Monday, February 8, 2016

This is not the Big Bear … Thanks, FED – The 3rd Bubble is Here … A bottom? … Stock Market Analysis

I watched Carter Worth on CNBC’s Fast Money program.  He noted that we have had a series of lows in the 1820’s area.  He thinks the path is lower. S&P 500 1575 would be take the Index back to the prior tops. Since 32% declines are the average, he said a drop to 1450 seems likely. He said today’s low is unlikely to be a final bottom since after the huge run up for multiple years, it seems likely that any correction would be worse than 13%.
“So I must admit to feeling nervous for this year’s equity outlook in the U.S. But I am not entirely convinced. Sure, we can have a regular bear market. That is always the case. But the BIG ONE? I doubt it…I still believe it is “likely” that we will reach Election Day more or less intact.” - Jeremy Grantham
My cmt: Mr Grantham said that he doubts the bear thesis due to a lack of blow-off top and lack extreme optimism usually associated with a top. I‘ll just point out that there was no blow-off top in 2008. 
“…the Federal Reserve has created the third speculative bubble in 15 years in return for real economic improvements that amount to literally a fraction of 1% from where we would otherwise have been…In short, what we should fear is not the slight impact of recent policy normalizations, but the violent, delayed, yet inevitable consequences of years of speculative distortions that are already fully baked in the cake….I simply don’t observe historically relevant differences that are likely to make the consequences of the recent bubble much less unpleasant than the other two.” –John Hussman, PhD. Weekly Market Commentary, from Hussman Funds at…
-Monday, the S&P 500 was down 1.4% to 1853 at the close.
-VIX was up about 11% to 26.
-The yield on the 10-year Treasury slipped to 1.74%.
“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
My Money Trend indicator is mixed to slightly up Monday. It has been a pretty good indicator recently.
Based on my comments in “A TRADABLE BOTTOM” below, I did add some to my long-position.  I projected a buy-indication, but not a strong-buy signal so I only added to my long-trading position.
I mentioned that we might see a retest of the recent low of 1859 (the prior low was 1859, not 1869 mentioned in yesterday’s blog) on the S&P 500. It wasn’t clear late in the day Monday where the Index was going to close. Going into the close the S&P 500 was climbing so fast that it seemed it might finish well above the 1859 level.
There is good and bad interpretation of that action. Let’s start with the “bad” first. Monday was not a classic panic-capitulation so it is not a “buy” from that perspective. The “good” interpretation of Monday’s price action is that traders seem to be anticipating a bottom and began buying to get ahead of a future rebound.
Let’s look at the obvious. Monday, there was a test of the prior 1859 low that was 1.2% lower than the prior low.  The prior low was about 3-weeks ago.  Today’s low comes 180-days after the 21 May all-time high. Volume was down vs. the prior low and this suggests that fear and selling are abating. Other Market Internals were not a slam-dunk buy, but the internals do suggest a bottom or near-bottom and I added to my long-trading position at the close.
If the market closes lower Tuesday, we’ll know Monday wasn’t the bottom.  That’s an obvious statement, but it is worth mentioning, because the proof in the pudding may be Tuesday’s action. A strong up-day should probably be bought, especially if there is a significant turn-around in new-high/new-lo data.
In short, this looks like a buying opportunity; but it is probably not the final bottom. My guess is that this could be a 2007 scenario where there will be a rally of a month or two only to be followed by more selling. We’ll have to wait and see. Tomorrow, Tuesday, will be an important clue.
In closing, based on the Futures, I seem to be in the minority so I’d rather wait for some confirmation Tuesday before I add to stock allocations.
(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 51.8% Monday vs. 51.3% Friday.  When you consider the big down-day, any improvement is impressive. (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 48.7%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) was down and finished negative on the day.
New-lows outpaced New-highs. The spread (new-highs minus new-lows) was minus-392 Monday. (It was -108 Friday.)   The 10-day moving average of the change in spread fell to minus-31. In other words, over the last 10-days, on average; the spread has DECREASED by 31 each day. Market Internals (based on 10-dMA) remained neutral 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 Volume, Price & Sentiment indicators were neutral. The long-term NTSM indicator is HOLD, but I’ll switch it to BUY is there is a confirmation of Monday’s weak bottom indication.
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.
I think Monday was a tradable-bottom, but I seem to be in the minority. I will be looking for signs of bullishness on Tuesday and add to my stock portfolio (or not) accordingly. I’ll post my proposed changes (if any) around 11:30 AM Tuesday.

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.