Friday, February 19, 2016

CPI … Corporate Bond Market Signals a Bear … China: Economic Collapse? … Stock Market Analysis

“Rising rents and medical costs lifted underlying U.S. inflation in January by the most in nearly 4-1/2 years, signs of an uptick in price pressures that could allow the Federal Reserve to gradually raise interest rates this year. The Labor Department said on Friday its Consumer Price Index, excluding the volatile food and energy components, increased 0.3 percent last month.” Story at….
My cmt: This is generally negative for the markets since rate-hikes by the FED are more likely. For charts and analysis see Advisor Perspectives at….
“For well over a year now the corporate bond market has been signaling a major shift in investor risk appetites from risk seeking to risk aversion. This is exactly how bull markets morph into bear markets. This risk aversion has grown so much that, in certain areas of the corporate bond market, there are literally no bids.” Commentary at…
I’ve commented on China’s economic collapse several times.  Here’s more from the WSJ, 18 Feb 2016 print edition. “…China’s economy is…saturated with surplus goods from farms and factories….The metals, coal, cement, aluminum and glass industries could lay off 3-million workers by shuttering a third of the capacity estimates China International Capital Corp….” The article detailed the problems associated with an economy that is producing products for which there is no market, due overproduction and falling demand.  I have been saying this for more than a year. While the Communists claim a 7% GDP growth (year-over-year), the number is meaningless since there is no demand for the “Product.”  China’s economy is collapsing. The evidence is that exports fell 11% while imports fell 19% in January on a year-over-year basis.  China seems to be headed for a far worse outcome than expected.  It seems unlikely that this will be ignored by U.S. stock markets. I am not an economist, so perhaps I should leave this to cooler heads. We’ll see…
Here’s a link to the WSJ article, although it is currently restricted to subscribers. It may be publicly available in a few days.
-Friday, the S&P 500 was unchanged at 1918 at the close.
-VIX fell about 5% to 20.53.
-The yield on the 10-year Treasury slipped 1.75%.
As seen in today’s price action, market participants are confused about the future direction of the markets. I expect the S&P 500 to be choppy before retesting the prior low of 1829 in about 4-8 weeks. By then, Q1 earnings will be starting and that may make or break this market.
…No capitulation at the bottom.
…Not enough fear.
…Market internals did not appreciably improve when compared to the prior low.
…TRIN was not elevated.
For more details see 17 Feb 2016 blog at…
A point I missed previously: There was a major “theoretically- bullish” signal after the bottom on 11 Feb. That’s because there were three 80% up-volume days in a row.  That’s a very unusual bullish sign of reversal…except for one important fact – there was no commensurate high down-volume day at or near the bottom. Without a sign of fear in the market prior to those high up-volume days, the high up-volume is just a sign of a strong oversold rally.
The 10-dMA version of the Money Trend is down Friday, but the smoothed version remained up. It looks like the short-term trend is down, but the signal is not particularly strong.
(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) is 49.1% Friday vs. 50.5% Thursday. (A number above 50% is usually GOOD news for the markets. On a longer term, the 150-day moving average of advancing stocks dipped to 48.6%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) was down slightly, but remained solidly positive on the day.
In a negative reversal, New-lows outpaced New-highs. The spread (new-highs minus new-lows) was minus-8 Friday. (It was +8 Thursday.)   The 10-day moving average of the change in spread fell to +1. In other words, over the last 10-days, on average; the spread has INCREASED by 1 each day. Market Internals (based on 10-dMA) switched to neutral on the market.

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, Price was positive; VIX, Volume and & Sentiment indicators were neutral. The long-term NTSM indicator is HOLD. (The first SELL signal of this cycle was 18 Dec 2015 and there has not been a BUY signal since.) There was a big improvement in long term indicators.  If markets improve, there could be a buy signal that would change my opinion on the markets in the next several days.

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 9-months. That looks like a top to me. See “Why the Bull Market May be Dead” in my 14 December blog at…
Even if that is true, there could still be a rally for 2 or 3-months.