.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks advancing rose to 48% at the close.  (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 +29.  (It was minus 64 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 decreased by 20 each day.
Overall, Internals are neutral on the market, but only because Up-Volume was high today and that pulled the 10-dMA up.  Still, Market Internals don’t look all that good now.
Market Internals are a decent trend-following analysis of current market action, but should not be used alone for short term trading. In 2013, using these internals alone would have made a 16% return vs. 30% for the S&P 500 (in on Positive out on Negative – no shorting).  Of course, few trend-following systems will do well in an extreme low-volatility, straight-up year.
 
NTSM
The NTSM system remained SELL today.
The four areas of analysis, Sentiment, Price, Volume and VIX are currently rated as follows:
-Sentiment is negative at 78%-bulls, slightly lower than yesterday and down 5% from its peak.  A falling sentiment reading is typical for a correction, but usually there is enough fear in the air so the sentiment falls very quickly as traders go short.  After 3-weeks, sentiment it is still so high that one wonders whether it is an indication that there are buyers ready to take the market higher.  78%-bulls means that nearly 4 out of every 5 investors are betting long in the Rydex Guggenheim long/short funds I track.  Incredible!
-Volume is negative (This is a variant of on-balance-volume.)
-Price (calculates and compares the size of up and down moves) and VIX (tracking direction and intensity of VIX) indicators are now neutral, but both are very near negative levels.  There are also a number of indicators designed to identify tops and bottoms such as the statistical analysis “panic-indicator” that flashed sell last Friday.
MY INVESTED POSITION
I am about 30% invested in stocks as of 20 December (S&P 500-1540) because I upped my stock holdings by 10% on the 20th of December.  30% is a reasonable level of stock holdings for a correction, so I don’t need to reduce holdings since I don’t think this will be a major crash.  Even if a surprise collapse did take the stock market down by 50%, I’d only lose 15% in the stock portfolio.  On the other hand, if I am wrong, leaving 30% invested in stocks hedges the bet since no system is perfect. 



Wednesday, January 29, 2014

FED Reduces QE

FED REDUCES QE (Bloomberg)
“The Federal Reserve will trim its monthly bond buying by $10 billion to $65 billion, sticking to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke’s unprecedented easing policy. “Labor market indicators were mixed but on balance showed further improvement,” the Federal Open Market Committee (FDTR) said today in a statement following a two-day meeting in Washington…”  Story at…
http://www.bloomberg.com/news/2014-01-29/fed-cuts-qe-to-65-billion-pace-as-labor-market-improves-further.html

OBAMA MINIMUM WAGE HIKE FOR FEDS (CNBC)
Obama announced at the State of the Union that he is hiking the minimum wage for federal contractors.  From CNBC: “…only a tiny number of workers will receive any benefit while economists continue hotly to dispute the broader merits of minimum wages as an anti-poverty program. According to the White House, the kinds of contractors who will benefit from the minimum-wage boost are janitors, construction workers and those who wash dishes, serve food and do laundry on military bases.”  Story at…
http://www.cnbc.com/id/101371009

I’m not sure about the construction workers.  Their wages are set by the Davis-Bacon Act and I am surprised that the President could change them.

EMERGING MARKET CRISIS – FORGEDABOUTIT (CNBC)
“Fears of an emerging market disaster have unnerved investors lately, but on Tuesday two stock market professionals dismissed fears of an imminent worldwide crisis and told CNBC there are several reasons to be optimistic about U.S. as well as global markets.  This still will be a strong year for growth in the United States, Joseph Tanious, a global market strategist at JPMorgan Asset Management…He called for gross domestic product growth of about 3 percent.  Jeremy Zirin, chief U.S. equity strategist at UBS Wealth Management Research, largely agreed with that GDP estimate and said doesn't believe the problems in emerging markets will reach the U.S, much less impact its growth trajectory.” Story at…
http://www.cnbc.com/id/101371354

MARGIN DEBT
Margin is when you borrow money from a broker and buy stocks with the borrowed money. Since the stocks purchased on margin serve as collateral for the loan, when stock prices fall, brokers ask for more collateral.  Investors can receive a telephone call, literally a “margin call” that can bring about forced selling to cover the extra collateral required. (I bet this is all computerized now.) High margin has a strong correlation to an approximate market top.  (Note that market tops can take months to develop.
 
I think the following chart speaks for itself.
For commentary, inflation adjusted charts and analysis see dShort.com at...

Chart from http://advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php

While many suggest that this year will be a good year for stocks, bigger picture indicators such as margin debt, FED tapering, Market Capitalization vs. GDP, Shiller PE (PE10 or CAPE) and others all indicate a major top is approaching.  It will take a catalyst, but it is very likely coming within the year.
 
MARKET REPORT
Wednesday, the S&P 500 was down 1% to 1774 (rounded).
VIX was up  about 10% to 17.35. (Correction off; correction on…make up your mind.)
The 10-year Treasury Note yield fell to 2.68%. The bond ghouls are enjoying the “crisis” as demand for bonds is up.  (Rates fall as prices go up.) Rates at 3% or above are considered by some traders to be “trouble-for-stocks”.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks advancing rose to 47% at the close.  (A number above 50% for the 10-day average is generally good news for the market.)   New-lows outpaced new-highs Wednesday, leaving the spread (new-hi minus new-low) at minus 64 (It was minus 14 Tuesday). The 10-day moving average of change in the spread fell to minus 16. In other words, over the last 10-days, on average, the spread has decreased by 16 each day. 

Overall, Internals are negative on the market.
Market Internals are a decent trend-following analysis of current market action, but should not be used alone for short term trading. In 2013, using these internals alone would have made a 16% return vs. 30% for the S&P 500 (in on Positive out on Negative – no shorting).  Of course, few trend-following systems will do well in an extreme low-volatility, straight-up year.
 
NTSM
The NTSM system switched back to SELL today.
The four areas of analysis, Sentiment, Price, Volume and VIX are currently rated as follows:
Sentiment is negative at 79%-bulls.  Volume is negative (This is a variant of on-balance-volume.) Price (calculates and compares the size of up and down moves) and VIX(tracking direction and intensity of VIX) indicators are now neutral, but both are very near negative levels.  I also have a number of other indicators designed to identify tops and bottoms such as the statistical analysis “panic-indicator” that flashed sell last Friday.
I said yesterday, “I am surprised to see the VIX come down so fast and this may indicate the “correction” is over.” Wednesday, it retraced nearly the entire drop so – “correction-on.”  It could still end quickly though.  There is still so much optimism and the S&P 500 is in that 1770-zone that I mentioned yesterday.  More exacting souls are suggesting 1768 is the line in the sand for the correction.  Below that support level there will be more losses; if it holds when tested - correction over.  
MY INVESTED POSITION
I am about 30% invested in stocks as of 20 December (S&P 500-1540) because I upped my stock holdings by 10% on the 20th of December.  30% is a reasonable level of stock holdings for a correction, so I don’t need to reduce holdings since I don’t think this will be a major crash.  Even if a surprise collapse did take the stock market down by 50%, I’d only lose 15% in the stock portfolio.  On the other hand, if I am wrong, leaving 30% invested in stocks hedges the bet since no system is perfect.