Tuesday, April 22, 2014

Will Downturn Cause a Stock Market Crash?…Another Tech Bubble?...Debt Remains a Problem…

“At BCA Research last week, analysts in a note posed the question: “Does the recent mini crash in the high-valuation sectors signify the beginning of major trouble on Wall Street?” Their answer: No. “Such localized shakeouts are an inherent part of any bull market.’… Hedge-fund managers tend to pay close attention to the stocks held by rivals…Aware that so many funds held some of the market’s most expensive and speculative shares, there was a scramble to be the first one out the door.” Story at…

“David Einhorn has a clear warning for technology investors: we're in a bubble. ‘Now there is a clear consensus that we are witnessing our second tech bubble in 15 years,’ Greenlight Capital said in an investor letter Tuesday. "What is uncertain is how much further the bubble can expand, and what might pop it.’" Story at…
What might pop it? The same thing that popped it last time - the Federal Reserve.

“Normally it is bullish for stock prices to see household debt increasing, and bearish to have household debt decreasing.  But occasionally the two can go in opposing directions, which is the condition we see right now.

Historically when such a divergence has happened, the stock market eventually realized that it had wandered off track, and it worked extra hard to get back with the program…It is a bigger and longer divergence that we are accustomed to seeing in past episodes, such as those labeled in the chart.  The most likely explanation is that the Fed is helping to push up asset prices, in hopes that such action will eventually help push down unemployment rates and other indications of economic malady, and that this action by the Fed is continuing the divergent condition much longer than normal.” Full commentary at…

April 10, 2014 Chart from...

Tuesday, the S&P 500 was UP about 0.4% to 1880 (rounded).
VIX was DOWN about 0.5% to 13.19.
The yield on the 10-year Treasury Note was up slightly to 2.72% at the close.
There was late day selling today so the Pros aren’t convinced the downturn is over in spite of comments to the otherwise above.  The S&P 500 is again near the all-time high and only about 1-1/2% above the 31 December high of 1841 so the market has gone nowhere in nearly 4-months.  The Index needs to break to all-time highs soon or there will be further selling that would likely become the long awaited correction. 

Once again the S&P 500 retreated to its lower trend line (on 3 February) and simply bounced up from there. I expected a breakdown, because of all the trouble on the NASDAQ. As it turned out, this was another case of trade what you see – not what you think, because the NTSM system never issued a sell.  I took a short position on the rebound, but the market moved up again and I quickly covered.  For traders, a failure to break to new highs may become another short opportunity.

The 10-day moving average of stocks advancing on the NYSE increased to 59% at the close.  (A number above 50% for the 10-day average is generally good news for the market.) New-highs outpaced new-lows Tuesday.  The spread (new-highs minus new-lows was +124.  (It was +83 Monday. The 10-day moving average of change in the spread was +12.  In other words, over the last 10-days, on average, the spread has INCREASED by 12 each day. The smoothed 10-dMA of up-volume remains UP as of Tuesday.  The internals are now positive 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 has fallen to 78%-bulls (5-dMA of {bulls/(bulls+bears)} for funds invested in selected Rydex/Guggenheim funds. The VIX, Price & Volume indicators are all neutral, and have improved as the Index climbed the last 5-days.


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.