Friday, January 29, 2016

GDP … Chicago PMI … Michigan Sentiment … Q4 Earnings … Freight Shipments Down … Stock Market Analysis

“The U.S. economy sputtered in the final months of 2015, a possible sign of flagging momentum amid global weakness and financial market turmoil. Gross domestic product, a broad measure of economic output, expanded at a 0.7% seasonally adjusted annualized rate…” Story at…

“The Chicago Purchasing Managers Index came in at 55.6 for January, the highest reading since last January. Economists polled by Reuters had expected 45.0…” Story at…
My cmt, excerpted from the original Press Release: "Previously, surges of such magnitude have not been maintained so we would expect to see some easing in February. Still, even if activity does moderate somewhat next month, the latest increase supports the view that GDP will bounce back in Q1 following the expected slowdown in Q4." - Philip Uglow, Chief Economist of MNI Indicators. Even with the upward surprise, the chart of Chicago PMI is collapsing downward and remains worrisome.  See the chart at…
MICHIGAN SENTIMENT (Advisor Perspectives)
“The University of Michigan Final Consumer Sentiment for January came in at 92.0…Consumer confidence has remained largely unchanged, as the January reading was just 0.6% below last month's level.” Commentary, analysis and charts at…
Excerpted from FACTSET Earnings Insight for 29 Jan 2016: “For Q4 2015, the blended earnings decline is -5.8%. If the index reports a decline in earnings for Q4, it will mark the first time the index has seen three consecutive quarters of year-overyear declines in earnings since Q1 2009 through Q3 2009.” Earnings Insight is available from FACSTET at…
CASS FREIGHT INDEX (CASS Information Systems)
“Both the number of shipments and freight transportation expenditures continued their downward slide in December, falling 4.9 and 2.7 percent respectively. The declines are not unusual for December, but they capped off a second quarter of decline. In retrospect, 2015 did not even begin to reach the heights we reached in 2014…
…Companies are laying off seasonal workers and many are even going beyond that. Macy’s just announced a downsizing that will affect close to 5,000 employees and will see the closing of some of their flagship stores. Expect unemployment to rise again in the first quarter of 2016…
…With manufacturing slowing, inventories high, companies rationalizing employees and a sixmonth slide in freight volume and expenditures, 2016 will get off to a slow start.” Press release available at…
My cmt: This is why there really should be a DOW Theory sell-signal even if the experts can’t seem to agree if there has been one. Freight is signaling a slowdown. More concerning, if the CASS Systems prediction for unemployment and a slowdown in the first quarter of 2016 is correct; expect trouble in the stock market to continue.
-Friday, the S&P 500 was up about 2.5% to 1940 at the close.
-VIX dropped about 10% to 20.20.
-The yield on the 10-year Treasury dipped to 1.93%. (Apparently, the Bond Ghouls are not convinced the economy is as good as the stock traders seem to think.)
“As an investor, you should remember that making money in the market is only one-half of the job. Keeping it is the other.” – Lance Roberts
The Wall Street Journal called today’s GDP number anemic.  Combined with less than stellar profit results from company earnings announcements one wonders what is propping up the markets. The Chicago PMI is a regional number and hardly indicative of the country as a whole. One must surmise that it is simply a technical bounce; 1950 on the S&P 500 remains my estimate for the top of this bounce, but I’ll be watching my Money Trend Indicator because the markets will do what they want.
After the rally’s end, we’ll need to re-test the 1859 low.  If past history holds, that would occur in 1 to 7-weeks after the low. (Those are wide-ranging numbers from looking at 4 corrections with steep declines.)
My Money Trend indicator is mixed Friday, but it actually finished better than it had looked earlier in the day. It has been a pretty good indicator recently.
Today, Friday, had a look of desperation with money chasing the Index higher.  Friday was a statistically-significant day and that means that the price-volume move UP exceeded my statistical parameters and, in about 60% of the time, that leads to a down-day the next day (Monday). With that in mind, and given that the S&P 500 is now less than 1/2% below my target for the end of this rally, I took a short position at the close.  That may turn out to be a bad call. I forgot it’s the end of the month and there is a strong upward bias to the markets going into a new month. The Smart money indicator thinks this looks more like a bottom and I usually don’t trade against my Market Internals that are now positive. Uh-oh….
(I am getting data from various sites. Some of the numbers are subject to minor revision so the previous day’s numbers may be slightly different than reported yesterday.)
The 10-day moving average of the percentage of stocks advancing (NYSE) jumped to 52.5% Friday vs. 50.3% Thursday.  (A number above 50% is usually GOOD news for the markets. On a longer term, the 150-day moving average of advancing stocks increased to 48.8%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) remained positive.
In a reversal, New-highs outpaced New-lows. The spread (new-highs minus new-lows) was +27. (It was -79 Thursday.)   The 10-day moving average of the change in spread remained +74.  In other words, over the last 10-days, on average; the spread has INCREASED by 74 each day. Market Internals switched to positive on the markets.

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.
Friday, the VIX indicator was negative. The Volume, Price & Sentiment indicators were neutral. The long-term NTSM indicator is HOLD.

On 30 Dec I reduced my invested position in my retirement account to 30% invested in stocks thru an S&P 500 Index fund (“C”-fund in the TSP). Friday, 15 Jan I reduced stock allocation to zero in long-term accounts. That leaves 100% invested in cash yielding about 2%.  Short-term bonds would be OK too.
The S&P 500 peaked in Mid-May and has not been able to break higher in the past 8-months. That looks like a top to me. See “Why the Bull Market May be Dead” in my 14 December blog at…