Monday, March 7, 2016

Earnings and Valuation … Bear Market Rally … Stock Market Analysis

“For Q1 2016, the estimated earnings decline is -8.0%. If the index reports a decline in earnings for Q1, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009…Forward P/E Ratio is 16.1, above the 10-Year Average (14.2).” Earnings Insight report from FACTSET at…
My cmt: On a percentage basis, Thursday’s PE at the close was 13% above the 10-yr average for the S&P 500. 8% earnings decline – this report is not secret; market participants know it, so it would surprise me if the markets continue their advance. 
BEAR MARKET RALLY (Hussman Funds)“Despite the rebound from the lows of January and February, the extent of recent improvement is of the character we typically observe during bear market rallies and short-squeezes - essentially a “fast, furious, prone-to-failure” clearing of oversold conditions on progressively dull trading volumeI continue to believe that both vertical market losses and an imminent U.S. recession should be viewed as significant and probable risks.” – John Hussman, PhD. Commentary at…
- Monday, the S&P 500 was up 0.1% to 2002 at the close.
-VIX was UP about 3% to 17.35.
-The yield on the 10-year Treasury rose to 1.88%.
Today the VIX indicator switched to a positive position.  The NTSM system is now pretty clearly BUY with all indicator positive except for Sentiment; but I remain skeptical. The bottom on 11 February didn’t meet tests for a durable bottom, just like the bottom last 25 August. Given the many market worries (consider  high valuation and falling profits to name just two), it is still my opinion that the market is likely to head lower.
The Overbought/Oversold Ratio remained “Overbought” Monday for the tenth day in a row. RSI was “Overbought” last Thursday and is now slightly below the overbought level. This rise probably won’t last too much longer, but overbought conditions can remain for extended periods.
The S&P 500 is 1% below the 200-dMA and the slope of the 200-dMA remains down. All in all, the Index is still in a down trend.  The 200-dMA remains an important test.  Can the Index break higher? We’ll see. Past corrections have rolled over at this point so I’ll continue to practice patience.
The short-term Money Trend indicator is still suggesting downside ahead.
I still am holding short positions in SH and QID. So far, these trades aren’t working.
(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 64.1% Monday vs. is 65.2% Friday. (A number above 50% is usually GOOD news for the markets.)
On a longer term, the 150-day moving average of advancing stocks remained 50.1%. A value above 50% indicates an up-trend since slightly more stocks have advance over the last 150-days. The McClellan Oscillator (a Breadth measure) was unchanged and remained solidly positive.
New-highs again outpaced New-lows. The spread (new-highs minus new-lows) was +49 Monday. (It was +72 Friday.)   The 10-day moving average of the change in spread fell to +1. In other words, over the last 10-days, on average; the spread has INCREASED by 1 each day. Market Internals remained 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.
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 that the Index is very close to topping out.  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 9-months. That looks like a top to me. See “Why the Bull Market May be Dead” in my 14 December blog at…