Tuesday, April 18, 2017

Housing … Industrial Production … Stock Market Analysis … Trading ETFs and ETF Ranking

HOUSING (Bloomberg)
“New-home construction in the U.S. cooled in March to a four-month low as starts of single-family properties settled back from the strongest pace in almost a decade, Commerce Department data showed Tuesday…there’s evidence of a strong outlook for the housing industry as homebuilder sentiment holds near the strongest level in more than a decade…” Story at
“Manufacturing output lost momentum in March, dragged down by weakness in the auto sector, according to Federal Reserve data released Tuesday. Factory output fell 0.4%, the first decline since last August…” Story at…
My cmt: Including Utilities output (as is normal for this stat) Industrial Production rose. It seems odd to include Utilities output (the result of cold weather) in the Industrial Production data, but that’s what they do.
-Tuesday the S&P 500 dipped about 0.3% to 2342.
-VIX dropped about 2% to 14.42 at the close.
-The yield on the 10-year Treasury dropped to 2.176%. (Bond investors are concerned. That’s the lowest yield since November.)
SENTIMENT. In addition to bearish issues noted in recent blog posts, Sentiment has once again reached extreme levels, currently at 81%-Bulls. I measure Sentiment as %-Bulls (Bulls/{bulls+bears}) based on the amounts invested in selected Rydex/Guggenheim mutual funds. On a standard deviation basis, that value matches extremes seen during the dot.com crash. It also reached similar extreme levels back in May-June 2015 after the Top that preceded a 12% correction. Sentiment tends to peak after a top as dip buyers move in. This isn’t by itself a great indicator since sentiment can remain elevated for some time, but it’s another reminder that caution is warranted. Extreme bullish sentiment is a contrarian indicator since the masses are usually wrong.
VIX has also been rising so it is possible that the long-term NTSM indicator will turn bearish soon.  Based on economic data, a recession seems unlikely in the near term, but it may still make sense to take some money off the table to reduce risk should a sell signal occur (or sooner if risk tolerance is low).
The 5-10-20 Timer has been “’sell” for about 2-weeks. It is simplified timing system that issues a sell when the 5-dEMA (exponential moving average) drops below the 10-dEMA and the 20-dEMA. An exponential moving average weights the moving average more on recent price data rather than a regular moving average that uses an equal weighting.
As far as a near-term correction, the jury is still out.  The Index is only down 2% although it has been 6-weeks since the markets made new highs.
Overall I am still somewhat bearish. If the Index can break above its upper descending trend-line, I’ll definitely reconsider.
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. (XLU was the only ETF that was up today, in the ones that I track.) The fact that XLU is outperforming most ETFs is an indication that the Pros are positioning for a correction. 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.
1. Emerging Markets (SCHE) was the top ranked ETF. Utilities Select Sector SPDR ETF (XLU) was second. (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 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). 
Tuesday, Sentiment was sell; Price, 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 based mostly on low volume at the test of the 50-dMA.
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.