Tuesday, April 5, 2016

ISM Services … Industrial Production Index - “Disturbing” … Recession? … The Case for Cash … Stock Market Analysis

ISM SERVICES (Marketwatch)
“Companies in the U.S. services sector such as health care providers and retailers grew in March at the fastest pace since December, indicating the U.S. economy improved after a slow start to the first quarter. The Institute for Supply Management said its nonmanufacturing index rose to 54.5% in March…” Story at…
“…the much more significant economic news on Friday was the Federal Reserve's noon release of the disturbingly negative annual benchmark revisions to Industrial Production.”

As can be seen above, the Industrial Production Index is already below levels associated with every recession going back to 1950.  Don’t worry, it’s only the manufacturing segment of the economy, at least that’s the current philosophy. See Doug Short’s commentary and analysis at the above link.  This was a very good piece.
“Here’s brand new proof the US economy is stronger than you think.” Story at…
The “proof” cited was the better than expected ISM Services number Tuesday along with improving ISM Manufacturing report Friday. They’re good news, but hardly a proof. I choose to ignore the economic pundits. I keep a simple comparison of a basket of cyclical industrial companies, Industrial Select Sector ETF (XLI) vs the S&P 500.  Cyclicals should underperform if investors saw a recession coming. Currently, the XLI is underperforming the S&P 500 over the last 10-20-& 30-days, but not by much.  This shows some concern, but no real threat of imminent recession. The most basic indicator is the stock market: If the stock market continues up, then we needn’t worry about recession; if not, recession may well be in the cards “…sooner than you think.”
THE CASE FOR CASH (RealClearMarkets)
“…stocks' recent recovery from their January/February lows was just a bear-market rally rather than a new bull-market leg…For most players, I think there's a strong case to be made for staying heavily in cash this year.”-  Doug Kass. Commentary at…
-Tuesday, the S&P 500 was down about 1% to 2045 at the close.
-VIX rose about 9% to 15.33.
-The yield on the 10-year Treasury fell to 1.73%
“The secular bull market is still intact.” – CNBC Pundit.
Sorry, but the Secular (long-term) Bear market from 2000 is still intact.  Secular Bear markets should be defined by the most “overly exuberant” index, i.e. the most extreme outlier of the major indices. If one wants to declare a secular Bull Market, one must see the Nasdaq Composite climb significantly above its prior year-2000 high of about 5060. The 5163 all-time high in July 2015 is not high enough for me. It was 2% above the prior high, but then was unable to hold that level.  This made a bearish double-top not a bullish breakout from the secular bear.  Those calling this a secular bull probably made the same mistake back in 2007 when the DOW broke above its prior high.  There were calls of a secular-bull at that point too.  Bulls were wrong then and, until proven otherwise, they are wrong now. 
The size of the down-move Tuesday was statistically-significant and that means that the price-volume move down exceeded my statistical parameters and, in about 60% of the time, that leads to an up-day the next day (Wednesday).
The short-term Money Trend indicator is negative on the market and suggests further 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) fell a lot again, down to 48.4% Tuesday. It was 50.4% Monday. (A number below 50% is usually BAD news for the markets.) Breadth (%-advancing) hasn’t been below 50% since mid-February.
On a longer term, the 150-day moving average of advancing stocks slipped to 51%. A value above 50% generally indicates an up-trend, but the slope of the 200-dMA is still down, so the trend must still be considered down. The McClellan Oscillator (a Breadth measure) fell again and remains negative on the markets.
New-highs again outpaced New-lows. The spread (new-highs minus new-lows) was +80 Tuesday. (It was +136 Monday.)   The 10-day moving average of the change in spread climbed to +3. In other words, over the last 10-days, on average; the spread has increased 3 each day. Market Internals remained neutral on the markets, but they are only a whisker from negative.)

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 & VIX were positive. Sentiment & 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 there are some topping indicators (RSI & the Breadth Index Top Indicator) that suggest a top has occurred.  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…