Tuesday, May 3, 2016

China PMI Falls Again … Lessons from Japan … Tech Bubble II is Bursting … Stock Market Analysis

“A private gauge of nationwide factory activity in China fell to 49.4 in April from 49.7 in March, Caixin Media Co. and research firm Markit said Tuesday. The reading points to a continued deceleration in China's manufacturing activity…” 

LESSONS FROM JAPAN (Financial Sense)
“The core failure of Japan's central bank and state is they have attempted to substitute monetary games for desperately needed social, political and economic reforms. This is the Keynesian ideology and project in a single sentence:
Keynesian policy holds that expansionary monetary and fiscal policy can be substituted for structural social, political and economic reforms, enabling the status quo to retain its power and privileges without disruption.” The Keynesian fantasy that Japan has embraced holds that every problem can be solved by printing more money.” - Charles Hugh Smith. Commentary at…
Then there’s Carl Icahn…
“Icahn, who Trump had previously suggested could serve as his Treasury secretary, warned that markets will have a ‘day of reckoning’ without fiscal stimulus, and argued that the U.S. government ‘certainly could do more spending.’” – CNBC. Story at…
My comment to Icahn is: I don’t know…I am tired of stealing from my children and Grandchildren. Fortunately, our country is much better off than Japan due to our rich natural resources.
TECH BUBBLE 2.0 IS BURSTING (The Felder Report)
“Rumors of the demise of tech bubble 2.0 started percolating last year. Q1 of this year proved it wasn’t an exaggeration. Last month the Wall Street Journal reported that funding for startups fell 25% during that period, the largest decline since tech bubble 1.0 burst. For many of the hottest startup communities outside of Silicon Valley it was even worse.” Story at… 
-Tuesday, the S&P 500 fell about 0.9% to 2063 at the close.
-VIX rose about 6% to 15.60.
-The yield on the 10-year Treasury fell to 1.80%.
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). Just as a reminder, this up and down movement is typical of a top, so the trend for reversals after big days could end anytime.
The slope S&P 500, 200-dMA is still falling (indicating a downtrend); the “Golden Cross” with the 50-dMa crossing above the 200-dMA remains. The Golden Cross is a bullish indication, but it has not generated much enthusiasm since it appeared 6-days ago.
My snapshot sum of 16 indicators, of which only about half are included in the NTSM long-term or Market Internals trend followers that I mention regularly, is currently -4. It was +8 just 8-trading days ago. (I assigned +1 to bullish indicators and -1 to bearish indicators.) Except for big reversals, this isn’t a great indicator, but it does show recent market deterioration.
All in all, there appears to be a downside bias indicated for this week. I think we have further to fall before a run at new highs will occur – and I’m not predicting that the markets will make a run at new highs; it’s just a possibility.
The short-term Money Trend indicator was down, Tuesday, an indication that the S&P 500 is most likely to trend down in the near term.  The indicator was sharply down today which makes the signal stronger than it has been recently. 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 of 2110 on the S&P 500.
The 10-day moving average of the percentage of stocks advancing (NYSE) fell to 50.9% Tuesday. It was 55.4% Monday. (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 52.4%. A value above 50% generally indicates an up-trend.  The McClellan Oscillator (a Breadth measure) was down sharply – a bearish indicator in the short-term.
New-highs again outpaced New-lows. The spread (new-highs minus new-lows) was +70 Tuesday. (It was +136 Monday).   The 10-day moving average of the change in spread dropped to minus-12. In other words, over the last 10-days, on average; the spread has decreased by 12 each day. New-hi/new-low data remains down and is suggesting further declines ahead. Overall though, Market Internals remained neutral on the markets, because Breadth (% of stocks advancing) is greater than 50%.

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, VIX, Sentiment, Price & Volume indicators were all neutral.  The long-term NTSM indicator is HOLD.

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 11-months. That looks like a top to me. See “Why the Bull Market May be Dead” in my 14 December blog at…