“While near-term stock-market volatility remains muted now…the summer could be a difficult one should utilities, Treasurys, and gold outperform…I believe the long-awaited correction may finally come in the months ahead, hitting in the summer with the same kind of surprise as the Summer Crash of 2011. Some will say that is a "call" on markets. That is a conclusion based on probabilities and proven leading indicators of heightened volatility. Maybe the volatility doesn't come, just like a [car] crash doesn't occur after driving through a storm. That doesn't mean you still shouldn't slow down.” – Michael Gayed
http://www.marketwatch.com/story/making-the-case-for-a-summer-correction-2015-05-26?page=2
My cmt: There is a big “if” in the opinion above. Utilities, treasuries, and gold must all outperform the major indices. We’re not there yet, but this is a reasonable approach and Michael may well be right this summer.
INFLATION
Yesterday I included a chart from Advisor Perspectives with a link to an inflation discussion by Doug Short. It showed that college tuition costs have risen by 130% in 15-years. I thought it was interesting, but I wondered what inflation has done over the past 15-years. I looked at CPI data and found it has averaged 2.3%, with a high of 4% in 2007 to near zero in 2008. On a compound basis, inflation has reduced buying power by 40%. (In fact, Doug had included that data in one of his charts.)
College tuition has increased over 3-times the rate of inflation.
Medical costs have increased at nearly double the cost of
inflation.
A person would need 40% more income just to stay even with inflation over the 15-year period (2000-2014). It is easy to see why the middle class is getting squeezed.
Regarding college costs, we’ve been throwing more federal money at the problem for years with student-loans and direct-grants to colleges. College loans are now the largest payments due to the US; higher than tax revenue. The colleges responded by building swimming pools, tennis courts, and elaborate dining facilities to attract students. Since there was plenty of money, there was little need to prioritize spending. It is time the colleges worried about education and reducing costs. A country can’t survive if it can’t afford to educate its citizens.
WHY DOW THEORY IS WRONG: THE TRANSPORT STOCKS – REPEATING THIS BECAUSE…
Over the weekend, I read a couple of doom and gloom reports based on Dow Theory. I’m not a Dow Theory expert, but the make-up of the economy is very different than it was 100-years ago when Dow first presented his basic theories. One must wonder how relevant it is. Dow Theory also uses volume to confirm trends. With volume down recently, I’m not sure if the Dow Theory proponents are even using it correctly.
Further, as I questioned in the 18 May blog, the Cass Freight Index showed that North American tonnage has increased for both rails and trucks. (See: http://navigatethestockmarket.blogspot.com/2015/05/cass-freight-index-upstock-market-is.html ); so what’s up with the transports? Cramer at CNBC had a good explanation: “Cramer took a closer look at the transports group, he was able to pinpoint the source of the problem down to the airlines. ‘Sometimes though, this kind of action is a sign not of weakening trade, but of potentially ruinous, cutthroat competition. And that's what is driving the group down at this very moment,’ Cramer said.” Commentary from CNBC at…
Conclusion: I am not presently concerned about Dow Theory and its suggestion of a selloff. It is wrong.
MARKET REPORT
- Wednesday, the S&P 500 was up about 0.9% to 2123 at the close.
-VIX fell about 6% to 13.27.
-The yield on the 10-year Treasury Note slipped to 2.13%.
As I expected, markets moved up today and, given the size of the move, it looks like many agreed with my assessment. Chip stocks were particularly strong. Intel was up nearly 2% and NXP Semiconductors (an Apple’s watch and phone component and soon to be a player in cars) was up 3.5%.
Also as expected, Market internals improved. I think now that earnings season is over we’ll move up. Summer swoon? Maybe late summer or fall.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) bounced up to 52% at the close Wednesday. (A number above 50% is usually GOOD news for the markets. On a positive reversal, New-highs outpaced New-lows Wednesday. The spread (new-highs minus new-lows) was +19. (It was -43 Tuesday.) The 10-day moving average of change in the spread rose to +5. In other words, over the last 10-days, on average; the spread has increased by 5 each day.
Internals switched to neutral on the markets. Up volume is lagging a bit, on a 10-day basis, but that is often the case, so I am positive on the markets overall.
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 2014, using these
internals alone would have made a 9% return vs. 13% 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, nearly straight-up year like 2014.
NTSM
Wednesday, the NTSM analysis remained HOLD. PRICE is positive. VOLUME, VIX and SENTIMENT indicators are neutral, although (as always) sentiment remains extremely high.
MY INVESTED STOCK POSITION
I remain fully invested at 50% invested, mostly in smaller
cap-stocks in the long-term portfolio with some international stocks. 50% is
conservative, but appropriate for a conservative retired guy. The Dow Jones US Completion Index (all stocks except the S&P 500 – the “S” fund in the TSP) remains ahead of the S&P 500. Since 1 February it is 2.5% ahead of the S&P 500. Since 1 March the Euro-Pacific ETF (EFA) (“I”-fund) is 3.3% ahead of the S&P 500.
THRIFT SAVINGS PLAN (TSP) MEMBERS
My TSP Allocation: 50%-G; 10%-C; 25%-S; 15%-I. (50% cash is too high for non-retirees, however, the “G”-fund did return 2.2% over the last 12-months and that is exceptional for risk-free money.) I may increase EFA (“I”-fund) exposure at the end of the month.
