Monday, January 11, 2016

Yield Curve Suggesting Recession? – No! … US Economic Activity Suggests Recession … Sell Rallies … Major Stock Market Top … … The Big Short … Stock Market Analysis

I read an account about how the yield curve was suggesting a recession.  Are they joking?  Here’s a chart of 30-year yield minus 5-year yield. The spread between the two yields is shown in red.  If this spread drops below zero (the green line), it indicates an inverted yield curve where short term rates are higher than long term. That’s a recession indicator. A flattening yield-curve would be signaled by a falling spread, i.e, the red line would be sloped down. As can be seen from the following chart, the spread is +1.3% and rising. This isn’t suggesting a recession. (Sorry about the typos.  Changes shown in italics.).

“…we already observe deterioration in leading economic measures that - coupled with financial market behavior - has always been associated with U.S. recessions.” –John Hussman, PhD., Weekly Market Commentary.

Chart and commentary at…
“…if investors think the sell-off is a buying opportunity, a top technician has one simple message for them. No way.” Story at…
MAJOR TOP (Financial Sense)
"We've had a series of failed rallies throughout most of 2015...I think you've created a major top in the markets—I'm very concerned here." - Ralph Acampora, technical analyst …” Story at…
I saw the movie over the weekend.  Even though I followed the Housing Crisis closely, I found the movie to be a fascinating review of the events. It included a portrayal of some the individuals who bet against the housing market and explained some of the complex financial instruments (CDO’s, CDS, SWAPS, etc.) in an entertaining manner. I highly recommend it.
As for the markets, I expect a bounce for a couple of days to be followed by more selling.  I may short again when the signals suggest it.
-Monday, the S&P 500 was down about 1% in the afternoon, but rallied late to finish up 0.1% to 1924 at the close.
-VIX fell about 10% to 24.3.
-The yield on the 10-year Treasury rose to 2.16. (Traders sold bond and bought stocks.)
“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 S&P 500 was down 1% early, but it finished slightly positive for the day.  That looks like a bullish turnaround to me. There was lower volume on the NYSE than Friday suggesting that the selling was not as intense, even when the Index was down – that may have sparked traders to buy.  I’m guessing we’ll bounce up for a couple of days. It does not look like a final bottom is in yet and it will take further testing down the road to identify a bottom.
Both the Overbought/Oversold Ratio (a Wall St. “classic” indicator based on breadth) and my own Smart Money Index were oversold.  RSI was not oversold, but it was oversold last week on Thursday and Friday so the market was due for a bounce.
Market Internals are negative. The Money Trend indicator remains bearish, but it is at a level where a turn to the upside has occurred recently.
I went 50% long in the trading portfolio using 2x-long ETFs near the morning lows. I was feeling dumb in the afternoon as the Index tanked, but I finished the day in the black. I am using my “Money Trend” indicator and a “Breadth vs. the S&P 500” indicator for short term trading. I won’t hold these positions for long since the trend is now down and betting against the trend is a good way to lose money. (I am once again testing the old adage, “short term trading is a losing proposition”. Last year I made about 5% in my short term accounts.  I didn’t get rich, but it was better than cash at 0%.)
Long-term the markets don’t look good and I remain mostly out of stocks in my retirement accounts.
(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) fell to 37.7% Monday vs. 39.7% Friday.  (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 48.8%. A value below 50% indicates a down trend.
The McClellan Oscillator (a Breadth measure) was down and remained negative.
New-lows outpaced New-highs. The spread (new-highs minus new-lows) was minus-595. (It was -498 Friday.)   The 10-day moving average of the change in spread was -63 Monday.  In other words, over the last 10-days, on average; the spread has DECREASED by 63 each day. Market Internals remained negative 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.
Monday, the VIX & Volume indicators were negative.   Sentiment & Price indicators were neutral. The long-term NTSM indicator is SELL; it has indicated SELL 6-times since 18 December without a BUY signal in the intervening time so the NTSM indicator has been warning about a sell-off for several weeks.

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 8-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…