Tuesday, January 19, 2016

Imminent Likelihood of Recession … Worst Set of Economic Reports … Bear to Last Until October … Stock Market Analysis

“Since October, the economic evidence has shifted from supporting a growing risk of recession, to a guarded expectation of recession, to the present conclusion that a U.S. recession is not only a risk but an imminent likelihood, awaiting confirmation that typically only emerges after a recession is actually in progress…
…In the current environment, oversold conditions are prone to becoming even more deeply oversold, not only because internals are weak, but because the economic evidence is quickly confirming an oncoming recession that remains almost universally denied by market participants.” – John Hussman, PhD. Weekly Market Commentary from Hussman Funds at …
Whether one agrees with the John Hussman’s recession discussion, his market analysis is reasonable. He wrote, “I continue to believe that a break of the prior support area around 1820-1850 on the S&P 500 could be the catalyst for self-reinforcing panic selling pressure among trend-following investors.”
5 DISASTROUS ECONOMIC REPORTS FROM FRIDAY (Global Economic Analysis, Friday, 15 January 2016) Commentary at...
My cmt: Scary stuff on the subject of a deteriorating economy.
The Russell 2000 is now down 19%. The NYSE Composite is down 17%.  Based on past experience, it is very, strongly, highly, exponentially, stupid-joke likely that the S&P 500 will fall at least as far as these other Indices. That’s at least another 6-7% down for the S&P 500.
Video from CCNBC at…
My cmt: Tom is bullish in the near-term for a bounce to last to the end of February.
-Tuesday, the S&P 500 was up about 1pt to 1881 at the close.
-VIX dropped about 4% to 26.05.
-The yield on the 10-year Treasury inched up to 2.04
“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
Market Internals were better at Tuesday’s low of 1881 compared to Friday’s low of 1880 so this is was a successful test of Friday’s low.  This is a possible bottom, but it will require further testing in several weeks to see if this really is a bottom. Given that there have been many signs of a major top; it doesn’t seem likely that this will end so quickly.
I wrote Friday, “I would not be surprised to see some sort of rally soon.” I think the rally will start Wednesday, but I wouldn’t count on it lasting much more than a week or so before it drifts lower.
I still think the most likely course for the markets remains lower than current levels; but we could easily see a rally before a bottom..
My short-term “Money Flow” and “Breadth vs the SnP” indicators appear to have bottomed Tuesday and this suggests a turn to the up-side.  These indicators have bounced around recently so it’s not a done deal, but I did take a position in QLD near the close Tuesday.  I may have to bail Wednesday if the markets head down.
After the rally is exhausted (assuming we get one) I am going to take a significant short-position in the trading portfolio. The trend is clearly down. The timing remains to be seen. My plan is that this will be a longer-term short rather than trying to time moves up and down – we’ll see.
(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) rose to 34.2% Tuesday vs. 34.1% Friday.  (A number below 50% is usually BAD news for the markets. On a longer term, the 150-day moving average of advancing stocks remained 48.4%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) declined slightly and remained negative.
New-lows outpaced New-highs again. The spread (new-highs minus new-lows) was minus-694. (It was -931 Friday.)   The 10-day moving average of the change in spread was -60 Monday.  In other words, over the last 10-days, on average; the spread has DECREASED by 60 each day (I picked up the wrong number Friday so my last blog post was incorrect on the change in spread.) Market Internals remained neutral on the markets, because up-volume increased. (I think this is an aberration in my methodology. I use actual up-volume instead of a percentage. As overall volume increases, the up-volume may increase even though the S&P 500 is falling. On a percentage basis, the 10-dMA of up-volume is still only 31% - clearly negative.)

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.
Tuesday the Price, VIX & Volume indicators were negative.   The Sentiment indicator was neutral. The long-term NTSM indicator is SELL; the first sell this cycle was 18 December and there has not been a BUY since.

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…