Wednesday, February 17, 2016

Producer Price Index … Housing Stats … Industrial Production … FOMC Minutes … Stock Market Analysis

“Headline PPI rose by 0.1% in January… Core PPI was up 0.4% on the monthly change and was up by 0.6% on the year-over-year measure.” Story at…
My cmt: CPI (due Friday) will be more important. For charts on trends see Advisor Perspective at…
U.S. housing starts unexpectedly fell in January likely as bad weather disrupted building projects in some parts of the country, in what could be a temporary setback for the housing market…Though residential construction accounts for a small fraction of gross domestic product, the decline in starts at the beginning of the year suggests that an anticipated rebound in economic growth will be modest.” Story at…
“U.S. manufacturing output rose in January by the most since July 2015, a sign the industry was starting to stabilize at the beginning of the year. The 0.5 percent advance at factories, which make up 75 percent of all production, followed a 0.2 percent decrease the prior month…” Story at…
“Federal Reserve policymakers worried last month that tighter global financial conditions could hit the U.S. economy and considered changing their planned path of interest rate hikes in 2016…However, they agreed it would be premature to change their outlook for the U.S. economy…” Story at…
-Wednesday, the S&P 500 was up about 1.7% to 1927 at the close.
-VIX fell about 7% to 22.31.
-The yield on the 10-year Treasury rose to 1.82%.
Regarding why the ongoing rally is suspect, one of the reporters on CNBC did some volume-analysis of the ongoing rally this morning.  The disappointing thing is that they trot out the same bogus, volume-analysis after every bottom.  I’m an amateur, but these guys are really amateurs. His thesis was that low volume in a number of ETF’s, including the S&P 500 ETF (SPY), indicated that the rally underway was questionable. This analysis is completely wrong.  After a bottom, there is ALWAYS low volume when the markets reverse upward.  Just look at the data.  The reason is simple – traders jump in to drive the price up, but investors don’t believe in the bottom and wait. The result is low volume after a bottom.
Now I do happen to agree with the conclusion – I am skeptical about the bottom too, but not because of volume. I don’t think we have seen a durable bottom because of the following:
-The last extreme-high, down-volume day was more than a month ago.  Further, the recent low was not a statistically-significant day in my system (indicated by a high standard deviation in price-volume) nor has there been one since mid-January. Every correction since 2008 has finished with a statistically-significant, down-day at the bottom, or no more than 3-days prior to the bottom. (I’m too lazy to pull out my older stats prior to 2008.) This is true for relatively minor pullbacks too.
-There has not been a day with an extreme low percentage of stocks advancing since the higher-low last September; before that there was one at the August low.
-VIX was 28 at the recent low. It was 36 at the August low.
-At the bottom, market internals did not appreciably improve.
These stats show a lack of capitulation along with a lack of improvement at the bottom, so this recent bottom will probably need to be retested. On the other side…
Bull arguments:
-High up-volume today (Wednesday) is a positive for the market, but as noted above, there was no high down-volume day that would have suggested a bottom, so I place little credence in this argument.
-There was a new-high/new-low reversal after the bottom, but in the past 8-years, only about 20% of new-high/new-low reversals have occurred at correction bottoms. Others have occurred as much as 2-months before a correction bottom.  (I didn’t go back thru the 2007 crash stats, but I bet the results are similar.)
-Smart money was very active buying late in the day again, Wednesday, so the traders remain bullish.

Still, the ongoing rally looks like an oversold bounce to me. The market reached my upward target of 1920 so quickly that it is likely to get higher and may even get to Art Cashin’s 1950 level noted below.
"It will prove itself if it gets above 1,950. For now we've taken a healthy leap forward. As I say, it's broad, so you've got to appreciate that, but I won't declare 'in' until we talk about 1,950," – Art Cashin on CNBC's "Squawk on the Street."
The smoothed version of the Money Trend remained UP Wednesday.
I sold my long position since my 1920 the Index met my target level of 1920; perhaps I sold too soon. Oh well…

(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 51.7% Wednesday vs. 45.5% Tuesday. (A number above 50% is usually GOOD news for the markets. On a longer term, the 150-day moving average of advancing stocks rose to 48.7%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) improved, and switched to positive on the day.
In a positive reversal, New-highs outpaced New-lows. The spread (new-highs minus new-lows) was +4 Wednesday. (It was -34 Tuesday.)   The 10-day moving average of the change in spread rose to +6. In other words, over the last 10-days, on average; the spread has INCREASED by 6 each day. Market Internals (based on 10-dMA) switched to 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.
Wednesday, 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 continue to 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.