No Change

It looks like we had below average volume today. 

I still think this is a correction even though the S&P 500 is up over 1.5% over the last 2-days.  The market never goes up or down in a straight line so we’ll have to be patient and see what happens.

 

All indicators improved a little today (except that I don’t have the Sentiment data because Rydex hasn’t posted their information yet.) Sentiment would not change our opinion anyway.

 

The Navigate the Stock Market analysis still calls a HOLD;  that means I won’t get back in the market (in a more meaningful way) until we have a BUY signal.  Curerntly, 30% invested. 

The Longer View

I’ve commented before that I have great respect for John Hussman, PhD, of Hussman funds.  Here‘s the longer term view from Mr. Hussman.

“For the third time in a decade, the Federal Reserve has embarked on a policy

that addresses structural economic problems by provoking speculation in asset prices.

The first two attempts were ultimately followed by stock market declines greater than

50% each....

My expectation is that this attempt to create what the economist Ludwig von Mises called “illusory prosperity” will end no better than it has in the past. As von Mises wrote in 1931, before the worst portion of the Great Depression: “Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods.  As a result, the upswing lacks a solid base…Sooner or later, it must become apparent that this economic situation is built on sand.”  February 21, 2011, The Hussman Funds Letter to Shareholders by John P Hussman, Ph.D. (used with permission of Hussman Funds - http://www.hussmanfunds.com)

The VIX came down 10% today and other indicators improved as well, so the NTSM system moved to HOLD.  This is not unusual for corrections, since there are many who will buy-the-dip.  At this point I have no reason to question our earlier SELL call.

The volume today was about 15% below the 20-day moving average for volume.  That shows there was not much conviction in the up-move today…I think we have more down days ahead.

"...the stock market has often been vulnerable to abrupt losses..."

Last Monday John Hussman, PhD, repeated his state-of-the-market comment that “…the market environment is characterized by a syndrome of elevated valuations, overextended price trends, overbullish investor sentiment, and rising interest rates. This combination of conditions typically does not persist for more than a few months, but when the complete set has been observed, the stock market has often been vulnerable to abrupt losses that can erase weeks or months of gains in a few trading sessions.”---- February 21, 2011, The Hussman Funds Letter to Shareholders by John P Hussman, Ph.D. (used with permission of Hussman Funds - http://www.hussmanfunds.com)

Mr.  Hussman has mentioned before that his firm doesn’t try to predict the exact time that these “abrupt losses” begin. 

They don’t; but we do. Our computer analysis issued a SELL signal this past Tuesday.  We had some clues before Tuesday though.  The volume (number of shares traded in the S&P 500) started falling at the end of January.  This is an indication that there were problems with the health of the market a good 2-weeks before the oil crisis tipped us over the edge. 

There is no change in the Navigate the Stock Market analysis…it is still calling a SELL.

The Wednesday Update of the Navigate the Stock Market System

The NTSM analysis called a SELL on the S&P 500 yesterday.  That was the first change since the 2 July 2010 buy-signal. 

Today we had another SELL signal.

SUMMARY OF NTSM INDICATORS:

As of today’s close, our 4-areas of market analysis present the following picture:

SENTIMENT:  Neutral. %-bulls indicator is now 47%.  This is a middle of the road value for sentiment.  (Sentiment is a reverse indicator; a high %-bulls indicator is bearish for the market and vice versa.)

PRICE: Sell. The NTMS has recorded a clear deceleration in upside moves since the end of January.

VOLUME: Sell.  More volume has been going to the downside…this indicator dropped to a SELL today after being neutral yesterday.

VIX:  Sell.  Our VIX indicator moved up another 10% today after moving up 27% yesterday.

The overall status for the Navigate the Stock Market system is SELL.   (Our indicators are based on closing data so we generally wait until after the market close to update the system.)

Looking at the overall NTMS indicators, this looks like a typical correction; but there is no way to know how far the market may fall when looking at the indicators.  We may guess that if the Sentiment values don’t get overextended, then maybe we’ll have a small correction…say in the range of 10%.  It could get a lot worse though.  There are no absolutes in this business. 

I am a little concerned that it has been about 4.2 years since the previous high on the S&P.  When we look at the 1966-Bear Market, a drop of about 25% in market prices (a 50% retracement) started at about the same 4.2 year point.  The difference is that in the 1966-Bear, the Dow made it back to the old high, so that comparison may not be warranted here.  (See the Page link at the side of this blog page, titled; “Compare 1966 Bear Market to the Current Bear Market.”  The major concern is oil price.  If the oil price remains at the current high level for too long we will likely see a significant drop in the markets.

MY INVESTED POSITION: I moved to an all cash position in retirement funds today and that makes my overall stock position about 30%.

Further, I took a 50% position in the Rydex Inverse Nazdaq 100 2x Strategy fund in my trading account.  This fund is a “bear” fund that doubles the inverse of the Nazdaq 100.  That means that it will go up twice as fast as the Naz 100 goes down…and vice versa.  (If I am wrong I’ll lose money twice as fast!)

 This moves me to a conservative position in terms of stock exposure; hedges some investments; and reduces overall risk considerably. 

Update after the SELL signal yesterday

The futures are up this morning. Even in the worst bear markets my work has shown that after a big down-day, like yesterday, the next-day-close is up about 60% of the time.

I got the sentiment data from yesterday and it shows the %-Bulls went from 47%, 2-days ago, to 57% at the close yesterday.  That means a lot of people are buying the dip.  Sentiment values are not extreme so it is possible we could go up for a few days.   Of my 8 indicators, 4 are negative within the last 2-days, so this is a fairly strong sell signal.

At this point, my guess is that this will be a short correction in the range of about 10%.  There are a lot of people who “want in” (as evidenced by the mutual fund flows over the past month and a half) and this will present a buying opportunity for them.

I also played with the NTSM system and there is no way we’ll get a BUY today even if we have an up-day as big as the down-day we had yesterday, so the SELL call remains in place.  I will follow my plan and cut back stocks to 30%.

SELL signal

Today we got a SELL signal in our Navigate the Stock Market System.  There were technical reasons and geo-political concerns.

 

VIX is a reliable indicator within our system.  The VIX is calculated from both call and put options of the S&P 500 and looks out about 30-days into the future.  The VIX is a widely used measure of market risk.  The VIX moved up 27% today and that is not good for the S&P going forward.  With the huge one-day, run-up in VIX, our VIX indicator flashed SELL.  In addition, our price indicator has been trending down since the end of January (with a lot of bouncing along the way) and it also finally called a SELL today.  One of our statistical measures went over the top to a SELL signal.  Another negative: at the close Friday the S&P 500 was over 15% above its 200-day moving average and that is the level where the correction started in January 2010.   (I wanted to get a sentiment reading tonight, but RYDEX has still not published their closing Asset Value data that we use for the Sentiment indicator.  It is probably a neutral indicator; I just wanted to see how it moved.  I’ll report on it tomorrow night.)

 

On top of that, we had geopolitical concerns from more turmoil in the Middle East and that caused a spike of about 6% in oil prices today.  That spooked the market over the expectation of $4.00 gasoline this summer and the possibility it could go higher.  

 

The key to trading stocks is to trade what you see; not what you think.  I think this will be about a 10% correction from top to bottom and we’ll be fine afterward.  What I see is the NTMS analysis giving a SELL signal.

 

So…I will be selling my retirement accounts tomorrow so I will about 30% invested overall.   Since I am now 100% invested in stocks, I am way overexposed for any rational portfolio.  The only thing that would change my mind would be a HUGE reversal that would create a BUY in the NTSM system tomorrow; that is not likely.  The odds favor an up day…but not a huge reversal. 

Mutual Fund Inflows Accelerate

The Investment Company Institute reported that almost $5-billion flowed into Domestic Equity Long-term Mutual Funds for the week ending 9 February (the most recent reporting date).  This is higher than the previous 2-weeks combined and is probably the reason for the continued rally in stocks.

Our Navigate the Stock Market analysis also continues its trend – there is no change in the outcome and we are still a HOLD; that means we are still holding our long position.    

“...some cynically believe the Fed will not let the market go down…"

“I don't believe that, but you are a fool if you do not take the Fed at their word. The lynchpin for the Fed is that rising equity prices will create a virtuous circle of economic activity. Mr. Bernanke himself has cited the positive effects his activities have had on the stock market.

Many traders are more than distressed by this policy...they're apoplectic. "QE2 is the exercise of fiat printing to raise asset prices in order to 'trick' the 'moneyed class' into doing the things that create economic activity," one exasperated trader wrote to me recently. "Problem is, it only rewards speculators and the very wealthy...the inflation confiscates wealth from everyone else because base necessities (commodities) go up and wages remain stagnant."  - Bob Pisani, CNBC Reporter, 16 Feb 2011

So is the market rigged?  The short answer is, “sort of”.  Under Quantitative Easing (QE2), the Fed is buying Treasury Bonds that the Government is issuing to cover the National Debt; but, the Federal Reserve has no real money to do this, so they simply print more money. They are buying the bonds on the secondary market from the Banks.  This puts more money in circulation as the banks make a profit on the sale and have more money on their books.

The stock market benefits in two ways: (1) Directly, because the banks can invest it themselves (2) Indirectly, because the Fed purchases are artificially keeping Bond yields low, so investors are flocking to the stock market. 

There is an unintended consequence though; some investors are betting on inflation and buying commodities.  So commodities, (cotton, oil, copper, silver etc) are going up.  Will this lead to disastrous inflation before the Fed can undo QE2?  I don’t know.    All we can do now is ride the wave in stocks.

I do expect a bad end to this.  The 1966 Bear Market lasted 16-years and the 1929 Bear Market lasted 25-years. 

A guess...this bear market will last 20-years.  In other words, it will be 2020 before we make significant new highs in the Dow and S&P.   

Our NTMS analysis still says “HOLD”.

The Wednesday Update of the Navigate the Stock Market System

We had our first BUY siganl on 2 July 2010 when the S&P was 1023.  Since then, we have only BUY or HOLD signals, so we have been holding LONG for a 30% gain.  There is no change today.

I continue to look for a big up day that will signal the start of at least a small correction and an opportunity to take a short position with the trading account.   

When we short in the trading account, we may or may not get a SELL on the NTMS analysis.  NTSM analysis is for longer-term investments.

SUMMARY OF NTSM INDICATORS:

As of today’s close, our 4-areas of market analysis present the following picture:

SENTIMENT:  Neutral. The %-bulls indicator is now 44%.  This is a middle-of-the-road reading.  (Sentiment is a reverse indicator; a high %-bulls indicator is bearish for the market and vice versa.)

PRICE: Neutral. Price action has meandered around and there isn’t a clear direction indicated.

VOLUME: BUY.  More volume has been going to the upside…enough for this indicator to call a buy.

VIX:  Neutral.  Our VIX indicator has been moving up; but not enough to call a sell

The overall status for the Navigate the Stock Market system is HOLD.   (Our indicators are based on closing data so we generally wait until after the market close to update the system.)

MY INVESTED POSITION: I remain 100% invested in retirement funds and all cash in the trading account.  (This is an absurdly aggressive position (for an old guy) and I don’t recommend it unless you have an extremely high tolerance for risk.

Down is good…

Too many days up and I start to worry.  Today was a good day for a downer.

Overall, the NTMS analysis still says HOLD, so I am holding my 100% long position in retirement accounts.

Mid 1990's? October 1929?

“Last week, the S&P 500 Index ascended to a Shiller P/E in excess of 24 (this "cyclically-adjusted P/E" or CAPE represents the ratio of the S&P 500 to 10-year average earnings, adjusted for inflation). Prior to the mid-1990's market bubble, a multiple in excess of 24 for the CAPE was briefly seen only once, between August and early-October 1929.” - February 14, 2011 Weekly Market Comment by John P Hussman, Ph.D. (used with permission of Hussman Funds - http://www.hussmanfunds.com)

 

I enjoy the Hussman weekly Market Comment because John Hussman, PhD., uses a comprehensive quantitative analysis of the market.  Clearly, his opinions aren’t based on guesswork – the numbers speak for themselves.

 

Our numbers speak too.  While we don’t disagree with Mr. Hussman, the Navigate the Stock Market (NTSM) analysis hasn’t called a SELL yet.  Some indicators have gotten worse and others, most notably sentiment, have gotten better.  Our 5-day Sentiment indicator is only 42% bulls – a fairly low number for the moment and that is somewhat bullish; however, the NTSM analysis could still call a SELL anytime.  We don’t know what the market will bring so we have to wait and see.  We can hope that the NTMS analysis will give us a warning before the correction starts.    

 

Currently, our NTSM analysis still indicates HOLD.

Still holding long…

Indicators improved a little today, but they still say HOLD. 

I hate small “up” days…

I get worried that the market won’t go up anymore.  I'd rather see small down days, because if the market won’t go down much, it isn’t getting sold, and if there are no sellers, it will start going up.  Make sense?  Well’ I’m not sure about that line of thinking either.  Maybe it’s just my superstition.  Let’s call today a tie and, as my Sicilian friend says, “forgetaboutit”.

 

No significant change in any indicators.

The Wednesday Update of the Navigate the Stock Market System

My guess is the correction (if it ever gets here) will be announced by a large up-day, perhaps in the 1-1/2 to 2% range.  If that happens, I will buy a “short” mutual fund in the trading account.  (A short fund goes up when the market goes down.) I use the Rydex Inverse Nasdaq 100 2x Strategy fund. 

 

I won’t sell my longer term holdings until the NTSM analysis give a SELL signal.

SUMMARY OF INDICATORS:

As of today’s close, our 4-areas of market analysis present the following picture:

SENTIMENT:  Neutral. %-bulls indicator has pulled back and is now 40%.  This is a middle-of-the-road reading.  (Sentiment is a reverse indicator; a high %-bulls indicator is bearish for the market and vice versa.)

PRICE: Neutral. Price action has meandered around and there isn’t a clear direction indicated.

 

VOLUME: Neutral.  More volume has been going to the upside…even with today’s down day in price.  That’s good, but the numbers aren’t strong enough to be a Buy yet.

 

VIX:  Neutral. 

The overall status for the Navigate the Stock Market system is HOLD.   (Our indicators are based on closing data so we generally wait until after the market close to update the system.)

MY INVESTED POSITION: I remain 100% invested in retirement funds and all cash in the trading account.  (This is an absurdly aggressive position (for an old guy) and I don’t recommend it unless you have an extremely high tolerance for risk.

Betting on a correction…

Over the past 2-weeks the %-bulls indicator has dropped from 59% to today’s reading of 40%.  This is telling us that more people are shorting the market - betting it will go down.  The more people bet on the correction, the less likely it is to happen.  40% is a reasonably low number and that is bullish for the market. 

 

On the other hand we have seen a lot of small moves to the upside in S&P price and that indicates this rally is slowing down.  There is always something to worry about.  As always we’ll have to wait and see.

 

NTSM computer analysis still indicates a HOLD.   

Correction coming?

Well maybe, but we haven’t seen a good signal for the short term – I am looking for a small (say 5%) mini-correction anytime.  Apparently, so is everyone else.

%-Bulls dropped to 42% today.   On 28 Jan, %-bulls was 59% so we have backed-up quite a bit.  This may give us some more room to keep climbing-the-wall-of-worry.   We’ll see.

The Navigate the Stock Market (NTSM) analysis is still a hold. 

Jobs, Jobs, Jobs

I commented earlier that the ADP hiring data hasn’t been reflected in Government stats. Wow, was that an understatement. The ADP report said the economy created 189,000 jobs last month; Bureau of Labor Statistics reported Friday that 30,100 net jobs were created. To be fair, these two stats aren’t quite comparable, but the expectations were for a much better number. The number was so bad that everyone ignored it…including investors…citing weather and other factors.


S&P 500 was up 0.25%. The jobs information also paints a painful long-term picture. David Stockton (former Budget Director with the Clinton Administration) was a guest on CNBC and he said that the economy now has 1/2–million fewer jobs than it did in January 2000. (This data was presented by the Economic Policy Institute.)


This just reminds us why Bear markets can last decades. Let’s hope the current bear market doesn’t last that long. The Navigate the Stock Market computer analysis is still a HOLD.

Mutual funds inflows

CNBC reported that US equity Mutual funds experienced inflows for the first time since April 2010.  ICI data showed that $6-billion went into equity mutual funds in January.

 

Not much change today in the Navigate the Stock Market computer analysis.  It’s still a HOLD.

The Wednesday Update of the Navigate the Stock Market System

CNN Money reported that private employer payrolls rose by 187,000 in January, according to payroll processor ADP.   

That’s good news, but the ADP predictions have not been born out by the Government stats so it is not clear that this will result in a boost for the market when Gov data is released Friday.  Still, it is good news and fundamentals continue to look good.  Earnings for the quarter so far have been good.  Retail was excellent, as we noted previously.  The Fed is trying to support the market.  I thought we’d see more profit taking today after the big up-day yesterday, but we held on well.  So that’s good too. 

There is so much bullishness out there that I’d guess any correction (if we do have one soon) will be in the 10% range.

As far as our analysis, I’d rather see the Navigate the Stock Market (NTSM) computer analysis issue a BUY signal, but we’ll take the HOLD and keep watching the market go up...forever?      

SUMMARY OF INDICATORS:

As of today’s close, our 4-areas of market analysis present the following picture:

SENTIMENT:  Neutral. %-bulls indicator has pulled back and is now 49%.  This is an elevated number, but not enough to issue a sell signal.  (Sentiment is a reverse indicator; a high %-bulls indicator is bearish for the market and vice versa.)

PRICE: Buy. Price action has turned positive again.

VOLUME: Neutral.  The volume indicator improved today.  More volume has been going to the upside…even with today’s down day in price.  That’s good, but the numbers aren’t strong enough to be a Buy yet.

VIX:  Neutral.  Vix pulled back to neutral with the big spike up on Friday.  It has improved since then, but it has a way to go before it will call Buy. 

The overall status for the Navigate the Stock Market system is HOLD.   (Our indicators are based on closing data so we generally wait until after the market close to update the system.)

MY INVESTED POSITION: I remain 100% invested in retirement funds and all cash in the trading account.  (This is an absurdly aggressive position (for an old guy) and I don’t recommend it unless you have an extremely high tolerance for risk.

"...overvalued, overbought, overbullish, rising-yields..."

“As of last week, the Market Climate for stocks remained characterized by an overvalued, overbought, overbullish, rising-yields syndrome that has historically been quite hostile for stocks, but with what I've called "unpleasant skew" - a seemingly relentless series of slight, marginal new highs, typically followed by an abrupt vertical plunge that wipes out weeks or months of progress in a few sessions.” January 31, 2011 Weekly Market Comment by John P Hussman, Ph.D. (used with permission of Hussman Funds -  http://www.hussmanfunds.com)

Indicators improved today; the Vix dropped around 10%; but as I have been suggesting, and as Mr. Hussman eloquently reminds us, caution is the watchword as this market seemingly goes up without end.    

For the past 3-weeks, the graph of S&P price is much less steep, i.e. the daily rate of advance has slowed significantly and we have seen lower lows.  For chartists, this “megaphone” pattern may show the top is near.  I’m not much into charts, but there is some logic here since it is a graphical representation of Mr. Hussman’s observation, at least in the short term.  

The NTSM analysis currently recommends HOLD as it has since 28 January.  Given the big move up today, it is tempting to call a top now, but I’ll follow the NTSM guidance instead. 

I am still 100% long in retirement accounts.  My trading portfolio is all cash.  (This is an absurdly aggressive position (for an old guy) and I don’t recommend it unless you have an extremely high tolerance for risk.