Monday, March 6, 2017

Factory Orders … Commentary from Jeffery Saut … The Most Broadly Overvalued Moment in History … Pop then Drop … Stock Market Analysis … Trading ETFs and ETF Ranking

“U.S. businesses increased their orders in January, although a key component that tracks business investment spending fell for the first time in four months. Factory orders rose 1.2 percent, led by a jump in demand for aircraft, the Commerce Department reported Monday.” Story at…
“…the Daily Sentiment Survey of Futures Traders shows a 92% Bulls reading. In the three times the reading has been that high since 2011 it has led to declines of 7% (2/11), 8% (5/13), and 3% (11/13). Also of note is that late last week the number of stocks making new 52-week highs on the NYSE collapsed by some 80%. Then there are the bullish sentiment figures that are at danger levels...All of this continues to leave us in a cautionary stance despite the fact that stance has been wrong for three weeks.” – Jeffery Saut. Commentary at… 
“There is a quick, knee-jerk response floating around these days, which asserts that ‘stocks are still cheap relative to interest rates.’ This argument is quite popular with investors who haven’t spent much time getting their hands dirty with historical data, satisfied to repeat verbal arguments they’ve heard elsewhere as a substitute for analysis…What investors may not realize is that the correlation between interest rates and earnings yields (as well as dividend yields) has been negative since 1998. Investors across history have not been consistent at all in treating stocks and bonds as closely competing substitutes.” – John Hussman, PhD.  Weekly Market Commentary at…
“Paulsen [Jim Paulsen, chief investment strategist at Wells Capital Management] foresees the S&P 500 as poised to roar to 2,600, then plunge to the 2,200 ballpark as rates rise and finally recover a bit to close out 2017 at 2,350.” Story at…
My cmt: Perhaps. But it sure looks like there is a pullback underway.  How far will it go? Sorry, but at this point we have only guesses. My guess is 5-6% off the top, but anyone can make a good argument for more or less.
“Most investors don’t start seriously saving for retirement until they are in their mid-40’s. This is because by the time they graduate college, land a job, get married, have kids and send them off to college, a real push toward saving for retirement is tough to do as incomes, while growing, haven’t reached their peak. This leaves most individuals with just 20 to 25 productive work years before retirement age to achieve investment goals.  This is where the problem is. There are periods in history, where returns over a 20-year period have been close to zero or even negative.” Commentary at…
My cmt: This is an interesting commentary on why investors saving for retirement must be concerned about corrections.
-Monday the S&P 500 was down about 0.33% to 2375.
-VIX rose about 3% to 11.24.
-The yield on the 10-year Treasury rose to 2.494%.
When I look at Rydex stock sentiment, I see that sentiment (measured as %-Bulls) has been rising since the recent all-time high. That indicates the dip-buyers are moving into Rydex Bull-funds and selling the Bear-funds.  Daily action in the S&P 500 may be confirming that trend, at least for the last 2-days.  On both Friday and Monday, we’ve seen a drop in the morning; buying the rest of the day; and then followed by a weak close as the smart money appears to be selling.  It looks bearish to me.  Further the chart guys pointed out a bearish “Island Reversal” pattern over the last 5-days since the gap up last week was not confirmed and was followed by a gap down today.  The gap down wasn’t strong so I am skeptical, as always, I am not really a chart guy. Here’s more on the subject of Island Reversals for those interested…
The new-hi/new-lo data deteriorated further today and the spread has turned negative with more new-lows than new-highs.  Breadth (measured as %-of stocks advancing) slipped below 50% on a 10-day basis, i.e. over the last 10-days there have been more stocks declining than advancing.
The sum of 16-indicators slipped from zero (neutral) Friday to -5 Monday. Money Trend is still pointing down. The Pros are still selling based on Late-day action that has been trending down on average over the last month, and that trend continued today.
Overall there has been a bearish bent to the data recently and it turned more bearish today. 
The top ranked ETF receives 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 4-months from Oct thru mid-February 2016, the number 1 ranked Financials (XLF) outperformed the S&P 500 by nearly 20%.
*For additional background on the ETF ranking system see NTSM Page at…
I would avoid iEAFE (Europe and Far East); currently its 120-dMA is declining.
Recommended ETF Portfolio of top 3:
1. Financial Select Sector SPDR (XLF)
2. iShares U.S. Aerospace & Defense (ITA)
3. Technology Select Sector SPDR ETF (XLK)
XLI was slightly ahead of the XLK, but not enough to change the recommendation.  Further, if there is a correction, XLI is likely to be among the worst performers.
I have not yet established a position based on the ETF Ranking; I am waiting for a better entry point.
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.
 “There are two kinds of forecasters. Those who don’t know, and those who don’t know they don’t know.”- John Kenneth Galbraith.
Market Internals declined 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). 
Monday, Price was positive; Sentiment Volume & VIX indicators were neutral.
I reduced stock allocation to 25% stocks in the S&P 500 Index fund (C-Fund) Wednesday, 1 March 2017 in my long-term accounts. Remainder is 75% G-Fund (Government securities). This is a conservative retiree allocation based mostly on short-term signals.