Wednesday, March 2, 2016

Fed Beige Book … ADP Employment … Crude Inventories … National Debt … Stock Market Analysis

FED BEIGE BOOK (MarketWatch)
“A key report about the U.S. economy released Wednesday offered a relatively somber take on the U.S. economy, bolstering the view of many that the Federal Reserve will be slow to raise interest rates further this year. None of the 12 districts in the Federal Reserve’s Beige Book reported any dramatic improvement in conditions in the January-through-late-February reporting period.” Story at…
“Private sector employment increased by 214,000 jobs from January to February according to the February ADP National Employment Report®…Mark Zandi, chief economist of Moody’s Analytics, said, “Despite the turmoil in the global financial markets, the American job machine remains in high gear. Energy and manufacturing remain blemishes on the job market, but other sectors continue to add strongly to payrolls. Full-employment is fast approaching.” Full press release from…
“U.S. crude oil and gasoline inventories jumped more than expected last week to record highs, data from the Energy Information Administration showed on Wednesday. Crude inventories rose 7.8 million barrels in the week to Jan. 29 to 502.7 million barrels, compared with analysts' expectations for an increase of 4.8 million barrels…” Story at…
“The U.S. Congressional Budget Office (CBO) has just delivered the bad news that the national debt is now rising faster than gross domestic product and heading toward ratios that we usually associate with Italy or Spain. That confirms my view that the fiscal deficit is the most serious long-term economic problem facing U.S. policy makers.” – Martin Feldstein
10-years ago the debt was only 35% of GDP. Now it is more than 70%. This is depressing and calls to mind an historical quote:
"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years." — Alexis de Tocqueville (1805-1859)
-Wednesday, the S&P 500 was up 0.4% to 1986 at the close.
-VIX dropped about 3% to 17.09.
-The yield on the 10-year Treasury rose to 1.85%.
My opinion remains that the markets are headed for serious trouble and the bottom is not in; but I may be wrong.  I expected a bounce up to around 1920. The index is past that level and has gotten higher more quickly than I expected.
Let’s look at two likely scenarios.  This may seem silly - the market is going up or down right? - But we can get some idea of the highs and lows for two main possibilities by looking at prior corrections.
#1. Correction Bottom is in: The sharp rise after the 11 February bottom suggests investors think the bottom is in.  If so, this bounce might continue.  Based on other correction bounces, a top around 2000 is possible. In this scenario, there is also the possibility that the top was today (Wednesday) based on the big pop Tuesday. In this scenario, the Index could drop to around 1870 (testing the first low of this correction) and move up from there, i.e., correction over.
#2. Correction continues: Based on larger downturns, from this level on the S&P 500 the Index might be expected to drop to the vicinity of 1770 before there is another bounce.
This is important to consider for my short positions.  When should I sell them?  With the likelihood that in either scenario the Index will fall below my purchase points, it seems best to hold shorts longer. That may change of course depending on the market.
The Overbought/Oversold Ratio remained “Overbought” Wednesday the seventh day in a row. RSI is closer to an overbought indication too.
Wednesday we got 2-consecutive days above the trend line.  According to the old Wall Street truism the down trend appears broken. Correction over? Doubtful, but it’s possible.
The short-term Money Trend indicator is suggesting downside ahead.
I still am holding short positions in SH and QID and I doubled down Monday adding more 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 61.2% Wednesday vs. 62.9% Tuesday. (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%. A value below 50% indicates a down trend. The McClellan Oscillator (a Breadth measure) improved and remained solidly positive.
New-highs again outpaced New-lows. The spread (new-highs minus new-lows) was +39 Wednesday. (It was +50 Tuesday.)   The 10-day moving average of the change in spread slipped to +3. In other words, over the last 10-days, on average; the spread has INCREASED by 3 each day. Market Internals remained neutral on falling up-volume on a 10-day basis.

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.
Wednesday, Price & Volume were positive; VIX & the Sentiment indicator were neutral. The long-term NTSM indicator is BUY. VIX may switch to a buy soon and that would be hard to resist.  I may have to move back in the market soon.
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…