Monday, February 13, 2017

FACTSET Excerpt … Weak Rally … Triumph of Hope over Experience – Felder Report … Stock Market Analysis … Trading ETFs and ETF Ranking

-“For Q4 2016, the blended earnings growth rate for the S&P 500 is 5.0%. The fourth quarter will mark the first time the index has seen year-over-year growth in earnings for two consecutive quarters since Q4 2014 and Q1 2015…
…In terms of revenues, 52% of companies have reported actual sales above estimated sales and 48% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is equal to the 1- year average (52%) but below the 5-year average (53%).” Earnings Insight at…
THIS IS A WEAK RALLY (Raymond James)
“Stocks have rallied strongly over the past three months, but there have been few breadth thrusts. The S&P 500 has enjoyed a 65-day, 10% gain to new highs, but there have been only two days during that stretch that would qualify as a thrust. That's the weakest such rally since 1999. Our models continue to suggest that it is unlikely this is going to be the beginning of a whole new up leg for the S&P 500. In fact, our models telegraph that the maximum upside from here for the SPX is 2330. That said, they also suggest no big downside collapse either.” – Jefery Saut.
“…when risk assets are pricing in economic miracles as they are today, any outcome that falls short of outright economic utopia is cause for falling prices. But if there’s one thing I’ve learned over the past couple of decades it’s that once investors have fallen in love with an asset bubble wild horses couldn’t drag them away from it, that is until they inevitably feel the pain of heartbreak once again.” – Jesse Felder. Commentary at…
I’ve gotten a number of requests recently, but I’m going to keep writing this blog anyway…sorry, it’s an old joke. 
The requests were to add additional ETFs to the mix of 11-ETFs. So today, we add MATERIALS SELECT SECTOR ETF (XLB); UTILITIES SELECT SECTOR ETF (XLU); iShares Core MSCI EAFE (IEFA); and SCHWAB EMERGING MRKT ETF (SCHE). 
This rounds out the mix of ETFs by adding Materials, Utilities, EAFE (Europe and Far East stock Index) and Emerging Markets. In addition, rather than just reporting the ranked order of the 15-ETFs, I’ll present a daily bar chart showing the relative strength of each one compared to the top ranked ETF. Here’s Monday’s chart:
The top ranked ETF (still XLF, Financials) will receive a 100%. The rest are then ranked based on their momentum relative to the leading ETF.  While momentum isn’t stock performance per se, momentum is closely related to stock performance. For example, over the last 6-months (Oct thru mid-February 2016), Financials (XLF) have outperformed the S&P 500 by nearly 20%.
My inclination is to invest in the 3 top-ranked ETFs (top 20% of the 15-ETFs). Investing in the top 3 would have captured the entire XLF run-up; XLF was ranked #2 on 27 October. It wasn’t ranked #1 until 10 November and by then half of the outperformance was in the books. So if one only invests in the #1 ranked ETF, a lot may be missed.
Preliminary Back-testing of a system based on owning the top 3-ETFs throughout the year follows:
2016: 61% Gain (S&P 500 gain of +11%)
2015: 12% Gain (S&P 500 loss of 1%)
2014: 41% Gain (S&P 500 gain of +11%)
(It’s “preliminary” because I need to check the numbers after some time passes.)
In practice, these returns may not be possible since it would involve a lot of trading in and out of the current top 3-ranked ETFs; further, the assumption is that there is an equal weight to all 3-ETFs.  On the other hand, the Technology ETF (XLK) was the top ranked ETF at the start of 2016; simply buying and holding XLK would for all of 2016 have produced a 22% gain. Buying Financial ETF (XLK) in early October when it became a top-3 ranked ETF would have produced 17% gain thru the end of the year. The Utilities ETF (XLU) produced a 14% gain when it was ranked in the top-3 at the beginning of the year before dropping out of the top 3 in mid-March.  While I don’t expect to make these extreme gains in the future, I think beating the S&P 500 is doable.
*As noted previously, for additional background on the ETF ranking system see NTSM Page at…
CURRENT RANKING OF 15 ETFs (Ranked Daily)*
#1 RANK for the past 69-days: Financial Select Sector SPDR ETF (XLF).
Here’s today’s tabular result of the ETF Ranking.
I would avoid IBB, XLU, iEAFE and XLV; currently their 120-dMAs are declining.
-Monday the S&P 500 was up about 0.5% to 2328.
-VIX rose about 2% to 11.07 and that’s a lot on a big up-day. (Perhaps the Options Boys are beginning to get worried.)
-The yield on the 10-year Treasury rose to 2.43%. (Since the yield is an inverse to price, this means investors were selling Treasuries.)
Bollinger Bands are indicating overbought; RSI is nearly overbought; Advance Decline ratio is overbought; Sentiment is at an extreme high; Volatility is non-existent; Monday was another statistically significant up-day; Closing Tick remains at overly bullish extremes; Smart Money is selling…Holy Trump-Rally Batman, will it ever end?
I’m tired of stating the facts on market-based on indicators that have signaled trouble in the past.  The Market is overextended, but NEVER MIND; stocks appear that they will keep going up forever.
SHORT-TERM TRADING PORTFOLIO - 2017 (Small-% of the total portfolio)
Rydex 2x Short S&P 500 (RYTPX): Established 6 Dec.
2x Short S&P 500 (SDS): Established 16 Dec.
Long Volatility ETN (VXX): Established 6 Jan 2017.  
Now I wish I had tightened trading rules sooner. I am underwater again!
-“In a bull market, you can only be long or neutral.” – D. Gartman
-“The best policy is to avoid shorting unless a major bear market is underway and downside momentum has been thoroughly established. Even then, your timing must sometimes be perfect. In a bull market the trend is truly your friend, and trading against the grain is usually a fool's errand.” – Clif Droke. Commentary at…
OK, OK. I’ll be more prudent next time. But wait, the market is still going up.  AAaaaagghhhhh! Get the straight jacket ready; I’ll need one soon.
With more ETFs to track, I am reducing emphasis on reporting detailed daily market internals. This will free up some time to get the ETF Bar Chart together.
Market Internals remained Positive 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). 
Monday, Sentiment was negative.  VIX & Volume indicators were neutral. The Price indicator was positive.
I increased stock allocation to 50% stocks in the S&P 500 Index fund (C-Fund) Friday, 23 Sep 2016 in my long-term accounts. Remainder is 50% G-Fund. This is a conservative retiree allocation.