CASE SHILLER HOME PRICES (MarketWatch)
“The S&P/Case-Shiller 20-city index rose a seasonally
adjusted 0.4% in October but in a clear sign of the housing market’s recent
struggles the increase in prices over the past 12 months slipped to the lowest
level in two years.” Story at…
CORRECTION UPDATE
This is day 66 of this correction. As of today’s close, the Index is down 15.8%
(19.8% max) from its prior high. There have been 21 new-lows so far. Outside of
the Financial Crisis, that has only been matched once in the Oct 2011
correction that bottomed at 19.4% over the last 10-years.
The average correction over the last 10-years (excluding
major crashes) lasted 52-days. The average drop over that period was 12%. The
longest correction in the last 10-years was the 19% drop in 2011. It took
108-days to complete, top to bottom.
MARKET REPORT / ANALYSIS
-Wednesday the S&P 500 jumped up about 5% to 2468.
-VIX fell about 16% to 30.41.
-The yield on the 10-year Treasury rose to 2.807%.
My daily sum of 17 Indicators improved from -5 to 0 (a
positive number is bullish; negatives are bearish) while the 10-day smoothed
version that negates the daily fluctuations improved from -44 to -43.
I made some “line-in-the-sand” comments Monday, i.e. we
see a bottom Monday or it is time to panic. We hoped to see a bottom Monday confirmed
by a bounce up Wednesday. If you didn’t read Monday’s blog, it may be worth reading
the Market Analysis section.
On Monday, I said:
“For now, let’s
take the optimistic side. That is, we
have at least made a short-term bottom and possibly a final bottom is not far
off…by historic measures, we should be nearing
an end…With the extreme new-low data, it appears that the selling should be
over today [Monday]… If we don’t see a bounce Wednesday, we need to
consider that this may be a major bear market with potential for a 50% loss,
top to bottom.”
The analysis/discussion for this stance was included in
Monday’s blog. Let me just add that in
addition to reasons noted Monday, a bottom Monday would be expected, when
combined with the other data, based on the Wall St adage, “never on Friday”. That means downturns rarely end on
Friday. Investors will stew over the
weekend and sell on Monday; the bottom is, more often than not, on Monday. That sets up turn-around Tuesday, or
Wednesday this time since Tuesday was Christmas. Today’s move up [on Wednesday]
looks like the end of the waterfall phase of the correction and the start of a
bounce.
Let’s look that the bounce in the 2011 selloff. After the bottom of the waterfall phase there
was a bounce of about 8% {(1210/1119)-1 = 8.1%}. That is a bit less than a 50%
retracement and that’s about what we’d expect this time. So, from yesterday’s
close of 2351 let’s add 8% and we expect a bounce to top out at around 2540 -
2560. From there, there will be considerable choppiness before we retest the
low, possibly a couple % lower/or higher than Monday’s low.
I may sell the bounce at about 2560 level. The point
would be to preserve capital if today was not the final bottom. A retest of the
low is a very high probability. This strategy is not without risk though since
identifying the bottom can sometimes be difficult, as we have seen.
We must be also prepared for a failed test at the 2350
level in a month or two – there are no guarantees this correction has made a final bottom. Additionally, we must also be prepared for a
sudden reversal that would indicate we haven’t made a low and the waterfall
phase is not over. That could happen when the Pros come back from their
vacation on 2 January or sooner.
BOTTOM LINE: For me, any significant drop below 2350
must be sold with to a point with no more than 30% invested in stocks.
Overall though, there were many clues that all suggest
today was an important bottom. Some were:
(1) Data extremes on Monday that suggested capitulation;
(2) a strong close today including a 5% gain with the
highs for the day at the close;
(3) a high-volume up-day today (96% up-volume - that is a
very rare, bullish event);
(4) and a turn to the bullish side on some of my key
indicators.
Only a retest at the 2350 level will tell us whether this
was THE bottom, but the bottom of the waterfall phase of a correction is usually
very close to the final bottom. It looks like the waterfall phase ended today.
MOMENTUM ANALYSIS:
(Momentum analysis is suspect in a selloff, so I‘d be
careful using momentum data for the time being – the only reason utilities are
highly ranked among ETFs is as an alternative to stocks during the correction.) The same is true for individual stocks in the
Dow 30.
TODAY’S RANKING OF
15 ETFs (Ranked Daily)
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%. In 2017 Technology (XLK) was ranked
in the top 3 Momentum Plays for 52% of all trading days in 2017 (if I counted
correctly.) XLK was up 35% on the year while the S&P 500 was up 18%.
*For additional background on the ETF ranking system see
NTSM Page at…
TODAY’S RANKING OF THE DOW 30 STOCKS (Ranked Daily)
The top ranked stock receives 100%. The rest are then
ranked based on their momentum relative to the leading stock.
*I rank the Dow 30 similarly to the ETF ranking system.
For more details, see NTSM Page at…
WEDNESDAY MARKET INTERNALS (NYSE DATA)
Market Internals improved
to 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).
I increased stock allocations to 60% invested in stocks
on 27 November. I bumped up stock investments to 65% on 19 December. Both
increases were made at technical bottoms or shortly thereafter. For me, fully
invested is a balanced 50% stock portfolio so this is higher. A successful test
at the bottom (2350, S&P 500) should be bought with a very high level of
stock allocation.
INTERMEDIATE / LONG-TERM INDICATOR
Wednesday, the VIX
and Volume indicators were negative; Price and Sentiment were neutral. Overall
this is a NEGATIVE / SELL indication. The concern is that the important
sell-signal was last October. The NTSM long-term system can give sell signals
near a bottom too. I am ignoring this indication for the time being.
