Sunday, January 17, 2016

Selling Stampede? … The Bear Market is Here … Up-Volume Suggests Bear Market … Oversold Readings … Sentiment says Stock Market Continues Down … Stock Market Analysis

“…we could be in one of these “selling stampedes” that tend to last 17 – 25 sessions, with only 1.5- to three-day pauses/throwback rallies, before they exhaust themselves on the downside. In Friday’s closing verbal comments I also said that it was too soon to tell yet if this is such a stampede, but “Never on a Friday.” The reference was that once the markets get into one of these weekly downside skeins, they rarely bottom on a Friday. Nope, they typically give participants over the weekend to brood about their losses and then they show up the next Monday in “sell mode” leading to Turning Tuesday…” – Jeffery Saut. Read Commentary at…
My cmt: If there is a selling stampede, it looks were at about day 12. This article was published on 11 Jan. 
“…the worst-case scenario for the S&P 500 could be a re-test of the breakout from 2007, which comes in around 1,575. It seems scary but that's only about 25 percent off the highs and that's well within the confines of normal pullbacks," he [Jonathan Krinsky, chief technician MKM Partners] said. That's a more than 16 percent move from Friday's price of around 1,885.”
Looking back, we can see that the recent peak was 2064 on the S&P 500 on Christmas Eve eve (if there is such a thing). It appears now, that day was an up-volume top since there was extreme high up-volume.  Since then, there have been 6-days with up-volume less than 15% (up/up+down) in only 16-trading sessions – more than one-third of the days have exhibited very low up-volume. As I review numbers over the weekend, there are additional troubling attributes in the Market. 
Last Wednesday there was a very low up-volume day (<10% up-volume) on extreme high volume over-all. That was nearly repeated on Friday when there was only 11% up volume.  Up-volume has not been as strong on intervening up days.  These are Bear-Market signals and suggest that the S&P 500 may be in real trouble.
“OVERSOLD” - DEFINITION (Investopedia)
(1) “A condition in which the price of an underlying asset has fallen sharply, and to a level below which its true value resides…[or]… (2)…the price of an asset has fallen to such a degree…that an oscillator has reached a lower bound. This is generally interpreted as a sign that the price of the asset is becoming undervalued and may represent a buying opportunity…”  Definition from Investopedia at…
My cmt: I can’t agree with Paragraph (1).  If the price was overvalued to begin with, an oversold reading says little about its current value. Paragraph (2) nails it. It’s oversold because an indicator says it is. The indicators show that declines have reached an extreme condition; it doesn’t imply that conditions can’t get more extreme. We must recognize that an indicator can flash oversold for 2 or 3-weeks before there is a reversal.
The Overbought/Oversold Ratio (a Wall St. “classic” indicator based on breadth), my own Smart Money Index and RSI all remain oversold Friday.
Looking at the Overbought/Oversold Ratio, one must go all the way back to August of 2011 to find oversold values as low as they are today.  When that oversold reading occurred, the S&P 500 rallied about 7% up to an overbought status, before declining to its final low 2-months later that was only about 2% lower than when the extreme oversold reading occurred. So if the Oversold/Overbought ratio is mirroring 2011, we’d say this decline is almost over.  Since it isn’t likely, let’s look at another indicator – Sentiment. {My Sentiment value is a 5-dMA of [Bulls/(Bulls+Bears)] invested in selected Rydex/Guggenheim Funds.}
On that day back in August 2011 when the Overbought/Oversold Ratio made its extreme low, sentiment was already 35%-bulls.  Sentiment (%-Bulls) bottomed at 25% at the final low 2-months later when the S&P 500 bottomed 20% lower than its all-time high. Sentiment is now 64%-bulls and that is telling us this correction probably has further to go.
-Friday, the S&P 500 was down about 2.2% to 1880 at the close.
-VIX rose about 13% to 27.02.
-The yield on the 10-year Treasury fell to 2.03
“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’s close at 1880 is close to the prior low of 1868 so it is reasonable to compare Friday’s stats to the 25 August low.  Market Internals were far worse Friday so Friday’s low of 1880 was not a successful test of the recent prior low.  Most likely there is more downside ahead; but perhaps that will change when the low is tested again.  It would be most telling if/when we see a lower-low.
Another Death Cross has occurred on the S&P 500 (50-dMA below the 200-dMA); that has lasted all last week.

Friday was a 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 (Monday). The S&P 500 is now down 12% from its all-time high; surprisingly, the up and down moves we have seen recently usually signal a top.  We could have a lot further to fall, but given the extreme oversold readings I would not be surprised to see some sort of rally soon.  Whatever rally occurs (a couple of days or a couple of weeks) the most likely course for the markets afterward is lower than current levels.
In summary: There was no long-term buy Friday; stats looked awful at the low and the test of the 1868 low was not successful. Both Sentiment and up-volume are suggesting a Bear Market.
(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 34.1% Friday vs. 36.2% Thursday.  (A number below 50% is usually BAD news for the markets. On a longer term, the 150-day moving average of advancing stocks dipped to 48.4%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) declined and remained negative.
New-lows outpaced New-highs again. The spread (new-highs minus new-lows) was minus-931. (It was -721 Thursday.)   The 10-day moving average of the change in spread was -217 Friday.  In other words, over the last 10-days, on average; the spread has DECREASED by 217 each day. 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 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.
Friday, the VIX & Volume indicators were negative.   Sentiment & Price indicators were neutral. The long-term NTSM indicator is SELL; it has indicated SELL 10-times since 18 December without a BUY signal in the intervening time so the NTSM indicator has been warning about a sell-off for a month.

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.
I am going to take a significant short-position in the trading portfolio (currently all cash). 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.
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…