Tuesday, March 14, 2017

Producer Price Index … Brace for a Pullback … Three Steps and a Stumble … Stock Market Analysis … Trading ETFs and ETF Ranking

“U.S. producer prices increased more than expected in February as the cost of services such as hotel accommodation pushed higher and the year-on-year gain was the largest in nearly five years, pointing to steadily rising inflation pressures…The Labor Department said on Tuesday that its producer price
index for final demand increased 0.3 percent last month…” Story at…
My cmt: Core PPI (excluding food and energy – we don’t need them right?) increased 0.3% in February.
"While we do not expect the current bull market to expire imminently, a more aggressive Fed likely to hike on 3/15 even as economic data and growth proxies such as oil and high-yield bonds are softening, and the potential for fund flows to slow down nearer to the US tax deadline of April [18th] could cause a…broad market pullback [as] with other such corrections of the past several years, toward the 200-day moving average near 2,192" – Julian Emanuel, UBS Exec Dir US Equity and Derivative Strategy. Story at…
My cmt: A break to the 200-dMA (as of Tuesday) would be about 8% off the all-time high of 2196.
I’ve seen a couple of articles on the odd complacency that has given us more than 100-days without a 1%-drop in price on the S&P 500.  Few have shown what it might mean.  Here you go…

Chart and commentary from Financial Sense at…
The last time we saw this level of complacency was just before the peak of April 2007 that preceded the Housing Bubble crash. Here’s what the author of this piece wrote: “”I’m not calling a top here, just a retrace. The highs haven’t been made on this market yet. It has some more room to run. But expect things to start getting a lot more bumpy…” – Alex Barrow.
“A rule predicting that stock and bond prices will fall following three increases in the discount rate by the Federal Reserve. This is a result of the increased costs of  borrowing for companies and the increased attractiveness of money market funds  and CDs over stocks and bonds as a result of the higher interest rates.” From… http://www.nasdaq.com/investing/glossary/t/three-steps-and-a-stumble-rule
My cmt: I read a piece on CNBC about why the “3-steps and a stumble” rule wasn’t a concern now even though this will be the third hike. It described the strong economy, small hikes, blah, blah, blah, etc. It missed the real point though.
The actual rule states that the three rate hikes must be in succession. And this hike Wednesday (assuming they do follow through) would not be the third in succession.
-Tuesday the S&P 500 was down about 0.3% to  2365.
-VIX rose about 8% to 12.30.
-The yield on the 10-year Treasury slipped to 2.601%.
Investors remain cautious and volume was again low today, roughly 10% below the monthly average. As noted previously, the markets are likely to remain in a holding pattern until after the FED meeting ends on Wednesday. 
Money Trend remains pointing down, but not by much. The SUM of 16-indicators dropped further to -10. Market internals gave up gains and again turned negative.
As previously noted, the Cyclical Industrial stocks (ETF, XLI) are underperforming the S&P 500 on almost every time frame. (XLI was down nearly 1% today.) That shows a high level of concern by investors.  Utilities continue to outperform the Index too.  These are additional measures of bearish dispersion within the market.
There aren’t too many bullish indicators. The old standby Advance Decline Ratio is oversold, but it could remain that way for some time. There has been some late day buying, but the amount has been very small and isn’t garnering confidence yet.
I’ve revised my preliminary number for using the 3-highest ranked ETFs rather than just the top ranked fund.  I had previously indicated that there was a 61% return in 2016 investing in the top 3-ETFs.  It didn’t seem likely and I had cautioned at the time it was “preliminary”. It turns out I made a rookie mistake. Let’s illustrate my mistake this way. In 2016 the S&P 500 gained about 10%. Suppose there were 3-ETFs in my ranking system that were ranked in the top 3 all year and each ETF earned 20%. I added the three returns to get 60%. Dumb. Since in a 3-way system the amount invested in each fund would be one third of the amount invested in the S&P 500, my returns in a system using 3-funds would be (20%+20%+20%) divided by 3 – not added (at least in my apples-to-apples comparison of returns). So the 2016 simulated return using 3-funds was 20%, not 61% as previously reported. It still handily beat the Index for 2016 based on this simulation. Revisions at…
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)
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 deteriorated 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). 
Tuesday, Price was positive; Sentiment was negative (Bullishness is at an extreme.); 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.