Wednesday, January 6, 2016

N. Korean Nuclear Test Bombs Stock Markets … Factory Orders … ISM Services … FOMC Minutes … Crude Inventories … Stock Market Analysis

Futures collapsed at 8PM EST Tuesday night. An earthquake was detected in N. Korea. The likely cause was thought to be from a nuclear test by N. Korea. N. Korea later claimed a successful test of a Hydrogen bomb. Story at…
“After reporting a notable increase in new orders for U.S. manufactured goods in the previous month, the Commerce Department released a report on Wednesday showing a modest pullback in orders in November.” Story at…
Factory orders were down by 0.2% for the month of November.
“The U.S. economy's service sector expanded in December, but at its slowest pace in 20 months, according to an industry report released on Wednesday.” Story at…
The ISM number was 55.3 (above 50 is expansion), but it fell from 55.9 in the previous month.
“Federal Reserve officials expressed some trepidation as they decided at a mid-December policy meeting to raise short-term interest rates after keeping them near zero for seven years.” Story at…
The markets were down after 2PM, probably in reaction to the minutes.  I am not sure what the markets expected; the FOMC indicated that future rate hikes would be gradual and that sort of language was widely anticipated.
“U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 5.1 million barrels from the previous week.” Story at…
-Wednesday, the S&P 500 was down about 1.3% to 1990 at the close.
-VIX rose about 6% to 20.53.
-The yield on the 10-year Treasury dipped to 2.18.
“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 markets were down on the N. Korean H-bomb news.  The evidence that the news from Korea caused the drop today was fairly strong; futures had been up Tuesday night, but they fell hard after the news came out.
Market Internals remain neutral, but generally declined Wednesday. New-hi/new-low numbers reversed to the down-side today. That’s the third reversal in a week and that last occurred about 6-months ago. It indicates confusion in the markets. The Money Trend indicator is now clearly bearish.
Wednesday the S&P 500 finished 3.4% below its 200-dMA – a bearish sign. The slope of the 200-dMA is moving down.  This is also a bad sign.
The news wasn’t all bad since Wednesday was another statistically significant day and that means 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. Comparing today’s numbers to 18 December, when the market made an interim low, one can see that volume was significantly less today than back in December.  This suggests a lack of fear (compared to December’s interim low) and probably will lead to some upward movement in the Index over the next couple of days. That makes Wednesday a mixed bag: Money Trend is down; Internals are neutral; and comparison with prior lows is short-term bullish. I lean toward the bullish view – at least short-term. Long-term the markets don’t look good and I am mostly out of stocks.
(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 51.3% Wednesday vs. 55.3% Tuesday.  (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 48.9%. A value below 50% indicates a down trend.
The McClellan Oscillator (a Breadth measure) switched back down to a negative reading.
In a negative reversal New-lows outpaced New-highs. The spread (new-highs minus new-lows) was minus-216. (It was +13 Tuesday.)   The 10-day moving average of the change in spread was -7 Wednesday.  In other words, over the last 10-days, on average; the spread has DECREASED by 7 each day. Market Internals remained neutral Wednesday, but deteriorated.

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.
Wednesday, the VIX indicator was negative.   Sentiment, Volume & Price indicators were neutral. The long-term NTSM indicator remained neutral, but there was a Sell signal just 2-days ago so the markets are not in great shape.

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). 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…