Wednesday, February 10, 2016

Crude Inventories … Yellen Congressional Testimony … Stock Market Analysis

“The essence of portfolio management is the management of RISKS, not the management of RETURNS.” - Benjamin Graham
“Feb 10 U.S. crude stockpiles fell unexpectedly last week as imports slumped, while gasoline inventories hit a record high for a second week, data from the Energy Information Administration showed on Wednesday.” Story at…
“U.S. Federal Reserve chair Janet Yellen brought a tempered message on the economy to Congress Wednesday, warning in prepared remarks that "monetary policy is by no means on a preset course." Underscoring the growing headwinds in financial markets, Yellen raised the possibility that the Fed could reverse its December decision to raise interest rates while keeping a "gradual" pace of policy tightening on the table.” Story at…
-Wednesday, the S&P 500 was unchanged at 1852 at the close.
-VIX was down about 1% to 26.29.
-The yield on the 10-year Treasury slipped to 1.71%.
The smoothed version of the Money Trend indicator is clearly down suggesting the trend is down. It is going to take a big move (up or down) that puts the Index at a meaningful level to get me to trade again. I’m tempted to short, but it seems to me that we’re overdue for a bounce up.
Yesterday I wrote, “Monday looked like a tradable bottom at the close, based on technical indicators, but the market didn’t agree and there was no confirmation Tuesday.”
Curiously, Wednesday’s data again shows lower volume and improvement in some internals which seems to suggest that the correction is nearing an end or at least that a bounce is coming.  There are at least 2-reasons why it is not the end now:
(1) I had previously noted the lack of capitulation on Monday. Looking at prior correction bottoms over the past 10-yrs or so, I see that all were preceded by a statistically significant down-day or were statistically significant at the bottom.  {A statistically significant down-day is a large down-day in price-volume that exceeds my statistical limits.} (2) Sentiment (as I measure it) was below 50%-bulls in all cases. Sentiment is now 60%-bulls.
I think this closes the book on the possibility that Monday, Tuesday, or even Wednesday was a durable bottom.  One wonders when the declining volume /improving internals will signal the beginning of a rally. It would seem like the market must rally if conditions continue to improve. Unfortunately, the more likely scenario is a return to selling followed by panic and capitulation.
Looking at numbers, it now appears that the Index could get back to 1900 as a short-term high and/or may bottom in the 1800 area before there is a rally of some duration. It’s anyone’s guess which way it goes first, but currently my indicators suggest down.
(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 48.1% Wednesday vs. 46.6% Tuesday. (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 48.5%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) improved, but it remained negative on the day.
New-lows outpaced New-highs. The spread (new-highs minus new-lows) was minus-127 Wednesday. (It was -412 Tuesday.)   The 10-day moving average of the change in spread rose to minus-10. In other words, over the last 10-days, on average; the spread has DECREASED by 10 each day. Market Internals (based on 10-dMA) 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.
Wednesday, Volume, VIX, Price & Sentiment indicators were all neutral. The long-term NTSM indicator is HOLD.

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.