Monday, April 14, 2014

Poor Profit Projections…Stock Market Correction? Depends on who’s talking…

“Officially, analyst consensus for profits is dismal—a loss of 0.13 percent for the S&P 500, against a projected revenue gain of about 3 percent, excluding financials, a sector expected to see a drop of 7.8 percent, according to S&P Capital IQ. Neither figure is anything to get particularly excited about, but the revenue number, and the full-year projection for a 4 percent gain, would represent a substantial increase from 2013's anemic 1.1 percent growth…"If you have a slowdown or further decline, if the next quarter doesn't come in at 8 or almost 9 percent where expectations are now, I think that's troublesome," Mike Thompson, head of global markets intelligence at S&P Capital IQ, said during a CNBC interview. "Of the handful of companies that have reported so far, a lot of guys have missed, and that's a little disconcerting." Story and video at…

So I’m seeing significant confirmation of the bearish thesis – fundamentally and more recently in the marketplaceI do see an unfolding backdrop conducive to one tough bear market. Everyone got silly bullish in the face of very serious domestic and global issues. Global securities markets are a problematic “crowded trade.” Marc Faber commented that a 2014 crash could be even worse than 1987. To be sure, today’s incredible backdrop with Trillions upon Trillions of hedge funds, ETFs, derivatives and the like make 1987 portfolio insurance look like itsy bitsy little peanuts. So there are at this point rather conspicuous reasons why Financial Stability has always been and must remain a central bank’s number one priority (whether Dr. Evans appreciates this or not). Just how in the devil was this ever lost on contemporary central bankers?” Commentary at….

Of course opinions are all over the place when the markets are in turmoil.  Here’s an opposite view…

"To a great degree what we've seen is high-growth momentum stocks reversing direction," Tobias Levkovich, chief equity strategist at Citigroup...He thinks people have misinterpreted the selling, saying investors are moving from small to large-cap stocks, from growth to value and toward quality. Levkovich says what we are seeing is "discreet parts of the market" like biotech, social media and cloud computing "start to lose what had been a small little bubble forming"…He doesn't think we're going to see this horrible correction -- he thinks this will remain more "discreet," but says 5% to 10% would be normal, healthy and cleansing -- and he's expecting that in the first half of this year. He says he doesn't expect a bear market, though.”  Story and video at…

Monday, the S&P 500 was up about 0.8% to 1831 (rounded).
VIX was DOWN about 5.4% to 16.11.
The yield on the 10-year Treasury Note was up slightly to 2.65% at the close.

The news of the day for me was that there was a very strong last hour of trading.  The S&P 500 gained nearly 8 points late in the day.  That suggests the pros think the downturn is over (or at least delayed a bit).

I know there was a comment last week that the falling 10-yr bond rate was a sign that investors might be getting concerned about recession.  As I see it, investors are signaling they have NO concern about a recession since the Morgan Stanley cyclical index is outperforming the S&P 500 on every time frame from 2-weeks out to 1-year.  If investors were expecting a recession, cyclical stocks would not be as popular. 

The S&P 500 was 1.5% below its 50-dMA at the close on Friday, but the lower trend line was not taken out.  The index finished about 0.8% below the 50-dMA Monday.

If the Index can climb significantly above 1850 (or so) it will show that the market is stronger than most think.  I think the upper trend line (now downward sloping) is around 1850.  If the Index has a statistically significant day (more than a 1% gain) and finishes at the upper trend line, this could be a good point to short the market for those inclined.  If it breaks up more than just a tiny bit on the next day – cover the short.  (I don’t have time to give too much advice on short-term timing and further, I’m now very selective about when I take a trading position.  I will include it in the blog if I take a short position on the set-up previously described, if it does occur.)    My guess is that the Index will climb, but fail to get above its upper trend line.  Time will tell…

The 10-day moving average of stocks advancing on the NYSE declined to 49% at the close.  (A number below 50% for the 10-day average is generally bad news for the market.) New-highs outpaced new-lows Monday.  The spread (new-highs minus new-lows was +13.  (It was -32 Friday). The 10-day moving average of change in the spread was minus-12.  In other words, over the last 10-days, on average, the spread has DECREASED by 12 each day. The smoothed 10-dMA of up-volume turned down Friday and continued down Monday.  The internals finished 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. 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 for LONG-TERM MONEY remained HOLD Monday.  Sentiment was a screaming high 83%-bulls (5-dMA of {bulls/(bulls+bears)} for funds invested in selected Rydex/Guggenheim funds. The VIX, Price & Volume indicators are all neutral, but just barely.

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.   I am watching closely to see if it is time to reduce my long-term stock holdings. An NTSM sell-signal along with a break of the trend line would convince me.