Thursday, February 11, 2016

Unemployment (Jobless) Claims … War as Fiscal Stimulus … Stock Market Analysis

“The number of Americans filing for unemployment benefits fell more than expected last week, suggesting the labor market remained on solid footing despite slowing economic growth and a stock market rout. Initial claims for state unemployment benefits declined 16,000 to a seasonally adjusted 269,000…” Story at…
“…the only 'fiscal stimulus' that I know that can break the deflationary cycle is war. That's what we got after the Great Depression, and I don't look forward to a repeat.” – Axel Merk, Founder, Portfolio Manager at Merk Investments LLC
My cmt: This article was titled “Clueless Fed” and it was mostly intelligent and thoughtful.  I say mostly, because comparing current conditions to WWII and the Great Depression is absurd.  Because of WWII, the U.S. built a massive manufacturing capability and infrastructure that powered the country for years after the war.  It also destroyed Europe and Japan so the U.S. had no competitors.  No wonder the U.S. thrived after the war.  A major war now will not have the same effect; in fact, it would bankrupt us since our National Debt (the total owed) now already exceeds the debt that existed at the end of WWII. If a war included a nuclear exchange, the possibilities are too horrific to consider.  Sorry, but I’ve seen similar comments before - they are idiotic.
-Thursday, the S&P 500 was down about 1.2% to 1829 at the close.
-VIX was rose about 7% to 28.14.
-The yield on the 10-year Treasury dropped to 1.64%.
The closing number traders a have been watching is a support level of 1816; that is where the index closed on 11 April 2014. Thursday, the Index tested slightly below that level after 2PM and bounced up as traders jumped in. The index sold off about 10pts in the afternoon. I’d look for a retest of the 1810 level Friday.  I would like to see a big drop before going long as a trade, but a retest of 1810 on Friday might be an opportunity to buy.  I track late day buying as a “Smart Money” indicator and smart-investors have been buying slowly since the end of January. Breadth is not yet indicating “oversold” and that has been a turnaround point recently.  
Carter Worth, Market Technician, was on CNBC’s Fast Money program Thursday and he compared charts of the S&P 500 vs relative performance of utilities. He said that it shows that we are headed into recession.  Further, 10-yr bonds show the same, as does gold spread vs the S&P 500.  Spreads with corporates vs treasuries all agree.  He stated that as a minimum, one would expect a fall back to the level from which the breakout occurred.  That would mean the Index drops to 1575.  That’s a minimum and it’s a foregone conclusion. The only question is when.
The smoothed version of the Money Trend remains clearly down suggesting the overall market trend. It is going to take a big move that puts the Index at a meaningful level to get me to trade again. That may have happened today, but I would like to see the Index at or below 1800.  If it gets there tomorrow, I’d consider that a “buy” since the big move would suggest a short-term bottom and create an oversold indication in breadth. This would be a trading-buy since I am guessing this would presage about a 5% rise in the S&P 500.
More aggressive traders could buy if the S&P 500 retests the 1810 low, i.e. it hits that level and doesn’t go lower.
(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 43.3% Thursday vs. 48.1% Wednesday. (A number below 50% is usually BAD news for the markets. On a longer term, the 150-day moving average of advancing stocks remained 48.5%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) was down and remained negative on the day.
New-lows outpaced New-highs. The spread (new-highs minus new-lows) was minus-672 Thursday. (It was -127 Wednesday.)   The 10-day moving average of the change in spread fell to minus-59. In other words, over the last 10-days, on average; the spread has DECREASED by 59 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.
Thursday, Volume and VIX were negative; Price & Sentiment indicators were neutral. The long-term NTSM indicator is SELL. At this point a sell indication just reiterates that market conditions are poor.  The first SELL signal of this cycle was 18 Dec 2015 and there has not been a BUY signal since.

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.