Friday, April 22, 2016

Earnings … Chicago FED CFNAI … Presidential Cycle Predicts Trouble … stock Market Analysis

“…With 26% of companies in the S&P 500 reporting earnings to date for Q1 2016, 76% have reported earnings above the mean estimate and 55% have reported sales above the mean estimate.
…For Q1 2016, the blended [those who have reported and those who have yet to report] earnings decline is -8.9%. 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.
…At this point in time, 20 companies in the index have issued EPS guidance for Q2 2016. Of these 20 companies, 10 have issued negative EPS guidance and 10 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 50% (10 out of 20), which is below the 5-year average of 73%.”
My cmt: Blended earnings were estimated at -9.3% last week, so the current value is slightly higher. This week’s value is still lower than the estimate of 4-weeks ago that was -8.7%. It doesn’t seem that earnings beats are enough to instill much confidence. On the other hand, forward guidance is running higher than is normal.  
“[The CFNA] Index shows economic growth below average in March. The Chicago Fed National Activity Index (CFNAI) edged down to –0.44 in March from –0.38 in February. Three of the four broad categories of indicators that make up the index decreased from February, and all four categories made nonpositive contributions to the index in March.” Release available from the Chicago FED at…
For analysis and historical charts of the CFNAI see Advisor Perspectives at…
The ADS Index concurs with the CFNAI; business conditions in the U.S. are deteriorating.  The ADS Index is falling at the same rate that it did prior to the 2008 recession and is now below the start point for the 2008 recession. (Current value indicated by the red dashed line.)  We can see that it remains significantly higher than its -1 reading prior to the 2001 recession. It is in line with the GDPNow reading of 0.3% growth indicated by the Atlanta Fed. On a related point, I can’t see the FED raising rates again this year; it appears they missed their chance to normalize unless inflation picks up - then they’ll have to raise.


“The Aruoba-Diebold-Scotti business conditions index is designed to track real business conditions at high frequency.” – Philadelphia FED. Available at…
“In December of last year, Jeffrey Hirsch, Editor of Stock Trader's Almanac and the Almanac Investor newsletter, told our listeners that 2016 may turn out to be a difficult year for investors, citing a tendency for stocks to see double-digit losses during an election year at the end of a President's second term in office.” Commentary at…
TRAP? (Real Investment Advice)
“With valuations expensive, markets overbought, volatility low, and sentiment pushing back into more extreme territory, there are a lot of things that can go wrong. “ In other words, it’s probably a trap. I highly suspect that within the next week, or so, I will be stopped out of recent positions. That is the risk of managing money. However, given the ongoing Central Bank interventions, verbal easing by the Federal Reserve and an excessiveness of “bullish hope,” it is likely that prices could indeed more higher in the short-term.

  • As John Maynard Keynes once famously quipped:
                 “The markets can remain irrational longer than you can remain solvent.” – Lance Roberts
    My cmt: Lance Robert committed more funds to stocks recently.  My target for adding funds remains higher than his was…mine is 2110.
-Friday, the S&P 500 was up a whisker (less than 1pt) to 2192 at the close.
-VIX fell about 5% to around 13.22.
-The yield on the 10-year Treasury rose to 1.89%.
The S&P 500 is again overbought using the old tried and true Overbought/Oversold Ratio (utilizing advance decline data), but the elusive pull-back I have expected seems to remain out of reach. The Index is not just overbought, it is still massively overbought - the percentage of stocks-advancing on a 10-dMA (day moving average) and 20-dMA basis is exceeding the year-2010 top…right before a 16% correction. In fairness, it has been this high recently after the February bottom.  Prior to that, one needs to go back more than a year to find values this high.
The Breadth vs. S&P 500 Topping Indicator is again signaling a top.  The Index is up 1.4% since the last time it signaled a top so this is just another indication that the Index has gotten ahead of itself.
The S&P 500 hasn’t closed above my buy point yet (2110) so I am still waiting to get back into stocks, at least at a small percentage. With the Index at high levels it would be best to average in a little each month, unless there is a buying opportunity assuming that the index breaks 2110.
Most indicators are neutral so it appears that momentum is slipping.
The short-term Money Trend indicator flattened out so this indicator is now neutral.  I continue to hold short positions mostly in SH and some in QID, but those will have to go if the market exceeds my pain-target above.
The 10-day moving average of the percentage of stocks advancing (NYSE) dipped to 62.1% Friday. It was 62.6% 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 51.8%. A value above 50% generally indicates an up-trend and the numbers suggest a long-term up-trend.  The problem is that there remains a lot of doubt about the status of the markets and whether they can make significant new-highs.  The McClellan Oscillator (a Breadth measure) was up and remained positive on the markets.
New-highs again outpaced New-lows. The spread (new-highs minus new-lows) was +63 Friday. (It was +78 Thursday).   The 10-day moving average of the change in spread slipped to minus-3. In other words, over the last 10-days, on average; the spread has decreased by 3 each day. Market Internals switched to neutral on the markets.

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, VIX was positive. Sentiment, Price & Volume were neutral.  The long-term NTSM indicator is HOLD. I have not followed prior guidance to BUY, but momentum is slowing a bit since this indicator is now HOLD. Other short-term numbers have suggested that the Index has topped out.

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. If the S&P 500 index closes above 2110, I plan to add to my stock allocation.
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…