Wednesday, April 19, 2017

Fed Beige Book … Crude Inventories … Stock Market Analysis … Trading ETFs and ETF Ranking

FED BEIGE BOOK (Federal Reserve)
“Economic activity increased in each of the twelve Federal Reserve Districts between mid-February and the end of March, with the pace of expansion equally split between modest and moderate. In addition, the pickup was evident to varying degrees across economic sectors. Manufacturing continued to expand at a modest to moderate pace, although growth in freight shipments slowed slightly. Consumer spending varied as reports of stronger light vehicle sales were accompanied by somewhat softer readings in non-auto retail spending.” Full Beige Book at…
“U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.0 million barrels from the previous week. At 532.3 million barrels, U.S. crude oil inventories are near the upper limit of the average range for this time of year.” Story at… 
-Wednesday the S&P 500 dipped about 0.2% to 2338.  (The small drop doesn’t indicate what a bad day it was – up early; then down all day.)
-VIX rose about 4% to 14.93 at the close.
-The yield on the 10-year Treasury rose to 2.216%.
What an ugly day.  The S&P 500 opened higher in the Morning, peaked around 10AM and then stair stepped down the rest of the day with only a slight recovery in the last 5-minutes of the day. With the Index below its 50-dMA, today’s price action was particularly worrisome. It was a classic 1-day example of the Hayes Indicator – buying in the first half-hour (dumb money) and selling all afternoon (smart money).
RSI is 38 as of today’s close.  That suggests we are closer to a bottom than top.
The S&P 500 is close to its lower Bollinger Band, but this is hard to interpret now since Bollinger Bands are very close together. Bollinger Bands are limit-lines 2-standard deviations above and below the Index. A Bollinger Band Squeeze occurs when the upper and lower bands get closer than they have in the last 6-months. They are almost indicating a squeeze now.  When that occurs the ensuing breakout can be strong.  In theory, the breakout can be up or down. With RSI close to a buy signal, perhaps this market move will surprise everyone and breakout to the upside.
My suspicion is that we will see further down moves, but perhaps not too much further.  
Sentiment climbed to an extreme of 82%-Bulls on a 5-day basis. I measure Sentiment as %-Bulls (Bulls/{bulls+bears}) based on the amounts invested in selected Rydex/Guggenheim mutual funds. Sentiment is not a good indicator by itself though, since it can remain elevated for some time. This is another sign of dip-buying.
As far as a near-term correction, the jury is still out.  The Index is only down 2.4% although it has been 6-weeks since the markets made new highs.
Overall I am getting a little more bearish, but there are bullish signs. It seems odd to me that the Index has broken its lower trend line and broken the 50-dMA, but the market reaction is almost nonexistent.  I guess we need to consider that may be a bullish sign, but extreme complacency can often be a recipe for trouble. 
Bottom line: The Index needs to break above its upper descending trend-line shown here in Red (or successfully retest recent lows) before we can get bullish.
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 iEFA and XLE their 120-dMAs are now trending down. In my back testing it was apparent that during corrections flight to safety meant that XLU tended to outperform.
1. Utilities Select Sector SPDR ETF (XLU) moved back into first.
The fact that XLU is outperforming most ETFs is an indication that the Pros are positioning for a correction. (One might also argue that it’s in response to falling interest rates that makes utilities more attractive.) Another sign of market stress is that dispersion between ETFs drops; and leadership changes frequently. Rather than try to chase the hottest ETF, I suggest exiting ETF trading positions, or just remaining with the recent recommendations (XLK) for long-term investors. (I am holding XLK.)
SHORT-TERM TRADING PORTFOLIO - 2017 (Small-% of the total portfolio)
Rydex Inverse 2x Nasdaq 100. Established 4/13/2017.
VXX. Established 4/13/2017.
This pullback could be over quickly (or already) so these positions will not be held long if the market closes above the upper downtrend line.
Market Internals remained Neutral 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). 
Wednesday, Sentiment was negative; Price was positive; Volume & VIX indicators were neutral.
I increased stock allocation to 50% stocks in the S&P 500 Index fund (C-Fund) Friday, 24 March 2017 in my long-term accounts, based on short-term indicators. Remainder is 50% G-Fund (Government securities). This is a conservative retiree allocation..
There have been no long-term Buy or Sell signals in a while.  The last signal was a BUY on 23 February and the last actionable signal was a BUY (from a prior sell) on 15 November 2016.