Friday, March 18, 2016

Michigan Sentiment … Liquidity says the Bear Market Continues … Bad News – People are Saving More … Buy and Hold – Bad for Retirees … Stock Market Analysis

“The University of Michigan’s preliminary sentiment index fell to a five-month low of 90 from to 91.7 in February.” Story at…
“The tricky part of dealing with any bear market is when you have a rally like this and you have a lot of short covering, you do need to look and see what the credit indicators are telling you…So we look to see what the smart money in credit is doing and...we have seen some improvement off the lows...[but] they haven't improved enough to really break the downtrend that they've been from our standpoint credit spreads have not come in enough to signal the all-clear for the equity market…
“…episodes of…people saving more tend to be associated with negative growth rate periods for stock prices.” Commentary at…
“Do you think you're a long-term investor who should buy-and-hold through a bad market? If you are retired and drawing money from your investments, I think that's a very dangerous idea. In fact, if you had retired 15 years ago and then followed a buy-and-hold strategy, you would now be out of money.” Story at…
My cmt: This is the usual inflammatory headline; it’s not bad for ALL retirees.
-Friday, the S&P 500 was up about 0.4% to 2050 at the close. (Volume was extreme due to options expiration.)
-VIX was down about 3% to 13.97 near the close.
-The yield on the 10-year Treasury slipped to 1.87%. (Hmmm. The Bond Ghouls don’t trust the rally?)
SENTIMENT AGAIN (%-Bulls in Rydex Funds): I commented yesterday that Sentiment is usually wrong, because at the extremes the crowds are wrong; but in between, like now when sentiment is not at an extreme value, they are often right. Sentiment fell again at the close Thursday (my data is a day late). Sentiment (%-Bulls) was 46% yesterday (52% on a 5-dMA basis).  Thursday was the first time since September of 2013 that traders in the Rydex funds I track were actively bearish (below 50%-bulls.) This rally is attracting more non-believers who are betting that it is just a Bear Market rally.
The Overbought/Oversold Ratio remained “Overbought” Friday for the nineteenth day in a row. RSI was overbought a week ago and is 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 1.6% above its 200-dMA.  I wouldn’t call this a trend break yet. Some would, though, since the index has remained above the 200-dMA for 2-days straight. The 200-dMA is still sloping down and others use that as a trend indicator.
Looking over the numbers a few things continue to jump out Friday: Breadth is falling; up-volume 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 some down side ahead.
It is always a difficult choice when you see a bottom form; buy or wait? If the bounce is short and small, the buy is going to be a loser as the market turns down.  On the other hand if one sits out and the bounce is long and big, one feels rather stupid.  I am feeling stupid; but I have resisted going back in the market because I expect a turn down anytime.  FACTSET states that the estimated earnings decline for Q1 of 2016 is -8.4%. If that number is close to the actual earnings decline, it seems to me that the current stock euphoria will be quickly forgotten and we will be witnessing new lows. I’ll look at some more numbers over the weekend.
The general trend of the short-term Money Trend indicator remains down Friday, 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 57.9% Friday vs. is 58.3% Thursday. (A number above 50% is usually GOOD news for the markets.)
On a longer term, the 150-day moving average of advancing stocks rose to 50.8%. 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 slightly and 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 +134 Friday. (It was +162 Thursday.)   The 10-day moving average of the change in spread dipped to +6. In other words, over the last 10-days, on average; the spread has INCREASED by 6 each day. Market Internals remained neutral on the markets. The new-high new low data looks like it is getting close to a turn-around. Up-volume continues to be problematic, even on an up day like today.

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.
Friday, 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. Still wrong so far, but 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…