Tuesday, October 11, 2016

Alcoa … Never Say Never … Recession Indicators … Big Drop Coming for the Markets? … Stock Market Analysis

ALCOA (Marketwatch)
“The third-quarter earnings season got off to a grim start Tuesday with Alcoa Inc. reporting weaker-than-expected numbers and the pace of sales and profit warnings from others continuing apace. Alcoa missed profit and sales estimates and said revenue fell at its fastest-growing segment, which it’s preparing to spin off. The stock tumbled 11.4%...” Story at…

-“In the investment world when you hear ‘never,’ as in rates are ‘never’ going up, it’s probably about to happen.” –Jeff Gundlach
-“It would only take a 100 bp rise in Treasury yields to trigger the worst price decline in bonds since the 1981 crash.” –Ray Dalio
“If interest rates were to rise again, in defiance of all of the “never” calls we have seen recently, it would likely mean equity valuations would fall at the same time.” -Jesse Felder commentary on Bonds at…

THE BIG FOUR RECESSION INDICATORS (Advisor Perspectives)
“Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions...There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process...” (1) Nonfarm Employment (2) Industrial Production (3) Real Retail Sales (4) Real Personal Income (excluding Transfer Receipts).
My cmt: The above chart shows that the average of the Big-4” is already below the level at the start of the 2007 recession. Analysis and additional charts at…
My cmt: My comparison of the cyclical industrial stocks contained in the XLI ETF vs the S&P 500 shows that cyclicals are underperforming the S&P 500.  This is cautionary for the market.  The underperformance is not extreme, so investors are not worried about recession, however, underperformance frequently shows up when the markets are under stress.

BIG DROP COMING FOR THE S&P 500? (Marketwatch)
“The S&P 500 has been trading within a “symmetrical triangle” on a number of time scales, as the index traced out a pattern of rising lows and falling highs. Since the upper and lower boundary lines are narrowing to a point, it’s just a matter of time before the S&P 500 breaks above or below one of them…“We believe the current formation is a setup for a move lower,” Worth said. [Carter Worth, technical analyst at research firm Cornerstone Macro]
 
Commentary at…
My cmt: Carter Worth said the move would be down and big; but many technicians see this pattern as a continuation pattern.  Since the trend is up that would indicate an upward breakout followed by new-highs. Generally, my indicators are sending cautionary messages. Carter may be right, but it may take a while for this to play out.

MARKET REPORT / ANALYSIS        
-Tuesday the S&P 500 was down about 1.2% to 2137 at the close.
-VIX rose about 15% to 15.36.
-The yield on the 10-year Treasury rose to 1.76%. (Curiously, investors weren’t buying treasuries as a safe haven Tuesday. A rising yield suggests bond-holders were selling.)
The size of the down-move Tuesday was statistically significant and that means that the price-volume move exceeded my statistical parameters and, in about 60% of the time, that leads to an up-day the next day (Wednesday).
Volume was down again, about 5% below the monthly average so it would appear that investors remain wary of this market in the short-term – they aren’t even sure about the selloff today. Given the market was down nearly 1.6% at one point I would have expected more volume.
We also saw the S&P 500 drop to its longer-term, lower trend-line and bounce up from there.  The late-day action was positive too. The Index is near its lower Bollinger Band. All are bullish signs, at least for the short term.
There were bearish indications too:
My sum of 16-daily indicators went from +2 to minus-5. This is a volatile series so I keep a 10-day sum and it dropped from +1 to -9 (not a moving average). Market Internals reversed from all-bullish to all-bearish overall and that’s a somewhat rare event to see them reverse in one day.
In spite of the bearish signs, until the Index breaks below its lower trend line I don’t know where the market is going in the short-term.  There are too many mixed signals. My guess is “up” because the lower trend-line held on a statistically significant down-day and late-day action was bullish.
Long-term, I’m fully invested at 50% in stocks (a conservative-retiree allocation) – that’s hold my nose bullish.

TRADING PORTFOLIO
Long Volatility ETF (VXX): Established 5 Aug. SOLD 15 Sep. Gain: +6.6%.
2x S&P 500 ETF (SSO): Established 22 Sep. SOLD 7 Oct. Loss: -1.5%.
2x Short S&P 500 (SDS): Established 7 Oct. SOLD 10 Oct. Loss: -1.4%.
I was tempted to go long, but decided against it due to “Money-Trend” and my “Sum-of-all-indicators” that are both trending down.

TUESDAY MARKET INTERNALS (NYSE DATA)
-10-day moving average of the percentage of stocks advancing (NYSE): 45.8%. (50.4% yesterday.) A number below 50% is usually BEARISH for the markets short-term.
-150-day moving average of advancing stocks: 53.6%. (A value above 50% indicates an up-trend.)
-McClellan Oscillator: declined from -16 to -53 (percentage calculation method).
-New-highs minus new-lows: Minus-6 (It was +122 yesterday.)
-10-day moving average of the change in spread: -7. In other words, over the last 10-days, on average, the spread has decreased by 7 each day.
Market Internals switched to Negative on the market.
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). 
LONG TERM INDICATOR
Tuesday the Price indicator is positive. Volume, VIX & Sentiment indicators were neutral. Overall the long-term indicator remained HOLD.
MY INVESTED STOCK POSITION:
TSP (RETIREMENT ACCOUNT – GOV EMPLOYEES) ALLOCATION
I increased stock allocation to 50% stocks in the S&P 500 Index fund (C-Fund) Friday, 23 Sep in my long-term accounts based on a number of indicators. Remainder is 50% G-Fund. This is a conservative retiree allocation.