Monday, March 31, 2014

Chicago PMI Falls…Market Internals Suggest Crash? Ooops. I meant new highs!

“A sharp drop in new orders (58.8 from 63.6) led to an overall pullback in manufacturing activities…The Chicago PMI has little overall economic value, and is only watched by the financial markets because it is usually released one day in advance of the similar national ISM manufacturing survey.”  Summary and charts at…

If you’re following the markets, and I assume you are because you are reading this blog, you have no doubt seen somewhere else that Market Internals are predicting a downturn.  Here at NTSM I have been writing the opposite; Internals are suggesting further gains.  What gives?  The difference may be the timeframe of internals being followed and the turn-around now underway.  The below chart tracks the S&P 500 (in black) vs. breadth (in Red) measured as the percent of stocks advancing over the last 100-days.  Breadth is a key market internal.  This is a 100-day moving average of the percentage of stocks advancing as of Friday.  A 100-day moving average is just a sum of the percentage of stocks advancing for the prior 100-days divided by 100.  The curve then is just a series of the points where each point is an average of the prior 100-days. The latest point on Friday was 52.9%.  That means that over the last 100-days, 52.9% of all stocks have been advancing. 
As the below chart shows, until a few days ago, the trend in breadth over the last 100-days was down while the S&P 500 has been nearly flat.  That “divergence” is usually a cause for significant concern. The majority usually wins and if most stocks on the NYSE are going down, the S&P 500 will follow.  Recently, though, the percent of stocks advancing has broken up as more stocks have been advancing.  That is evident at the far right of the red graph where the trend has broken to the upside of the former red trend line.

Zooming in on the same 100-dMA and measuring to the nearest tenth of a percent below, the upturn is even clearer.  If this trend continues, the S&P 500 will continue up.  We can’t say for how long, but a week or two might be a reasonable guess.  To keep track of this, I follow a shorter moving average of 10-days so changes in trend can be identified earlier.  See the Market Internals paragraph below.  There are other internals such as new-high vs. new-lows and up-volume that have also turned positive.

Bottom line: Market Internals are suggesting upside movement of the index not down.
THE BEST TRADING ADVICE EVER: “Trade what you see not what you think.” - Richard Mcranie, aka The Old Fool. 

I use statistics for stock analysis and I appreciate statistics!  But here is the stupidest thing I have read in some time…
Here is the article if you wish to waste your time…
I have this to say: Who drinks diet drinks? Fat people! Who is at risk for heart disease and high-blood pressure?  Fat people!  Who is wasting my time with stupid analysis? NBC who reported this in a misleading and incompetent manner.  Comment by Christophe: “New study shows 100% of people born before 1850 have in fact died. While scientists are certain about the risks associated with being born a very, very long time ago, they are uncertain as to whether or not diet soda would have saved these people’s lives.”

Monday, the S&P 500 was up about 0.8% to 1872 (rounded).
VIX was down about 4% to 13.88.
The yield on the 10-year Treasury Note held steady at 2.72%.
Today was a statistically significant up-day since it exceeded my price and volume statistical parameters.  This would usually (about 62% of the time) be followed by a down day on Tuesday.

The S&P 500 is only 6 points from the all-time high of 1878.  Even though the internals are positive, there are some slowdown signs in the internals data so it will be interesting to see if the index can make new highs.  The Index is now 7% above its 200-dMA and values of 10% have usually resulted in a pullback of some kind. Recently, those pullbacks have been only about 5% down to the lower trend line.
The 10-day moving average of stocks advancing on the NYSE was up to 54% at the close.  (A number above 50% for the 10-day average is generally good news for the market.)  New-highs outpaced new-lows Monday.  The spread (new-highs minus new-lows was +129.  (It was +61 Friday). The 10-day moving average of change in the spread was +3.  In other words, over the last 10-days, on average, the spread has decreased by 3 each day. The smoothed 10-dMA of up-volume continued up today.  The internals are positive.

Market Internals are a decent trend-following analysis of current market action, but should not be used alone for short term trading. They are usually right, but they are often late.  They are most useful when they diverge from the Index.  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 like 2013.
The NTSM analytical model was BUY today, Monday.  The Price indicator is positive, because up moves have been bigger than down moves recently and the VIX has been falling and is now positive too. Sentiment has fallen slightly to neutral and Volume is also neutral.  The 5-10-20 Timer model is positive again because the 5-dMA and 10-dMA are both above the 20-dMA and Market Internals are positive too.

I increased my stock allocation to 50% invested in stocks on 26 March because of the NTSM indicators turned positive Monday (24 Mar) at the close.   Further the 5-10-20 Timer was positive along with market internals on 26 March.