Monday, March 14, 2016

Earnings & Valuation … Worst Environment for Investing … Uptrend is A bear Market Rally … Hussman Almost Bullish Short-Term … Stock Market Analysis

“Earnings Growth: For Q1 2016, the estimated earnings decline is -8.3%. 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… the estimated decline for…Q2 2016 [is] -2.2%, while the estimated growth rates for Q3 2016 and Q4 2016 are 4.2% and 9.0%...
…Valuation: The 12-month forward P/E ratio is 16.1. This P/E ratio is above the 5-year average (14.4) and the 10-year average (14.2).” Excerpted from Factset Earnings Insight at…
My cmt: I’m no expert on earnings, but getting from -8% (Q1) to +9% (Q4) in 3-quarters doesn’t seem realistic with the current strong-dollar and weak world economy.
“The latest Z.1 data was released yesterday showing that, as of the end of the year, the stock market was still very overvalued, investors were still overly bullish and the S&P 500 was still very overbought relative to its long-term regression trend. In other words, this is still the worst possible environment for equity investors.” Commentary at…
“Louise Yamada CMT, Managing Director of Louise Yamada Technical Research Advisors…sees the current uptrend in the market as a bear market rally and notes that the major indexes are stalling at the declining 200-day moving average. She believes we need to make new highs to see an end to the bear market.” Story at…
"...our measures of valuations and market internals remain jointly unfavorable. Still, given a somewhat mixed technical picture, we have no strong near-term views [my emphasis]. A market retreat of even a few percent, say, below 1975 on the S&P 500, would shift our outlook like a light switch to a steeply negative view as the most critical measures would again be wholly one-sided. Until that point, we’ll ease our table-pounding about crash risk. For contrarians, this at least briefly softens one of the loudest voices on the subject, which might be exactly the thing to get a crash going.” – John Hussman, PhD, Weekly Market Commentary. My cmt: I’ll be watching that 1975 zone.
-Monday, the S&P 500 was down about 0.1% to 2020 at the close. (This close is at the 200-dMA.)
-VIX was up about 3% to 16.92.
-The yield on the 10-year Treasury dipped to 1.96%.
Some thoughts on the rally: I spent time drawing charts and trend lines recently, but in the end, I decided it really didn’t matter. It really comes down to the 200-day moving average (200-dMA).  The trend remains down, but that could change if the S&P 500 can manage to break significantly above its 200-dMA.  Friday it closed slightly above the 200-day and Monday it closed at the 200-day. The key is the 200dMA.  If the index can break significantly above it, the correction will be on death watch.
The Overbought/Oversold Ratio remained “Overbought” Monday for the fifteenth day in a row. RSI was overbought a week ago and is close to overbought today.  Tick remains overbought and the Smart-Money indicator (based on late day action) is was overbought Friday.  All are short-term bearish for the markets. 
Volume on the NYSE was around 20% below normal Monday. As I noted Friday, that is not the way it is supposed to work.  In a bounce, volume starts out low as traders don’t believe the bottom is in.  As it proceeds, more investors pile in and the volumes improve as the rally moves higher.  The stat is a bit worse when one considers that up-volume is now falling faster than down volume.
This rally has lasted longer than I expected which is another reminder to buy when my system says buy. The Index is up 5% since I ignored the first long-term buy and 8% since my correction worksheet flashed buy. (Time will tell if the recent 11 Feb bottom will be a durable bottom. Most prognosticators seem split about 50-50 on the subject.) Had I expected a durable bottom, I would have bought in. Still, in the near term the most likely course for the market is down.
The short-term Money Trend indicator is still suggesting downside ahead, but less so today. It is closer to neutral now. I continue to hold short positions mostly in SH and some in 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 62.0% Monday vs. is 62.9% 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 50.5%. 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 significantly lower, but remained firmly positive. Tom McClellan wrote on his website that he considers the current 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 +35Monday. (It was +82 Friday.)   The 10-day moving average of the change in spread fell to +2. In other words, over the last 10-days, on average; the spread has INCREASED by 2 each day. Market Internals switched to neutral on the markets due to falling up-volume. There has been some deterioration in Market Internals recently.

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