Monday, March 28, 2016

Personal Spending … Profit Squeeze … Hussman Comments … Stock Market Analysis

“Personal spending barely increased in February and the prior month’s advance was revised down as Americans saved more of their incomes. Spending on goods and services climbed 0.1 percent for a third month in February…” Story at…
“…after-tax profits were 15% below year-earlier levels [Q4-2015]. That was a lot worse than what investors have been hearing from companies. Over the same period, S&P 500 pro forma earnings per share, which excludes items such as restructuring charges and stock-based compensation, were down 3.6%, according to FactSet.”  Story at…
My cmt: I’ve commented on falling corporate profits for some time based on data from FACTSET.  The Government’s report from the Commerce Department (mentioned in Thursday’s blog and above) noted profits that are significantly worse than FACTSET’s. Their methodology was different, but I was still surprised by the WSJ article: the fact that profits have fallen 15% year-over-year by the Government’s methodology is shocking. I am surprised that the stock market is holding up as well as it has.
The second sentence above mentions pro-forma earnings. Pro-forma earnings exclude “one-time charges” sort of a “gee this is the profit that we would have made if this one thing hadn’t cropped up.” Unfortunately, the gap between GAAP profits (generally accepted accounting practices) and pro-forma are now at extreme levels as companies have been “tweaking” their numbers with more frequent one-time charges. That is yet another warning for stock market investors. Currently, conditions don’t appear to be conducive to higher stock market prices.
The above stats are well known to the Wall Street pros, so perhaps I am missing something – I just don’t know what that might be. I remain a Bear.
“…the stock market continues to trace out a massive arc that is likely to be recognized, in hindsight, as the top formation of the third financial bubble in 16 years… It's difficult to imagine that the current situation will end well, but it's quite easy to lose a full-cycle perspective when so much focus is placed on day-to-day fluctuations. The repeated speculative episodes since 2000 have taken historically-reliable valuation measures to extremes seen previously only at the 1929 peak and to a lesser extent, the 1937 peak (which was also followed by a market loss of 50%).” – John Hussman, PhD. Weekly Market Commentary at…
-Monday, the S&P 500 was up about 1pt to 2037 at the close.
-VIX rose about 3% to 15.24.
-The yield on the 10-year Treasury fell to 1.87%
Volume was very low today, about what would be expected around Christmas week.  It looks like Wall Street took an Easter vacation.  Schools are probably out for spring break.  As in other Holidays, this may bring a slow melt-up this week followed by a return to reality later. The numbers (internals, Smart-Money, other indicators) generally continue to exhibit a slow deterioration suggesting a downturn in price (S&P 500).  Whether that happens over what appears to be Holiday trading is not clear - like it is ever clear what the stock market is doing.
The short-term Money Trend indicator is trending down Monday, but not sharply, suggesting a downtrend in prices. 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 52.4% Monday vs. is 55% Thursday. (A number above 50% is usually GOOD news for the markets.)
On a longer term, the 150-day moving average of advancing stocks climbed to 50.9%. 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 nearly unchanged and remains negative.
New-highs again outpaced New-lows. The spread (new-highs minus new-lows) was +97 Monday. (It was +38 Thursday.)   The 10-day moving average of the change in spread rose to +2. In other words, over the last 10-days, on average; the spread has INCREASED by 2 each day. Market Internals remained neutral on the markets, but the up-volume continues to fall. New-high new-low data is now mixed.

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 were positive. Sentiment and Volume (a variant of on-balance-volume) were neutral.  The long-term NTSM indicator is BUY. I have not followed the guidance yet. My numbers suggest that the Index is topping out. I have been saying that for a while as the market has moved up; but the data remains bearish.  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…