Monday, May 8, 2017

Do Tax cuts Pay for themselves? … Market Analysis … Trading ETFs and ETF Ranking

“Forty-three years after economist Arthur Laffer sketched a pictorial representation of individuals’ response to changes in income tax rates, economists still can’t agree if tax cuts pay for themselves: entirely, in part, or not at all. In a capitalist system, a tax rate of 0% or a tax rate of 100% will yield no revenue for the government: in the first instance, because there is no tax levied on labor income; in the second, because there is no labor income to tax because most of us would refuse to work without compensation…
…In a recent paper, Veronique de Rugy and Matthew Mitchell, senior research fellows at George Mason University’s Mercatus Center, reviewed the financial literature and found no consensus on the spending multiplier [for Government spending and its impact on the economy]. The estimates of the effect of a $1 increase in government spending ranged from +3.7 (implying $2.7 of additional private-sector growth) to -2.88 (a displacement of $3.88 of economic activity.)” Story at…
My cmt: If tax cuts pay for themselves, why have we been running a deficit since Ronald Reagan made huge tax cuts? Further, GHW Bush and Bill Clinton combined (in a little over 4-years) to produce one of the largest tax hikes in history.  That was followed by the one of the biggest booms in history during the dot-com era. One wonders whether taxes matter. The answer is they probably matter a lot; it’s just hard to see in the short run. Over the longer term the data isn’t clear., but there are red flags out there.
Government spending is now 35% of GDP (Gross Domestic Product). That’s up from 20% of GDP in 1950. GDP growth was 4% in 1950; it’s below 2 now. This is the first time in history that there are more businesses failing than are being started.
Are tax cuts good or bad? … ask an economist. Personally I hate to see deficits continuing to climb.
-Monday the S&P 500 was unchanged at 2399. 
-VIX fell about 8% to 9.77 at the close.
-The yield on the 10-year Treasury rose slightly to 2.388%.  
RSI, (SMA-14)
Relative Strength measures the size of up-moves vs. all-moves on a 14-day moving average basis and presents the result as a percentile. For example if the RSI is 85, it means that the size of up-moves are in the 85th percentile when compared to all moves over the 14-day period.  If ALL moves had been up, RSI would be 100 – a definite short term sell indicator. For my purposes, 30 is oversold (suggesting a turn-around to the upside) and 80 is overbought. If the up-moves and down-moves are equal in size over the 14-day period, RSI would be 50.
RSI hit 79 today. 80 is “overbought”; that’s a concern for the bulls, at least in the short run. My Sum of 17–indicators dipped from 6 to 2 on the day.  That’s not a big deal since this value jumps around a lot.  The 10-day value is down, though, so we may be seeing a beginning of a short-term slowdown (or not – it’s too early to say). Market Internals have deteriorated and that’s worth watching.
Long term, VIX below 10 is a worry.  That has happened before and it presaged major tops. It could be signaling a major bear market, though it may be 2018 before THE TOP is in. It really depends on the Fed and how the markets react to Fed rate hikes.
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 XLE; its 120-day moving average is falling.
No.1 remains Technology (XLK). I continue to hold the XLK.
SHORT-TERM TRADING PORTFOLIO - 2017 (Small-% of the total portfolio)
No positions. Long is the call now though, as it has been since the Index closed above the 50-dMA. The call may be neutral soon.
Market Internals are still neutral on the market, but they deteriorated today.
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 was negative; 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, but I consider it fully invested.
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.