Monday, March 21, 2016

Corporate Profits – a Train Wreck … Existing Home Sales Dip … Stock Market Analysis

“Sales of previously owned U.S. homes dropped more than forecast in February after reaching the second-highest level since 2007 as low inventory levels continue to limit progress in housing.” Story at…
“The corporate earnings picture is ugly and getting uglier in a hurry, with S&P 500 companies expected to post an 8.3 percent decline in first-quarter profits from the same period a year ago [FACSET actually reported an 8.4% decline]…At a time when the stock market has just recently erased its losses for the year and bounced out of correction mode, the worsening earnings picture presents a formidable headwind. After all, analysts at the beginning of 2016 actually had been projecting a modest 0.3 percent earnings increase.” Story at…
My cmt: I noted the weak corporate profits on Friday, but it is worth repeating because weak corporate profits are what this correction is all about.
See Sunday’s blog for a comparison of the 2007 correction/crash to the current market.
-Monday, the S&P 500 was up about 0.1% to 2052 at the close.
-VIX was down about 2% to 13.79 near the close.
-The yield on the 10-year Treasury rose to 1.92%.
SENTIMENT AGAIN (%-Bulls in Rydex Funds):
Sentiment (%-Bulls) was 45% Friday (49% on a 5-dMA basis).  Traders in the Rydex funds I track have not been bearish (below 50%-bulls) since September of 2013. These traders are betting that this rally is just a Bear-Market rally that will end soon.
The Overbought/Oversold Ratio remained “Overbought” Monday for the twentieth day in a row. RSI was overbought a week ago and was overbought again Friday.  The Smart-Money indicator (based on late day action) was overbought a week ago.  All are short-term bearish for the markets.  As I have often heard, “Overbought conditions can last for longer than you think.” That’s the case this time.
S&P 500 is now 1.7% above its 200-dMA.  I wouldn’t call this a trend break yet. The 200-dMA is still sloping down and that is a critical trend indicator.
Looking over the numbers a few things continue to jump out Monday: Breadth is falling; up-volume is falling; new-hi/new-low data is falling; and Tick is falling, i.e. fewer last trades of the day are up. All of that data is based on a 10-day average. These Market Internals are suggesting down side ahead.
The short-term Money Trend indicator continues down Monday, suggesting downside ahead. I continue to hold short positions mostly in SH and some in QID.
(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 56.3% Monday vs. is 57.9% Friday. (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 50.6%. A value above 50% indicates an up-trend since slightly more stocks have advanced over the last 150-days. The McClellan Oscillator (a Breadth measure) was down but remained positive. (Tom McClellan wrote on his website that he considers the recent high values of the Oscillator to be too high and that they should be interpreted as bearish.)
New-highs again outpaced New-lows. The spread (new-highs minus new-lows) was +50 Monday. (It was +134 Friday.)   The 10-day moving average of the change in spread dipped to 0. In other words, over the last 10-days, on average; the spread has remained unchanged each day. Market Internals remained neutral on the markets. The new-high new low data turned down and up-volume continues to fall.

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 & VIX were positive. Sentiment was neutral. The long-term NTSM indicator is BUY. I have not followed the guidance yet. My guess is still that the Index is topping out. I have been saying that for a while, but the data continues to point down.  We’ll see.

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 10-months. That looks like a top to me. See “Why the Bull Market May be Dead” in my 14 December blog at…