Tuesday, March 1, 2016

ISM Index … Auto sales … Construction Spending … Transports are Sending the Wrong Signal … Stock Market Analysis

“U.S. manufacturers contracted in February for the fifth straight month, though at a slower pace. The Institute for Supply Management said its manufacturing index rose to 49.5% last month from 48.2% in January.” Story at…
My cmt:  The article pointed out that the Index has been below 50% (signifying contraction) for 5-straight months; that hasn’t happened since the Great Depression.
AUTO SALES (Columbus Dispatch)
“Automakers posted big U.S. sales gains in February as consumers returned to showrooms after a snowy January…Consulting firm LMC Automotive consulting firm predicts…last month would be the best February in 16 years.” Story at…
“U.S. construction spending surged in January to the highest level since 2007, in the latest indication that the economy was regaining momentum after slowing in the fourth quarter.” Story at…
“Year over year, freight shipments were essentially flat from last year, just 0.2 percent lower than last January. Sequentially, January was the fourth month in a row that the number of freight shipments declined. The Association of American Railroads (AAR) reported that carloads were down 20.6 percent, while intermodal loadings fell 11.9 percent over December 2014.” Press release at…
My cmt: The Dow Theorists on CNBC’s FAST Money were ecstatic that the Transport stocks continue to rebound strongly – they conclude this means the correction is over. This is a bogus signal. The Transports are doing better because fuel costs are low. Remember, airlines are in the transports and they weren’t even around in Charles Dow’s day. The real economic indicator is freight volume.  Freight remains depressed and is slightly falling year-over-year. One shouldn’t cite the Transports as evidence that the correction is over. At best, they are neutral.
-Tuesday, the S&P 500 was up 2.4% to 1978 at the close.
-VIX dropped about 14% to 17.7, below its 200-dMA.
-The yield on the 10-year Treasury rose to 1.83%.
The size of the up-move Tuesday was statistically significant and that means that the price-volume move UP exceeded my statistical parameters and, in about 60% of the time, that leads to a down-day the next day (Tuesday). Given that the up-day occurred near the top of a channel, I give it more credence that the future is more likely to be down (at least in the short-term).  I don’t understand the big move up at the close.  You’d think traders would take profits late in the day so my guess is that there was some panic buying going on, or the computers were reacting to technical buy-signals.  Either way, it is likely that the market will begin to pull back from here.
The Overbought/Oversold Ratio remained “Overbought” Tuesday for the sixth day in a row.  This has been a trouble point for the markets recently. RSI is close to an overbought indication too.
I’ve been watching the charts. The index has broken higher than the old trend line suggesting a bullish breakout, but not necessarily. The old Wall Street truism says it must close 2-consecutive days above trend or close 3% above trend. We’ll see. 
I’ll be watching the charts closely – the bears may be wrong again.
The short-term Money Trend indicator was clearly down around mid-day, but they turned neutral in the afternoon.
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 62.9% Tuesday vs. 62.8% Monday. (A number above 50% is usually GOOD news for the markets. On a longer term, the 150-day moving average of advancing stocks improved to 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 +50 Tuesday. (It was +15 Monday.)   The 10-day moving average of the change in spread slipped to +9. In other words, over the last 10-days, on average; the spread has INCREASED by 9 each day. Market Internals switched to 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.
Tuesday, Price & Volume were positive; VIX & the Sentiment indicator were neutral. The long-term NTSM indicator is BUY, but until the charts and VIX indicator are resolved I am going to watch and wait. 
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…