Friday, January 22, 2016

Leading Economic Indicators … Time to Buy Stocks? No! … Stock Market Analysis

“The leading economic index fell in December in a reflection of the choppy growth that characterized the U.S. late in the year. The index dropped 0.2% to 123.7…” Story at…
My cmt: The Board’s Press Release stated: “While the LEI’s growth rate has been on the decline, it’s too early to interpret this as a substantial rise in the risk of recession.” For more on the LEI see Jill Mislinski’s analysis at…
“If you’re a long-term investor, it’s still not a great time to buy. Considering the poor returns and elevated risks stocks pose currently, you may want to do just the opposite in order to match your risk tolerance and time frame to this reality.” - Jesse Felder. Commentary at…
-Friday, the S&P 500 was up about 2% to 1907 at the close.
-VIX fell about 16% to 22.34.
-The yield on the 10-year Treasury rose to 2.05%
“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 Overbought/Oversold Ratio (a Wall St. “classic” indicator based on breadth), my own Smart Money Index and RSI all remain oversold Friday, but that won’t last long now with a rally starting. Still I remain bearish in the longer term. Why am I so pessimistic?
To many, Wednesday looked like a bottom.  The new-high/new-low numbers were extremely bullish; but all is not well. Wednesday, 20 January, was not a final bottom because…
(1) It did not successfully test prior lows; (2) Sentiment is too high; (3) We have not seen any panic days (less than 10% of stocks advancing on the NYSE) preceding the bottom; (4) VIX was too low.
I heard a stat on CNBC yesterday that most of the largest up-days on the NYSE have occurred during Bear markets, so I am not going to get too bullish over Friday’s move. 
We’ll need to re-test the 1859 low.  If past history holds, that would occur in 1 to 7-weeks after about a 5% retracement upward. (Those are wide-ranging numbers from looking at 4 corrections with steep declines; I am sure the Wall Street crowd has these stats down pat based on a lot more history.)
(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 up to 42.6% Friday vs. 35.1% Thursday.  (A number below 50% is usually BAD news for the markets. On a longer term, the 150-day moving average of advancing stocks rose to 48.3%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) improved, but remained just barely negative.
New-lows outpaced New-highs again. The spread (new-highs minus new-lows) was minus-14. (It was -96 Thursday.)   The 10-day moving average of the change in spread was +45 Friday.  In other words, over the last 10-days, on average; the spread has INCREASED by 45 each day. Market Internals remained neutral 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 & Volume indicators were negative. The Price & Sentiment indicators were neutral. The long-term NTSM indicator is SELL; the first sell this cycle was 18 December and there has not been a BUY since. The S&P is now rallying, so this may not be a great time to sell – a better time might after a 5% climb from the bottom or above 1950 on the S&P 500 if one is bearish.

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…