Monday, February 1, 2016

ISM Manufacturing … China and the Next Financial Crisis … Margin Debt Suggests a Crash on the Stock Market … Stock Market Analysis

ISM MANUFACTURING (Advisor Perspectives)
“Today the Institute for Supply Management published its monthly Manufacturing Report for January. The latest headline PMI was 48.2 percent, an increase of 0.2% from the previous month…” Commentary at…
My cmt: New orders improved, a good sign, but they remained in below 50 indicating continuing contraction.
"It's no secret that China is slowing under a massive debt burden…I'm concerned that Beijing is running out of options, they won't be able to defend the renminbi for very much longer and they may have to let it float. That may end up leading to a better outcome for China long-term...but it's a very nasty development for global growth, for global economic stability and threatens unleashing huge deflation in the developed world, a very strong dollar, and I think maybe the next global financial crisis." - Worth Wray, Chief Economist at Evergreen Gavekal
“… after both of the prior occurrences in which margin debt became as substantial as it is today, stocks suffered a 50% drawdown (and 3-year returns of roughly -40% at the lows). If history indeed rhymes, another such decline is not out of the question.” – Jesse Felder
My cmt: I’ve covered Mr. Felder’s margin debt concerns before; they remain troublesome.
Durable goods orders didn’t just fall in December 2015, they were awful, down 5.1% from the prior month and down 3.5% for the year. According to the Wall Street Journal, that is the largest decline that wasn’t during recession since 1992. The good news is that the manufacturing sector only accounts for 12% of US GDP.  It does raise a concern since declines in manufacturing do show deterioration that may well expand to other parts of the economy.  Store closings and layoffs, such as MACY’s and WALMART, should also be a cause for significant concern since they signal trouble in the retail sector.
- Monday, the S&P 500 was down a point to 1939 at the close.
-VIX dropped about 1% to 19.98.
-The yield on the 10-year Treasury rose to 1.97%.
“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 Overbought/Oversold Index or the Advance-Decline Ratio (a Wall St. “classic” indicator based on breadth that I have routinely misnamed) is simply a ratio of Advancing stocks divided by declining stocks.  It is typically averaged over 10-days and is overbought when the ratio is 1.25 or advancing stocks exceed declining stocks by 25%.  That Ratio turned “overbought” Monday.  It just shows how strong this bounce has been even though the Index has only appreciated about 4+%.  This is a headwind for the Bulls.
1950 on the S&P 500 remains my estimate for the top of this bounce, but I’ll be watching my Money Trend Indicator because the markets will do what they want.
There have been a number of articles on the Web regarding Sentiment that have suggested that due to bearish sentiment in various surveys (or even the put/call ratio) a significant reversal to the upside is imminent. Perhaps; I’ll just note again that my sentiment reading (%-bulls based on funds invested in Rydex/Guggenheim Bull-Bear Funds) remains elevated at 55%-bulls.  In other words, most unsophisticated investors remain bullish. That number needs to get lower before there is a bottom, but there could always be further upside before the Index puts in a bottom.
After the rally’s end, we’ll need to re-test the 1859 low.  If past history holds, that would occur in 1 to 7-weeks after the low. (Those are wide-ranging numbers from looking at 4 corrections with steep declines.) It’s already been more than a week after the low so that scenario is off the table.
My Money Trend indicator is UP Monday suggesting further upside ahead in the near term. It has been a pretty good indicator recently.
Friday, I took a short position at the close.  I was going to dump the position for a loss at the close Monday (especially since Money Trend was up), but markets fell at the close and I decided to hold the position a bit longer. Money Trend is Bullish, but not all indicators are.
(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) jumped to 55.6% Monday vs. 52.5% Friday.  (A number above 50% is usually GOOD news for the markets. On a longer term, the 150-day moving average of advancing stocks remained 48.8%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) declined slightly, but remained positive.
New-highs outpaced New-lows. The spread (new-highs minus new-lows) was +50. (It was +27 Friday.)   The 10-day moving average of the change in spread increased to +98.  In other words, over the last 10-days, on average; the spread has INCREASED by 98 each day. The new-high/new-low data is currently the best news for the Bulls. Market Internals remained positive 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 indicator was negative. The Price & Sentiment indicators were neutral. Volume is now positive. 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 8-months. That looks like a top to me. See “Why the Bull Market May be Dead” in my 14 December blog at…