Monday, February 29, 2016

S&P 500 Earnings: Worse … Chicago PMI … Dallas FED Manufacturing Survey … Hussman on the Economy … Stock Market Analysis

This 1st piece says it all as far as I am concerned.  It’s the reason that a crash, or at last a more serious correction, remains likely.
“…With most calendar-year results now in, FactSet estimates companies in the S&P 500 earned 0.4% more per share in 2015 than the year before. That marks the weakest growth since 2009. But this is based on so-called pro forma figures, results provided by companies that exclude certain items such as restructuring charges or stock-based compensation. Look to results reported under generally accepted accounting principles and S&P earnings per share fell by 12.7%, according to S&P Dow Jones Indices. That is the sharpest decline since the financial crisis year of 2008.” Story at…
CHICAGO PMI (MarketWatch)
“The Chicago PMI fell 8 points to 47.6, MNI Indicators said Monday. In January, the index had increased 12.7 points to 55.6, the highest reading in a year.” Story at…
A number below 50 indicates contraction.
DALLAS FED (Business Insider)
“Manufacturing activity in Texas remained in contraction this month, as the headline index from the Dallas Federal Reserve printed at -31.8…Manufacturing activity in Texas remained in contraction this month, as the headline index from the Dallas Federal Reserve printed at -31.8.” Story at…
The following is a brief excerpt from the letter:
“Prior to U.S. recessions, the earliest indications of an oncoming economic shift are usually observable in the financial markets, particularly in growing deterioration across broad market internals, and widening credit spreads between debt securities of varying creditworthiness. The next indication comes from measures of what I call “order surplus”: new orders, plus backlogs, minus inventories. When orders and backlogs are falling while inventories are rising, a slowdown in production typically follows. If an economic downturn is broad, “coincident” measures of supply and demand, such as industrial production and real retail sales, then slow at about the same time. Real income slows shortly thereafter. The last to move are employment indicators - starting with initial claims for unemployment, next payroll job growth, and finally, the duration of unemployment…. The present syndrome of historically extreme equity valuations, poor market internals, widening credit spreads, and growing evidence of oncoming recession is familiar. The same set of observable conditions prompted my strong concerns in 2000 and 2007, both before steep market retreats and economic weakness.” – John Hussman, PhD. Letter to Shareholders, Hussman Semi-Annual Report.  Available at…
John Hussman has a PhD in Economics from Stanford so he should know something about the economy.  His record on the stock market has been less than stellar in recent years because he has hedged his funds causing them to underperform the markets; this time he may be right.
-Monday, the S&P 500 was down 0.8% to 1932 at the close. (This was a bearish move since the Index peaked before noon and dropped for the remainder of the day.  It dropped hard at the close.)
-VIX rose about 4% to 20.55.
-The yield on the 10-year Treasury dipped slightly to 1.74%.
Sentiment is 66%-bulls based on a 5-dMA of funds invested in selected Rydex/Guggenheim bull-bear funds { Bulls/(Bulls + Bears)}. This means that 2 out of every 3 investors are betting long.  This level of bullishness suggests further downside ahead in the markets.
The 10-dMA of closing Tick (the difference between stocks going up vs. down at the close) was over 500 for the past 5-days.  That’s a sign of too much bullishness too. For a discussion of this indicator, see…
The Overbought/Oversold Ratio remained “Overbought” Monday for the fifth day in a row.  This has been a trouble point for the markets recently.
I have been waiting to see if the charts will resolve. The S&P 500 has climbed back to a line of resistance at 1950 where the old bottom of the uptrend channel is climbing from its Dec 2011 low.  1950 is also the upper trend line of the declining short term trend for 2016. This all suggests a break in the making and we may have seen it today.  Unfortunately for the bulls, it appears the break was to the downside. The market pushed up to around 1958, but was unable to hold that level and fell hard.
I’ve been saying that the short-term Money Trend indicator looks like it is topping; today it rolled over and is suggesting we go down from here. The indicator could be stronger though.  We’ll see what happens tomorrow.
I still am holding short positions in SH and QID and I doubled down Monday adding more QID.  Now is a good time to establish a short position.  If the market moves up and breaks Monday’s 1958 intra-day high, it would suggest further upside may be possible and one could sell the short positions with a minimal loss.  On the other hand, it looks like there could be a 5-8% drop from here so the risk is skewed to the bear side.
(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 62.8% Monday vs. 65.5% Friday. (A number above 50% is usually GOOD news for the markets. On a longer term, the 150-day moving average of advancing stocks improved to 49.6%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) declined, but remained solidly positive.
New-highs again outpaced New-lows. The spread (new-highs minus new-lows) was +15 Monday. (It was +25 Friday.)   The 10-day moving average of the change in spread slipped to +13. In other words, over the last 10-days, on average; the spread has INCREASED by 13 each day.

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, Price & Volume were positive; VIX was negative; & the Sentiment indicator was neutral. The long-term NTSM indicator is BUY, but until the charts and VIX indicator are resolved I am going to watch and wait. 
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) and on 15 Jan I reduced stock allocation to zero in long-term accounts.
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…