Thursday, May 1, 2014

Jobless Claims Jump…Consumer Spending Rises…QE tapering; Three Steps and a Stumble

Jobless claims rose by 14,000 to 344,000 in the period ended April 26, the highest level since Feb. 22, Labor Department data showed today…“This is a time of the year when there’s a lot of seasonal issues to work through,” said Stephen Stanley, chief economist at Pierpont Securities LLC…“Eventually we’ll settle out. If we were to settle at 320,000, it would be modest improvement.” Story at…

“Household purchases, which account for about 70 percent of the economy, climbed 0.9 percent, the most since August 2009…”  Story at…
"The reason it matters to investors is that stock and bond prices have benefited greatly from QE and deficit spending. Not only has QE expanded M2 [a measure of money supply], but a large portion of that M2 has found its way directly into stocks, pushing equity valuations higher and higher. The reason QE hasn't produced significant economic growth is in part the fact that the money created on the front-end of this process has been invested in risk assets rather than flowing into the economy to stimulate GDP growth… with the Federal Reserve now withdrawing that support…this leaves the market vulnerable to the actual underlying economic and fundamental underpinnings.  That story is much less exuberant." – Lance Roberts. Commentary at…

The Fed has completed its third QE reduction.  Will the 3-steps and a stumble rule apply?
THREE STEPS AND A STUMBLE (Financial Dictionary)
“A rule of thumb stating that the prices of stocks fall significantly after the Federal Reserve raises interest rates three times in a row. In a booming economy, minor adjustments in key interest rates, both up and down, are fairly normal. However, if the Fed raises interest rates three times in a row, this is taken as an indicator that it intends for interest rates to remain at a comparatively high level for the foreseeable future. This leads investors to sell stock, because the businesses underlying the stock now have the added cost of high interest rates, which reduces profits. The selling of stock causes stock prices to drop.” Definition from…

I posted a little more on the 3-steps rule here (in December 2013):

Actually, a more accurate statement of the 3-steps and a stumble rule says that when the Fed tightens one of its basic policy variables (Discount rate, Margin requirement, or Reserve Requirement) three times in succession then the markets should fall.  There is no track record for QE since bond buying on this massive scale has never been tried before.  With the Fed withdrawing QE, and thus support for the markets, one must conclude that the markets will be in trouble.  In 2000 it took 4-tightenings before the major top.  In some years it has only taken 2-tightenings.  It is doubtful that QE reduction will have the impact that a tightening of interest rates has had in the past.  Trouble is expected, but perhaps not an all-out crash and it may take more than 3 or 4 reductions.  All I can do is warily watch the markets.
Down the road, there are new regulations that will require more Bank reserves.  Bank reserve requirements have been called the single most accurate stock market indicator of all time.  Higher reserve requirements infers market declines.  Conversely, there are some economists who say that this current stock boom began in 2009 when “mark-to-market” accounting rules were dumped. That was a de facto reduction of reserve requirements for banks.  The new-rules requiring greater reserves are due to be enacted 1 or 2-years in the future.  I’m sure there will be more out there as this comes closer into view.

Thursday, the S&P 500 was UNCHANGED at about 1884 (rounded).
VIX fell about 1% to 13.25.
The yield on the 10-year Treasury Note fell again to 2.61% at the close.
The Bond Ghouls are getting more worried about the stock market.
I’m going to leave this posted until the S&P 500 breaks thru the old highs: The S&P 500 has closed in the vicinity of 1880 about 8 to 10 times since 31 December.  The index has only closed above 1880 3-times and then only about ½-% higher.  It needs to punch higher or the correction will be back.  The prior high was 1890 so, not yet.

The 10-day moving average of stocks advancing on the NYSE declined to 56% at the close.  (A number above 50% for the 10-day average is generally good news for the market.) New-highs outpaced new-lows Thursday.  The spread (new-highs minus new-lows was +95 .  (It was +66 Wednesday.) The 10-day moving average of change in the spread was +1.  In other words, over the last 10-days, on average, the spread has INCREASED by 1 each day. The smoothed 10-dMA of up-volume reversed down today.  The internals turned neutral 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 Thursday.  Sentiment climbed to 84%-bulls (5-dMA of {bulls/(bulls+bears)} for funds invested in selected Rydex/Guggenheim funds. This is a very high number and on a statistical basis Sentiment is now negative.  Price reversed to neutral and VIX & Volume indicators are neutral.


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.  50% in stocks is fully invested for me, given my age (semi-retired) and the risk inherent in today’s stock market. I am watching closely to see if it is time to reduce my long-term stock holdings.