VIX isn’t confirming the SELL

Volume was down about 40% below normal today.  Many traders must have stayed home due to the Veterans Day holiday, so I won’t pay too much attention to today’s data.

MARKET RECAP                                                                               

Monday the S&P 500 finished up a whisker, but basically flat at 1380 (rounded).  VIX fell more than 10% Monday (and that’s a lot) to 16.68.  

VIX has been confounding traders for a while and even more so today.  A falling VIX would ordinarily indicate a rising stock market. 

I must note here that maybe the VIX is correct and this “correction” will turn out to be a big fake out.  I don’t think so at this point, but realistically, no system is right all the time.  Tyler Durden at ZEROHEDGE may have the answer.

IS VIX PRICING IN THE FISCAL CLIFF?

“Much is being made of the drop in VIX today - with some suggesting it indicates confidence that investors believe the fiscal cliff resolution is closer. This could not be further from the truth. Investors had bought short-term VIX across the election and are unwinding that protection in the November futures contract but at the same, they are actively bidding for protection across the event-horizon of the fiscal cliff - out to Feb 2013. The options market is absolutely not pricing in a fiscal cliff resolution and in fact is just beginning to price in the expected rise in realized volatility as the market becomes increasingly headline-sensitive once again.”  Backup, Charts and more at…
http://www.zerohedge.com/news/2012-11-12/vix-pricing-fiscal-cliff

NTSM

The NTSM analysis switched back to SELL Monday.

Breadth, measured as the percentage of stocks advancing, declined today.  New-highs, new-lows also declined.   As I noted in the last blog, market internals are continuing to trend down and that indicates that more selling is probably coming.

MY INVESTED POSITION

Based on the SELL signal, 7 November 2012, I moved out of the stock market.  Because of the extreme negativity I have noted from Hussman and others, I am currently invested in a range of near 15% invested in stocks.  I also took short positions on the morning of the 8^th that make me currently net short the S&P 500.  (I am using Guggenheim (formerly RYDEX) funds and 2x Short ETF, SDS.  Those are dangerously volatile so I don’t recommend them unless you have a BIG tolerance for risk.  Also, if they are held too long they may not perform well.

As I have noted before, others may choose to keep more invested in stocks without too much damage to their portfolio if the invested % is low.  For example, if one were to keep 30% invested in stocks and the market crashed by 50%, the loss to the portfolio would only be 15%.  If that is your plan, keep the low-beta stocks (those with lower P/E ratios) such as utilities, consumer staples, or value oriented mutual funds.  Sell technology.  Keeping 30% invested in stocks is actually a pretty good strategy since it hedges the bet if I am wrong and the market continues up after a sell signal. 

To be clear I am not predicting a crash; but there seems to be a lot of risk now.

Correction is Underway

The correction has begun.  The S&P 500 is now about 6% below its recent high of 1466 on 14 September, 38-trading days ago; but as the article below indicates, some are just figuring it out.

REUTERS – “Wall Street Week Ahead: "Fiscal cliff" blues may lead to correction”

“The benchmark Standard & Poor's 500 closed below its 200-day moving average - a measure of the market's long-term trend - on Thursday for the first time in five months, and ended below it again on Friday. More than half of the Dow components are trading below key technical levels…."I don't think you have to panic here, but I think you really want to be looking for the market to move lower for the next couple of months," said Frank Gretz, market analyst and technician for Wellington Shields & Co., a brokerage in New York.”  Full story at…
http://finance.yahoo.com/news/wall-street-week-ahead-fiscal-002515955.html

MARKET RECAP                                                                               

Friday the S&P 500 rose 0.2% to 1380 (rounded) and VIX rose 0.4% to 18.57.  

Again, again, again…{creeps at this petty pace…(sorry Macbeth)} there was late-day selling – again, again, and again, negative for the markets.

NTSM

The NTSM analysis was HOLD Friday, but it was so close to sell it’s hardly worth calling it a HOLD. 

That’s not unusual though.  Typically the NTMS analysis switches to HOLD a day or two after a sell signal when the market undergoes its typical bounce.  If it follows a normal pattern, selling will resume next week, and NTSM will switch back to sell.

Breadth, measured as the %- of stocks advancing, showed some improvement today on 10 and 20-day moving averages, but not on longer term measures.

New-highs vs. new lows were falling over 10-day, 20-day, and 40-day moving averages; even today’s spread (new-highs minus new-lows) was worse than yesterday and that is on a day when the S&P 500 advanced.  The bottom line?  Market internals are not looking good and further selling is coming.

MY INVESTED POSITION

Based on the SELL signal, 7 November 2012, I moved out of the stock market.  Because of the extreme negativity I have noted from Hussman and others, I am currently invested in a range of near 15% invested in stocks.  I also took short positions on the morning of the 8^th that make me currently net short the S&P 500.  (I am using Guggenheim (formerly RYDEX) funds and 2x Short ETF, SDS.  Those are dangerously volatile so I don’t recommend them unless you have a BIG tolerance for risk.  Also, if they are held too long they may not perform well.

REPEATING STRATEGY: As I have noted before, others may choose to keep more invested in stocks without too much damage to their portfolio if the invested % is low.  For example, if one were to keep 30% invested in stocks and the market crashed by 50%, the loss to the portfolio would only be 15%.  If that is your plan, keep the low-beta stocks (those with lower P/E ratios) such as utilities, consumer staples, or value oriented mutual funds.  Sell technology.  Keeping 30% invested in stocks is actually a pretty good strategy since it hedges the bet if the market continues up after a sell signal. 

To be clear I am not predicting a crash; but there seems to be a lot of risk now.

Recession Warning…NTSM “SELL” again

If you saw any financial TV yesterday or today, I am sure you heard a lot of discussion about the election and fiscal cliff, both supposedly contributing to the sell-off yesterday.  I don’t think it’s about the election or the Fiscal Cliff.  I think the real issue is earnings.  Reporting for the recent quarter is coming to a close and they have been bad

Here are two related articles.

OBAMA IS NOT TO BLAME FOR THE CORRECTION

by Michael A. Gayed, CFA, Chief investment strategist and co-portfolio manager at Pension Partners, LLC.
“The hard selloff in equities Wednesday seems to have taken many by surprise, with various pundits arguing that the drop was directly because of Obama winning the elections...However, as followers of my writings know, deterioration has been in place within markets ever since QE3. Our ATAC models used for managing our mutual fund and separate accounts have been warning of a harsh environment for equities, keeping us in bonds despite every “nouveau bull” in the world believing stocks could not go down in the face of the "Bernanke Put"...Take a look...at the price ratio of the DB Commodities Tracking Index Fund relative to the S&P 500...price has been warning of a correction and deflation pulse for about six weeks now BEFORE the elections. So stop listening to talking heads, stop listening to pundits, and stop listening to spin. Instead, do yourself a favor, and listen to price."  Full story at...
http://www.marketwatch.com/story/obama-is-not-to-blame-for-the-correction-2012-11-08?link=mw_story_kiosk

RECESSION WARNING
from The Reformed Broker (Joshua Brown)
"Today I'd like to talk about the relationship between earnings recessions and economic recessions. Because we're beginning to have the former, which typically leads to or coincides with the latter. Don't get mad, that's what the data says.
This is important because stocks should not continue to climb under these circumstances. Note that I said should not, not will not.

Seth Klarman of the Baupost Group would agree with me. Here's what he told his investors in a letter the other day (via Distressed Debt Investing):
"The overall market environment seems increasingly risky to us, as securities prices are rising despite weak and generally deteriorating global fundamentals. U.S corporate earnings are expected to be lower this quarter. Higher markets in the face of eroding fundamentals can be a toxic combination. A market rising for non-fundamental reasons (i.e., QE and ECB bond repurchases) is always one that demands a healthy dose of skepticism." Full blog at ..

http://www.thereformedbroker.com/2012/11/07/fire-in-the-disco/

FROM FACTSET (www.factset.com/earningsinsight)

“Downward Estimate Revisions…For the fourth quarter, 56 of the 74 companies (or 76%) that have issued EPS guidance have guided earnings below analyst expectations. If 76% is the final percentage for the quarter, it will mark the highest percentage of negative guidance for a quarter since FactSet began tracking guidance in 2006.”

“Earnings Growth: The blended earnings growth rate for Q3 2012 is -0.5%. If -0.5% is the final growth rate for the quarter, it will mark the end of the eleven-quarter streak of earnings growth for the index.”

I rest my case.

MARKET RECAP                                                                               

Thursday the S&P 500 fell 1.2% to 1395 (rounded) and VIX fell 3% to 18.49.  

Repeating yesterday’s comment (it’s true for today, again): Market internals (breadth and new-highs/new-lows) remain neutral to negative. 

Again, there was late-day selling – all negative for the markets.

MARKET TECHNICALS

Thursday, the S&P 500 slightly broke its 200-dMA by about 0.2%, but in my opinion, that fact alone is irrelevant.  As I noted yesterday, the S&P 500 is now in a downtrend.  That is based on the significant break of the lower trend line on the 3-month chart.    
 
NTSM
The NTSM analysis was SELL again Thursday.

I always like to see continuation of signals when there has been a change in direction since a 1-day signal might be quickly reversed.  Don’t get me wrong, the market can always reverse, but it is less likely if I see a series of signals that agree. 

VIX fell today and that is counter to the expected direction.  VIX should be going up signaling higher volatility.  One reason it isn’t, might be that the Options-boys just haven’t bought into the idea that the Market is correcting.  They are betting on future prices and apparently they don’t expect the prices to be too much different in 30-days.  More on the subject…

From http://en.wikipedia.org/wiki/File:Vix.png :  “The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, which is then annualized.”

For the current VIX of 18.49, this represents an expected annualized change of 18-1/2% or a move of 4.3 % (up or down) over the next 30-days.  That is, index options are priced with the assumption of a 68% likelihood (one standard deviation) that the magnitude of the S&P 500's 30-day return will be less than 4.33% (up or down).  Clear as mud?  Yes VIX was invented by a Professor.

In the past it has sometimes taken quite a while after a top for the VIX indicator in the NTSM system to switch to sell.  Still, I’d feel better that my call is right if my VIX indicator would confirm the sell signal.

MY INVESTED POSITION

Based on the SELL signal, 7 November 2012, I moved out of the stock market.  Because of the extreme negativity I have noted from Hussman and others, I am currently invested in a range of near 15% invested in stocks.  I also took short positions on the morning of the 8^th that make me currently net short the S&P 500.  (I am using Guggenheim (formerly RYDEX) funds and 2x Short ETF, SDS.  Those are dangerously volatile so I don’t recommend them unless you have a BIG tolerance for risk.  Also, if they are held too long they may not perform well.

As I have noted before, others may choose to keep more invested in stocks without too much damage to their portfolio if the invested % is low.  For example, if one were to keep 30% invested in stocks and the market crashed by 50%, the loss to the portfolio would only be 15%.  If that is your plan, keep the low-beta stocks (those with lower P/E ratios) such as utilities, consumer staples, or value oriented mutual funds.  Sell technology.  Keeping 30% invested in stocks is actually a pretty good strategy since it hedges the bet if I am wrong and the market continues up after a sell signal. 

To be clear I am not predicting a crash; but there seems to be a lot of risk now.  I’ll get back in when the NTSM system switches to buy sometime in the future.

TIME TO SELL

If you read my earlier post today (Wednesday night), I apologize for the confusion.  I ran the analysis with an assumed volume that was lower than the final volume.  The NTSM is SELL using Wednesday’s final S&P 500 volume.  

All right…Let’s try this again with the final numbers…

NTSM

The NTSM analysis switched to SELL Wednesday driven down by the Volume indicator that has been trending to the downside for 3-weeks combined with the Price indicator.  The Volume indicator is a variant of On-Balance-Volume used by many in market timing.

The Price indicator tracks the size of Price moves (comparing up and down moves) and the Price indicator has been trending down since it topped out 6-weeks ago. 

I should also note that the panic indicator flashed sell 2-weeks ago at S&P 500 1433.  This indicator is a measure of Price-Volume and it tracks extreme moves (using statistical analysis) that sometimes warn of the start of a downturn.  As might be expected, the panic indicator was also quite high today, although not technically a sell value in my system.

The VIX indicator is not confirming SELL (yet), but that is not unusual – one of the indicators has to be first, but VIX is drifting toward sell.  I’ll feel more confident if VIX (the best indicator) switches to sell.  It is currently neutral, but well toward the sell side of neutral.

Sentiment was elevated 5-weeks ago at 62%-bulls, just 8-days after the most recent top of 1466 so Sentiment may have been warning me back then.  A sell signal for sentiment was 67% at the time.

All in all, the NTSM analysis has been warning of trouble for a while and is now an outright SELL. 

Looking at a chart of the S&P 500, the trend is currently down.  That follows a triple-top when the S&P 500 couldn’t get above the 1460 area. 

I never know how far the market may fall from here, assuming the sell call is correct. This could be just a post-election fake out.  There is nothing in the NTSM system that predicts the future.  I have certainly blogged a number of excerpts from crash predictions over the past few months.  While I think a crash is coming, I have to admit this feels more like a correction.  The correction we had last April was awfully shallow and only lasted 2-months so this may be a continuation correction. 

Since we can’t know the future, I prefer to take a cautious path.  If the future brings bad news, as Hussman and others are predicting, this correction could morph into something much worse.  Either way (crash or correction) I am selling.

As I noted earlier, I expect an up-day Thursday and the futures are now pointing to a positive day Thursday.  Good, I will be happy to sell on a strong move up.

MY INVESTED POSITION

Based on the SELL signal, today, 7 November 2012, I will move out of the stock market tomorrow.  Because of the extreme negativity I have noted from Hussman and others, I plan to be in a range of near zero to 15% invested in stocks. 

As I have noted before, others may choose to keep more invested in stocks without too much damage to their portfolio if the invested % is low.  For example, if one were to keep 30% invested in stocks and the market crashed by 50%, the loss to the portfolio would only be 15%.  If that is your plan, keep the low-beta stocks (those with lower P/E ratios) such as utilities, consumer staples, or value oriented mutual funds.  Sell technology.  Keeping 30% invested in stocks is actually a pretty good strategy since it hedges the bet if I am wrong and the market continues up after a sell signal. 

To be clear I am not predicting a crash; but there seems to be a lot of risk now.  I’ll get back in when the NTSM system switches to buy sometime in the future.

NTSM SELL? (The Times they are a-changin’)

REVISED POST:
***As I noted earlier, this is a close call. The Hold or Sell call will depend on the volume for the day. I realized that the actual volume may indeed push the system to sell. I will re-run some numbers later when I get the final volume.***

GREECE AGAIN
Greece Protests Turn Violent
ATHENS, Nov 7 (Reuters) - "Greek police fired teargas and water cannons to disperse thousands of protesters who flooded into the main square before parliament on Wednesday in a massive show of anger against lawmakers due to narrowly pass an austerity package...In all, nearly 100,000 protesters - some chanting "Fight! They're drinking our blood" - packed the square and side streets in one of the largest rallies seen in months, police said."  Full story at
http://www.huffingtonpost.com/2012/11/07/greece-protests_n_2088775.html

Update: The Greece parliament did vote in more austerity measures Wednesday.

EUROPE AGAIN (from BREAKOUT)
"David Lutz, managing director and head of ETF trading at Stifel Nicolaus, thinks investors better get used to negative news out of Europe. "We're really coming down to the end of the game right now to see if Greece is going to be staying in the eurozone and getting some capital," he says.
 
Greek unrest brings back the negative cycle that dominated 2011 --a U.S. recovery stymied by our main trading partner not just slumping economically but potentially ceasing to exist in current form. More discouraging still, Lutz says Greece is only 3/4 of the way through a process that has lasted years already." Full story at...
http://finance.yahoo.com/blogs/breakout/europe-back-spotlight-investors-run-cover-160911325.html
 
EURO ZONE SLOWING (from CNBC)
"The slowdown in the euro zone is now impacting Germany, European Central Bank President Mario Draghi said on Wednesday, warning that data shows that Europe's biggest economy is no longer shielded from the effects of the euro zone debt crisis."
 
The ECB has embarked on its on version of QE and Draghi said, "Our new program of Outright Monetary Transactions provides...(a)...backstop by allowing for unlimited interventions in government bond markets."  Full story at...
http://www.cnbc.com/id/49724245

Europe is in recession – period.  Will the US follow Europe into recession (are we already there?) or lead the world out of recession?  The most likely course is that we follow them.
 
I caught the last few minutes of Fast Money on CNBC.  Of the final picks by the 4-pundits, one was Caterpillar (the ultimate cyclical stock) and another was CSX, the railroad company, (a Dow-theory transportation company).  They were buying the dip with cyclical stocks so they don’t believe the recession scenario.

MARKET RECAP                                                                               

Wednesday the S&P 500 fell 2.4% to 1395 (rounded) and VIX rose  8-1/2% to 19.08.  

Repeating yesterday’s comment (it’s true for today too): Market internals (breadth and new-highs/new-lows) are still neutral to negative.  There was some selling late in the day – all negative for the markets.

NTSM
I will post later as soon as I re-run the analysis with the final volume numbers for the S&P 500.

 

Are the Recent Employment Numbers Bogus?

EMPLOYMENT NUMBERS FLAWED
from dshort.com

“If employment was indeed surging as reported by the (Bureau of Labor Statistics) BLS - the online help-wanted index should be on the rise. The chart below shows the Help-Wanted index as compared to historical employment...What this means, when taking into account the recent slate of economic weakness, is that post-election we are likely to see many of the recent job gains revised away as the data aligns itself with overall economic activity. The STA composite employment index is likewise pointing towards higher jobless claims numbers in the months ahead and falling export orders will continue to impact corporate profitability and their need to increase employment…So, while I don't believe in conspiracy theories, the underlying data is simply not supportive of the recent improvement in the jobs picture.”

For the full story, see dshort.com at the following link…
http://advisorperspectives.com/dshort/guest/Lance-Roberts-121105-ISM-Composite-Employment-Black-Helicopters.php

My comment: This article includes a number of economic points with charts and data that support what John Hussman has been suggesting - the economy is turning down.  Be cautious.

MARKET RECAP                                                                               

Tuesday the S&P 500 rose 3/4% to 1428 (rounded) and VIX fell almost 4-1/2% to 17.58.  

Market internals (breadth and new-highs/new-lows) are still neutral to slightly negative.  There was selling late in the day so the Pros took profits and probably didn’t want to hold positions before the election.

NTSM

The NTSM analysis remained HOLD Tuesday.

On the positive move today the Volume indicator switched to neutral;  the VIX indicator got slightly worse, but overall I’m a little further away from a sell since the NTSM system is slightly more positive.  It could still switch in a hurry though.

MY INVESTED POSITION

Based on the BUY signal, 6 July, I moved back into the market on 9 July (after the weekend) at S&P 500 1352. 

I currently have a 50% stock allocation overall.  For my age, that is what many advisors recommend as a fully invested position, however, I am normally much more aggressive.  I have less invested in stocks now because there’s a lot of risk.

NTSM Creeping Closer to SELL Stocks

HUSSMAN
"...analysts who interpret economic data as a stream of unconnected anecdotes are likely to find recent data encouraging, and will easily dismiss any concern about a U.S. recession on that basis. For our part, the internals of the economic picture - new orders, backlogs, real income growth, and even the employment components of prominent economic surveys - continue to deteriorate. Based on dozens of economic variables and methods that account for leading/lagging relationships (e.g. unobserved components estimates) our view remains that the U.S. economy has already entered a recession. We are certainly open to changing that view in the event that we observe a broad and sustained firming in leading economic measures, particularly those that are broadly based on orders, production, sales and income. But at present, those measures remain generally weak, and their direction remains flat to down (though the bright spot is that they are not collapsing as they did in 2008), while the employment-related measures have deteriorated significantly.” – John Hussman, PhD, Weekly Market Comment for November 5, 2012.  Full commentary at…
http://www.hussmanfunds.com/

MARKET RECAP                                                                               
Monday the S&P 500 rose 0.22% to 1417 (rounded) and VIX rose almost 5% to 18.49.  

A rising VIX is not good and the VIX indicator is not very far away from a sell signal.  If the VIX indicator flashes sell it will swing the entire NTSM analysis over to sell.  If it does, I will be selling out of my stock positions.

NTSM

The NTSM analysis remained HOLD Monday.

MY INVESTED POSITION

Based on the BUY signal, 6 July, I moved back into the market on 9 July (after the weekend) at S&P 500 1352. 

I currently have a 50% stock allocation overall.  For my age, that is what many advisors recommend as a fully invested position, however, I am normally much more aggressive.  I have less invested in stocks now because there’s a lot of risk.