Monday, January 4, 2016

ISM Index … Construction Spending … Risking Dollars to Make Pennies … Stock Market Analysis

“The U.S. economy's manufacturing sector contracted further in December, according to an industry report released on Monday. The Institute for Supply Management (ISM) said its index of national factory activity fell to 48.2…” Story at…
“U.S. construction spending sank 0.4% in November to a seasonally adjusted annual rate of $1.12 trillion, the Commerce Department reported Monday.” Story at…
“…the broad stock market today offers less than a 1% annual return over the next decade along with a large double-digit potential drawdown. It would take another major bear market, similar to the last two, for stocks to simply fall to their median valuations over the past several decades.” Commentary at
…with a low of around 1700 later this year.
There is significant divergence between the NYSE Composite and the S&P 500. Since the Composite includes all NYSE stocks, divergence is actually showing how large caps (S&P 500 ) are performing compared to small and mid-cap stocks. In the bubble, the max divergence as the crash got underway was about 20%.  The divergence is now about 20%. This occurs because as the bull advances, investors become more selective and avoid small and mid-caps. The below charts show the S&P 500 in Red and the NYSE Composite in Blue.

The chart below is the current chart…

Unnotated charts from Yahoo Finance
-Monday, the S&P 500 was down about 1.5% to 2013 at the close.
-VIX rose about 14% to 20.7.
-The yield on the 10-year Treasury dipped to 2.25.
“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
Friday the S&P 500 dropped below its 200-dMA – a bearish sign – and Monday it finished 2.3% below the 200-dMA.  Once again the slope of the 200-dMA is moving down.  This is a very bad sign and is further evidence that the bull market may be over.
I wrote last week that the first day of the month is usually an up-day since most mutual funds and retirement accounts are set to invest funds on the first and a down day would be bad news. Monday we got the bad news, but there was a decent recovery in the afternoon which mitigates the negativity somewhat. Perhaps some of the buying will carry over to tomorrow.
My new “Money Trend” indicator tracks Up-$ vs. Down-$ vs the S&P; it improved but was still trending was down Monday.  This has been a very good indicator recently.
New-lows outpaced New-highs Monday.  That is never a good sign for the markets.   
Not all of the news was bad though: Monday was a statistically significant day and that means simply that the price-volume move down exceeded my statistical parameters and, in about 60% of the time, that leads to an up-day the next day. My view is that the overall trend is now down.  If I am correct, the Index is near its lower trend line so a bounce to the 2090-2100 region would not be a surprise.
(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) slipped to 52.9% Monday vs. 53.3% Thursday.  (A number above 50% is usually GOOD news for the markets. On a longer term, the 150-day moving average of advancing stocks slipped to 49.0%. A value below 50% indicates a down trend.
The McClellan Oscillator (a Breadth measure) switched to negative.
New-lows outpaced New-highs. The spread (new-highs minus new-lows) was minus-92. (It was -9 Thursday.)   The 10-day moving average of the change in spread was +5 Monday.  In other words, over the last 10-days, on average; the spread has INCREASED by 5 each day. Market Internals remained neutral Monday.

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.
Monday, Volume & VIX indicators were negative.   Sentiment & Price indicators were neutral. The long-term NTSM indicator switched to sell; this is of no concern too me since I sold back to 30% in stocks last Wednesday. If I decide to reduce stocks further, I will wait a bit to see what happens in the next couple of days.

On Wednesday, 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). The remaining 70% is invested in cash yielding about 2%.  Short-term bonds would be OK too. I remain bearish long-term.
The S&P 500 peaked in Mid-May has not been able to break higher in the past 7-months.  That looks like a top to me, so I’ll be using short-term indicators for long-term money. That may be too conservative for many, but at least it is a strategy. Be warned: unless there is a correction, this strategy will probably underperform a buy-and-hold strategy. Short-term trading is usually a losing proposition.
See “Why the Bull Market May be Dead” in my 14 December blog at…