A sense of urgency from John Hussman, PhD...

“It is now urgent for investors to recognize that the set of economic evidence we observe reflects a unique signature of recessions comprising deterioration in financial and economic measures that is always and only observed during or immediately prior to U.S. recessions. These include a widening of credit spreads on corporate debt versus 6 months prior, the S&P 500 below its level of 6 months prior, the Treasury yield curve flatter than 2.5% (10-year minus 3-month), year-over-year GDP growth below 2%, ISM Purchasing Managers Index below 54, year-over-year growth in total nonfarm payrolls below 1%, as well as important corroborating indicators such as plunging consumer confidence.”

Mr. Hussman continues with an interesting discussion of the impacts of Fed interventions and a discussion of valuation.  Regarding valuation he said, “… major secular undervaluation as we observed in 1950, 1974 and 1982 would presently map to about 400 on the S&P 500. When you think of "once in a generation" valuations and "secular bear market lows" - that number, not anything near present levels, should be what crosses your mind. - John P. Hussman, Ph.D., 31 Aug 2011 Weekly Market Comment, http://www.hussmanfunds.com, used with permission.

I have suggested that the low for this leg of the bear market might be in the range of 1050 - 825.  My worst case guess would be the previous intraday day low around 650 (in round numbers).  400 on the S&P 500?  Wow…let’s hope not.  If it does happen, we’ll hope that the NTSM calls it correctly.

The Navigate the Stock Market analysis is HOLD again today.

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)  

(See the page “How to Use the NTSM System” – the link is on the right side of this page).

I am also 75% short in the trading portfolio.  I will have to re-think the short position if we go up again.  The S&P is breaking above its top trend line so we may be seeing a better bear market rally than I had expected.  I may sell the shorts and try to re-short at a higher value on the S&P.  I did see a report on CNBC where it was suggested that the rally for the past couple of days was due to end-of-the-month positioning and should be over soon so I am inclined to hang on a little longer.

Consumer Confidence Down; Bankers Worried...but not the Market

The S&P 500 was up 0.23% Monday after a big day Friday.  Volume today was only 68% of the volume over the average for the past month.  Volume Friday for that big 3%+ up day was only 61% of the 20-dMA.  Moving up on light volume is not a good indicator of where we are headed.  In other words, we have not learned much in spite of the good % move upward.

From London’s “The Telegraph”

 http://www.telegraph.co.uk/finance/financialcrisis/8721151/Market-crash-could-hit-within-weeks-warn-bankers.html

The London Telegraph reported that we may be headed for a bigger crash than the one that occurred when Lehman Brothers failed.  That is based on Credit default swap spreads.

A couple of quotes from senior bank officials:

"The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008,"

"I think we are heading for a market shock in September or October that will match anything we have ever seen before,"

Essentially, the insurance on the debt of the banks has hit levels higher than they were during the US Financial crash.

From http://www.conference-board.org/press/pressdetail.cfm?pressid=4276

The Conference Board Consumer Confidence Index®, which had improved slightly in July, fell in August. The Index now stands at 44, down from 59.2 in July.

Lynn Franco, Director of The Conference Board Consumer Research Center said "Consumer confidence deteriorated sharply in August, as consumers grew significantly more pessimistic about the short-term outlook. The index is now at its lowest level in more than two years.”

The NTSM analysis is HOLD as of Monday’s close.

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)   I am 75% short in the trading portfolio (and feeling nervous as we have advanced for 2-days).

(See the page “How to Use the NTSM System” – the link is on the right side of this page).

Should I stay or should I go?

That’s a good question in this market; but I still feel we are headed down to make a low that is lower than the 1119 that we set on 8 August just 3-weeks ago.

There is a slight uptrend visible in the charts, but the slope upward is too flat to be believed.  Today’s rally was widely attributed to short covering.  It probably was and that may portend a turnaround (back down) soon. 

The Government revised the GPD number for last quarter down to 1%.

Consumer spending was slightly above forecasts.  None of this data is particularly market moving so the market is trading on technicals until we get more info.

A big move up, like today’s, is often an indication we are at a short term top.  It is followed by a down day around 60% of the time.  So the odds favor a turn down soon. 

NTSM is HOLD today.

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)   I am 50% short in the trading portfolio.

(See the page “How to Use the NTSM System” – the link is on the right side of this page).

Established a short trading position…

I am now 50% short in the trading portfolio using the ETF QID (2x short the Nasdaq 100).  Today we hit the 1175 target so I added the short position.  Since I expect that we will have to test the 1119 level, a short here makes sense since 1175 is about 5% above the 1119 low. So if we move back to the 1120 level, we can make a profit of about 10%.  If the market goes up, I’ll add more shorts.  We’ll see if it works out.  1175 is about half way back to the previous high.

NTSM is HOLD today.

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.) 

(See the page “How to Use the NTSM System” – the link is on the right side of this page).

Famous Stock Market Quotes: “Do you feel lucky; well do ‘ya, Punk?”

I spent the day prepping for the hurricane including moving a sailboat with friends so this was not a day to watch that market.  It was a good day to short if you were smart enough to go short near the top of this morning’s bounce.  I may not post much next week depending on the status of electrical power after the storm.

As you know I like to quote John Hussman, PhD.   He is a proponent of the CAPE method of valuing stocks.  CAPE is an acronym for a modified price earnings ratio based on a 10-yr earnings average adjusted for inflation.  I saw a report yesterday where some were suggesting (in another study) that the CAPE is too bearish now because the 10-yr avg. includes 2-significant downturns of low earnings.  If I can find the reference I’ll post more on it later.

The key S&P 500 level is around the previous 1119 low.  We have visited that general vicinity 4-times over the last 3-weeks.  While it is my guess that the 1119 level will not hold and we will see further declines from that level, that’s just what I think.  As the famous trader said, “Trade what you see; not what you think.”  We’ll have to see if it holds there with improving market internals.  The internals were so bad on 8 August when we made the 1119 low it shouldn’t be hard to improve on them.  The trouble is, even if we have a successful test we might fail to hold that level in the coming weeks.  So if we have a successful test, the question may be, “Do you feel lucky; well do ‘ya, Punk?”

NTSM is HOLD today.  

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.) 

Looking to short more if opportunity knocks…

We’re probably due for some more declines.  I’ll watch the market tomorrow to decide whether to reestablish short positions.  We hit our 1175 target based on a 50% retracement back toward the previous high.  Since I still think we will test 1119 again, we should be able to make money short at least down to 1119.  This is not as sure as the previous short because we are further into the correction now and the other bounce was off the first low. 

I number the lows in a correction as each lower low occurs.  The 1^st low is the point that is the lowest low before the market turns up.  The 2^nd low will happen when a new low is set and the market again turns up.

1119 is the first low we made in this downturn.  It would be unusual for a correction to end without making further lows before we exhaust selling; therefore, I don’t think 1119 will hold.  We’ll see.

I will go short in the trading portfolio if tomorrow is a big up-day since that might signal the end of the upward movement.  There is a bias for big up days to be followed by down ones.  Otherwise, I’ll just see what happens.

The NTSM analysis is a HOLD today after yesterday’s Hold.

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.) 

Another top indicator for the S&P 500?

I remember a year ago that a CNBC talking-head said that the bull market would be over when Joe-public began to move back into the market.  All thru the 2009-2010 Bull run, Joe-public investor was taking money OUT of the stock market as reported by the Investment Company Institute.  That changed in January of 2011 as money began to return to Domestic Stock funds.  The respite was short though – money again began flowing out of the market in April and there have been parabolic (every increasing rates) of withdrawal in June and July.  I wish Joe was reading this blog; it would have saved him a lot of pain.  I hate that so many missed the Bull and started buying at the top. 

If you find this Blog helpful, refer it to your friends.  I need more viewership.   You can always comment or ask questions by emailing navigatethemarket@gmail.com.

The NTSM analysis is a HOLD today, but just barely.  If the move had been a little smaller we would have had a sell.  Actually, I don’t have final volume numbers for the S&P so it’s possible we had a sell anyway.

I closed the short positions in the trading account with an 11% profit.  Not bad for 1-week’s work.  I think this bounce may get back to the 1175 area.  If it does, I’ll re-establish shorts.

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.) 

PIMCO’s Bill Gross says recession is inevitable…

PIMCO’s Bill Gross says recession is inevitable…but at the same time there are some cracks appearing in the recession argument?

The Navigate the Stock Market system turned to BUY today.  That is a surprise and I don’t at this point recommend that we act on it.

First, I am fairly confident that this level on the S&P 500 will be tested again. Corrections that are this deep don’t end in just a couple of weeks, so we should have an opportunity to get in later at this level, if this is indeed the bottom.

Further, if we see some significant down days NTSM could switch back to sell. 

Parts of the NTMS look at market action in such a way that a continuous downtrend creates a “Buy” signal.  As I’ve said before, sometimes the herd is right so the parts of the system that are now suggesting a Buy may be wrong or at least premature.

We can, however, see some clues that make the recent market move look more like a correction than a Bear market.  Volume has not increased during this downturn when compared to the correction we had in April 2010.  Volumes are up, but not as much as might be expected for a recession panic.  Peak volumes were much higher in April 2010 and the moving averages of volume were much higher too.  So that really calls into question whether “the market” is pricing in a recession as so many (including me) have `been suggesting for the past month.  Volume wise, we look better (we’re seeing relatively lower volumes) at this point than during the April 2010 correction when we experienced a 16% correction.  (I know – you are thinking, why didn’t he write this sooner?  The answer is; we really can’t know these things in advance.  We get a sell signal and then we can analyze additional data as it comes in.)

The reason NTSM switched today was the volume indicator became more bullish.

Still, in the phase of the correction/bear market, it is possible that we may see a big drop down and we don’t want to buy into that.  A huge drop would probably cause another sell signal and also convince undecided investors to sell, but that is not the most likely short term direction.

We have tested the vicinity of the 1119 low the past 2-days; volumes are down, internals are improved, so the most likely direction of the market is up for a while.

Everything depends on the economy.  More bad news will kill a rally; some good news will feed a rally and may end the correction/bear trend.

More forecasts:  PIMCO’s Bill Gross said Friday in an interview with CNN/Money that a recession is inevitable in both the Eurozone and in the US.  “Growth is limited because of too much debt and because of the lack of policy options going forward”.  We have a “stall speed economy” it can’t go up so it must come down. – Video at http://money.cnn.com/2011/08/19/markets/markets_newyork/index.htm?iid=HP_LN

On the other hand I got notes from both Black Rock and T Rowe Price mutual fund companies that we are not entering a recession.  (A recession creates a mess for the mutual funds so their opinion is not exactly, ethically pure.  PIMCO also gets more customers in a recession so they have a similar, if opposite, bias.)

Bottom line…I will keep my “out of the market” position until we get some more evidence.

On the other hand, I will close out the short positions in the trading portfolio (at a good profit) to hedge a bit.  No need to carry too much risk.  I’ll watch market action.  If it is dropping, I’ll hold the shorts.

Wholesale Inflation up a lot too, but may improve next month…

Here’s some more inflation data. Core wholesale inflation was up 0.4% last month, excluding energy and food.  The increase was due mainly to tobacco.  Since most raw material costs were down in July, it is not likely that we will see follow-through on the bad numbers next month.  The overall Producer Price Index was only up a more manageable 0.2% in July.

The worst number yesterday was the Philly Fed manufacturing data and that was my reason for writing that recession looks much more likely.  The Morgan Stanly comment is troubling too.

President Obama said in his interview with CBS news that the nation was not in danger of falling into another recession.  (Another recession might put him out of office.)  More importantly, even if he believes the many economists who are warning of a possible recession, it would not be good for the President to predict one since it would hurt consumer confidence and make recession even more likely.  As a result, I discount comments by Politicians. 

The Navigate the Stock Market computer analysis isn’t too important right now.  We will need to successfully test the previous low of (1119) before I’d recommend buying.

The NTSM analysis is HOLD today (based on early data, but it might be Sell on the final numbers).

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.) 

(See the page “How to Use the NTSM System” – the link is on the right side of this page).

I have a 75% short position in the trading portfolio using QID (2xshort the Nasdaq 100).  We could be near a short term bottom and I will reassess the short position next week. 

Inflation, Jobs, Europe…pick your poison

Consumer prices were up 0.5% in July.  That’s an annual rate of 6% (if I am reading the data right) and that’s a very high number.  If it is sustained by future data, the Fed’s promise to keep interest rates low for the next 2-years is toast.

The Labor Department reported that jobless claims were up by 9,000 to 408,000 in the week ended Aug. 13.  That’s the highest in a month.  Economists had expected jobless claims to be 400,000.

Fox Business News reported:

(1) Morgan Stanley warned the global economy is "dangerously close to a recession" and cut forecasts for global growth, because of "recent policy errors" in the United States and Europe.  Goldman Sachs also cut its forecast of economic growth.

(2) “Deutsche Bank cut its projection for Chinese GDP growth to 8.9 percent for 2011 from 9.1 percent and to 8.3 percent for 2012 from 8.6 percent, largely reflecting a downgrade in export outlook due to slower growth in the United States and Europe.”

(3) Manufacturing in the Philadelphia area showed a huge drop in August. The Philadelphia Federal Reserve's manufacturing-activity-number came in at -30.7, far short of the expected value of 3.7.  A number below zero indicates contraction. http://www.foxbusiness.com/markets/2011/08/18/daily-market-update/#ixzz1VOOhlQot

Taken together, all of this makes a recession a near certainty.  If you have been reading this Blog for the past week or two, it shouldn’t be much of a surprise.  We have been using the r-word (recession) since our SELL signal of 27 July.

The Navigate the Stock Market computer analysis isn’t too important right now.  We will need to successfully test the previous low of (1119) and that is not likely, given that the news is getting worse; more information is confirming that a recession is coming or already started.  

This only reaffirms fears that we could see the S&P500 drop to the range of 1050 or as low as 825.   If you really want to worry about this stuff, we got out of the Great Depression by spending our way out.  When it was finally over, after WWII, we had a huge debt load.  Because we already have a huge debt load, it is not likely that we can spend our way out of this mess.  We seem to be faced with unpleasant choices.  Do little, and it is hard to imagine our politicians taking that course,…or…spending even more on infrastructure-stimulus-jobs-bills.   That may leave us with a very bleak future.

The NTSM analysis is HOLD today (based on early data, but it might be Sell on the final numbers), but as I noted above, that isn’t too important now,

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)  I have a 75% short position in the trading portfolio using QID (2xshort the Nasdaq 100). 

(See the page “How to Use the NTSM System” – the link is on the right side of this page).

Navigate the Stock Market is SELL…

NTSM slipped back to a SELL. today.  That is not really too important at this point.  The important SELL signal was 21 July when the NTMS signaled Sell at  S&P 500 = 1301.  (See the page “How to Use the NTSM System” – the link is on the right side of this page).

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)  I have a 75% short position in the trading portfolio using QID (2xshort the Nasdaq 100). 

Another Technical Analyst says stay out of the market...

From http://finance.yahoo.com/blogs/breakout/market-death-cross-mode-stay-sidelines-says-louise-152153683.html here’s Louis Yamada’s view on the market.

Louise Yamada is a technical analyst who guests on CNBC often.  She is the CEO of - Louise Yamada Technical Research Advisors, LLC ("LYA").  Previously, she worked for 25-years at Smith Barney (Citigroup) as a top-ranked "Institutional Investor" technical analyst.

Louise says "...stay on the Sidelines…We are "finished with a cyclical bull and entering a cyclical bear." It's not the end of the world, just an end of the uptrend off the 2009 lows. Since January of this year, the market has seen falling volume on rallies. Simply put, longs are nervous and ever less inclined to buy the dips. As we saw when the S&P500 uptrend from 2009 broke definitively around the 1,300 level, followed by support failing at 1,250; nervous bulls sell in a hurry.”

She said, “I would rather than be out of the market wishing I was in instead of in the market wishing I was out.”

Today the NTSM analysis indicates Hold so we remain out of the market per our last Sell signal.

(See the page “How to Use the NTSM System” – the link is on the right side of this page).

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)  Today I added to a short position to make it 75% of the trading portfolio using QID (2xshort the Nasdaq 100).  I may not have the top, but I believe we will have to at least test the previous low of 1119 (6% below today’s close).  There is potential for a much greater drop since it looks like we may be heading into another recession that will take the market down in the range of 1050 to 825.  As always, we’ll have to wait and see.

Consumer Confidence Way Down

Friday’s University of Michigan Consumer Confidence numbers were awful.   It is now at a level generally seen during recessions.  54.9 was well below the expectation of economists who had predicted 62.  A drop this big probably means that consumers will not spend as much in the future and this is another worry for the stock market.

On the subject of the World Economy, Robert Zoelick, Chief of the World Bank said that because of Europe’s debt crisis, “In the past couple of weeks the world has moved from a troubled multispeed recovery…to a new and more dangerous phase”.  He noted that interest rates are already so low that there is no further room for central banks to move on monetary policy.  {“Mighty strong words runt”…Oops, sorry, that’s Zoelick not Zemeckis.}

The bounce is still going, but a 50% retracement back toward the previous high of 1350 would be 1237, or so, so this bounce is running out of steam.  The S&P 500 closed at 1204 today.  We’re due for a reversal soon anyway since a bounce after a big drop only seems to last 3-5 trading days.

Today the NTSM analysis dropped back to SELL and we remain out of the market per our last Sell signal. on 27 July. (See the page “How to Use the NTSM System” – the link is on the right side of this page).

I sold on the 27 July sell signal at S&P 500 - 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)  Today I took a short-position of about 50% of the trading portfolio using QID (2x short the Nasdaq 100).  I may not have the top, but I believe we will eventually test the previous low of 1119 (7% below today’s close).  There is potential for a much greater drop since it looks like we may be heading into another recession that will take the market down in the range of 1050 to 825.  As always, we’ll have to wait and see.

A Tale of Two Gurus

There are 2 financial gurus that I particularly respect.  The first is Bob Brinker, because I learned the basics of financial management from his radio show.  In the old days, from the ‘80’s to 2000, Bob Brinker’s “Money Talk” was not to be missed.  The first 15-minutes of the show were a weekly run-down of market action and the implication to investors.  He simplified his show after the dot-com crash of 2001 because there were people who were re-selling his commentary and ideas.  I stopped listening, but I subscribed to his timing newsletter.  

Bob Brinker called the Top of the dot-com market boom almost to the day.  The only other person to do that was a man who had called the ‘87 crash and he was quoted in a short unnoticed column titled, “Time to Sell?” in Barons.  Sorry, I don’t recall his name and probably can’t find the article, though I did save it.  My point is that Brinker deserves respect.  Unfortunately, he missed the Crash of 2008 since he never issued a sell signal. 

The second guru I thoroughly enjoy reading is, of course, John Hussman, PhD.  Those who read this Blog regularly know that I include short quotes of his whenever they are noteworthy.

I mention this now because these 2-gurus are now on opposite sides of the fence.  Bob Brinker has written that he is not changing his portfolio recommendations.  Essentially, he is not issuing a sell signal and remains in a bullishly invested position.

On the other hand John Hussman wrote recently: “The economic evidence now suggests that the U.S. and the global economy are again entering recession…. the composite of economic and financial evidence we presently observe has always and only been associated with ongoing or immediately impending recessions. This is not an opinion or a viewpoint, but a fact of the data. –  excerpts from the 8 Aug 2011 Weekly Market Comment by John Hussman, PhD. from http://www.hussman.net/wmc/wmc110808.htm

Mr. Hussman, PhD, doesn’t issue buy/sell recommendations; he runs Hussman Funds and publishes a weekly market comment, primarily for his shareholders.  However, if he is right and we are entering recession, it is clearly time to sell. 

So whom do we believe?

I lean toward John Hussman’s view because I think his analysis may be more analytically rigorous and also based on my review of the past history of bear markets.  There are many who will agree with Bob Brinker, though, and he certainly could be right.  In conclusion, we won’t know the answer for several months, perhaps when the earnings come out next quarter or possibly when GDP numbers are issued.   We'll also get regular employment numbers that may give hints about the directioin of the economy.

Since our Navigate the Stock Market analysis is based on S&P 500 and its gyrations, we needn’t try to guess how the economy will turn out.  I will BUY when NTSM issues the next buy signal based on analysis of Sentiment, Price, Volume, and VIX…or…when volume analysis gives us a buy signal.

Today the NTSM analysis indicates Hold so we remain out of the market per our last Sell signal.

I sold on the 27 July sell signal at S&P 500 1301 and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)

No change in the Navigate the Stock Market analysis

The Department of Labor reported “In the week ending August 6, the advance figure for seasonally adjusted initial claims was 395,000, a decrease of 7,000 from the previous week's revised figure of 402,000. The 4-week moving average was 405,000, a decrease of 3,250 from the previous week's revised average of 408,250.” 

Any downward movement is good news, but the change is less than 1% of the 4-week moving average.  If the economy was picking up significantly, I doubt that the Fed would have promised zero interest rates for the next 2-years as they did yesterday in the Fed statement.  Mortgage rates are hitting new lows and that is a testament to the bond market’s fear of another recession.  As people buy bonds the interest rates drop.

I said yesterday that I expected more bounce and I think it will continue a little longer.  This is normal in corrections and bear markets.

The NTSM analysis indicates Hold today so we remain out of the market per our last Sell signal.

I sold on the 27 July sell signal and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)

First back-to-back drop in productivity since the crash of 2008

Our leaders aren’t tending to chores,

as our debt and insolvency soars.
And it’s really a shame,
that the one that they blame,
is the head guy at Standard and Poors.

-       Skip Jordan, Portsmouth (letter to the editor, Virginian-Pilot)

I expected a longer bounce...so much for expectations.  We only got a one-day bounce since today we gave back yesterday’s gains.  That may change though because it looks like we made a double bottom today on lower volume and I think that a lot of people will buy it tomorrow and maybe for a few days after.  After a short respite, I think we will resume the downward price action. 

The market is pricing in a recession.  I must say that I agree with the market, just based on the comments from experts I have mentioned in previous blog posts.

A couple more comments on the drop in Productivity reported by the Labor Department yesterday: It was the first back to back drop in productivity since the second half of 2008.  That was the crash half.  I noted that the labor costs were up 2.2%, but I didn’t realize that labor costs had already risen 4.8% in the 1^st three months of the year.

Sentiment is a counter indicator – low sentiment is Bullish.  The NTSM Sentiment indicator dropped below 30% today, meaning that less than 1 in 3 investors are bullish.  That in itself is bullish.  Unfortunately, that is the only Bullish indicator we have now and I’m not sure we should treat it as a Bullish indicator since that looks like the smart money right now.  In other words, sometimes the herd is right.

The NTSM analysis indicates Hold today so we remain out of the market per our last Sell signal.

I sold on the 27 July sell signal and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)

No one noticed…but productivity fell today

It will be a while before we get more earnings information from companies so the direction of the stock market depends on economic data and whether the economy is slipping into recession.  I note that fact because today, we got another piece of bad economic news.

CNN/Money reported that productivity of U.S. workers fell 0.3% during the second quarter, after dropping 0.6% the prior quarter. Labor costs rose by 2.2%. (http://money.cnn.com/2011/08/09/markets/premarkets/)

Productivity is a measure of work performed by each employee.  If productivity is falling it may mean that there are too many workers to perform required tasks.  That happens when orders fall and may predict higher unemployment ahead.  But, I should be clear; I am not an economist and predicting the future of our economy is beyond me.  According to NPR today, it is also beyond most economists.

MohMED El-Erian, CEO of the PIMCO, said on CNBC Sunday night that the economy was at stall speed implying recession is coming and he noted that the Bond market is much more concerned about recession than the stock market.  Treasury yields dropped to record lows today and the Fed said that the economy is “considerably slower” than expected.

The NTSM system doesn’t care whether we are moving into recession or just a correction.  Our work will be the same – identify the next buying opportunity.

NTSM moved to Hold today because the Sentiment indicator fell to 35% bulls.  As of the close today, 4 out of 5 investors are betting that the market will be down tomorrow, at least in the Rydex leveraged funds we track.  When everyone thinks the market is going down, it usually goes up, so it will be interesting to see what happens tomorrow.

If this is a correction, I doubt that we will see a buying opportunity for a month to 6-weeks.  If it is the start of a bear market, I suspect it may be longer.

I sold last week on the 27 July sell signal and I am defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)

Free Fall Continues on the NYSE

In 2008, the steepest part of the free fall lasted from 30 September to 10 October (8-trading days) before there was any bounce at all.  Volume accelerated throughout the decline.  Our present crash started 26 July, 9-days ago so we are due for a bounce.  Tomorrow may squeeze out the last of the sellers, however, Tuesdays are historically bad (think black Tuesday in 1929).  My theory is that those who have thought about selling all weekend, and then hoped for a rebound on Monday, but didn’t get one, are now ready to sell and will get out no matter what on a Tuesday.  We could see a break lower at the open only to be followed by some upward movement later in the session.  That’s my guess, but it’s not worth much and it isn’t based on any numerical analysis. 

The market apparently now believes that the scales have tipped in favor of recession.  As regular readers know, I like to quote John Hussman, Phd, of Hussman Funds.  Here are some excerpts from Monday’s Weekly comment: “The economic evidence now suggests that the U.S. and the global economy are again entering recession…. the composite of economic and financial evidence we presently observe has always and only been associated with ongoing or immediately impending recessions. This is not an opinion or a viewpoint, but a fact of the data. "Always and only" is the Bayesian equivalent of "certainty" (a Bayesian is someone who, vaguely expecting a horse, and glimpsing the tail of a donkey, concludes he has probably seen a mule)… The problem at present is that multiple lines of evidence suggest more than just a "healthy correction" in the stock market, or a "soft patch" in the economy. –  excerpts from the 8 Aug 2011 Weekly Market Comment by John Hussman, PhD. from http://www.hussman.net/wmc/wmc110808.htm

The Table I posted past Thursday showed that the average Bear following a Bull run in a Secular Bear Market is a 39% decline.  Based on past history, we might guess that the S&P 500 will likely fall that far, especially given the fragile economy and jittery investors.  That would take us back to the area of 830.  (That is only a guess.) 

While we may see a bounce, and there are many who will start to buy now believing this is just a “dip” that should be bought, I will not buy-the-dip.  We know from history that Secular Bear markets last for many years and experience ups and downs.  (The current secular bear started in 2000.)  I expect the “down” is just starting and will probably last for more than a year. The only buying I plan would be for a short term trade.

I didn’t need to run the numbers to know that the Navigate the Stock Market analysis is still a SELL.

I sold last week on the 27 July sell signal to be defensively positioned with only a small amount of my portfolio invested in stocks. (Zero stocks in the 401k.)

Panic in the Stock Market this week

Volume was high today on the S&P 500, about 120% of the 20-day moving average.  Volume on the NYSE was ridiculous high – 215% of its 20-day moving average. (20-dMA is just another way of saying the average over that last month.)  That is huge volume with little change in the value of the indices.  S&P was down only 1 point

"…(a) mix of buying and selling, high volume with little change in price.  This is important…it indicates that while shares of stocks are changing hands, the current price range is considered reasonable by the market as a whole." - Getting Started in Options, by M.C. Thomsett.

I’m not sure I agree with that observation.  On the surface it seems to make sense, but I am always concerned that what is really happening is that the “smart money” is selling and the “dip buyers” (those perma-bulls who always buy the dips) are buying.  The perma-bulls are right in a Bull market, but perhaps not in a Bear.  Do today’s buyers represent the “dumb-money”?  I don’t really know.  We may find out Monday though.  After the markets closed the S&P downgraded the US to AA from our AAA rating.   We now have the same credit rating as Slovenia.  That can’t be good for the market.

I am also concerned about the pace of the decline.  This week’s steep decline represented panic.  As the following slide shows, we have seen panic not long ago (2008).

(By the way...the huge spike in volume shown on the right side of the above graph is an error in the Historical Yahoo data that they didn't bother to fix.  SInce it is in the data, it also shows up on the graph.)

Breadth (the numbers of advancing vs. declining stocks) continues to deteriorate.  Breadth can be a harbinger since it can show what is happening with the market as a whole rather than just the indices.  There are about 3000 stocks traded on the NYSE.  The S&P 500 is only, well, 500 stocks.  Since it is also a weighted average, it is heavily influenced by the largest stocks of the 500, say the nifty fifty.  So if the other 2950 stocks start going down, the S&P 500 might not show it.  Following breadth can sometimes help predict the future.  The 10-dMA of advancing stocks showed that 51% of stocks were advancing on 14 July.  Today, the 10-dMA shows only 31% are advancing.

In spite of all the negatives I’ve written above, we are due for a bounce.  With the debt downgrade, it may not be Monday though.  There are many that will think about the market over the weekend and decide to sell on Monday or Tuesday.

The Navigate the Stock Market system was SELL again today.

I sold last week on the 27 July sell signal to be defensively positioned with 30% invested in stocks.  (Zero stocks in the 401k.)  I sold more today because I will need more cash (non-tax sheltered cash) within the year. I was slow to sell because I don’t like the tax implications, but it was overdue.  Today I am about 15% invested in stocks.  I think keeping 30% in stocks is OK for most people, though, because if the market is cut in half, you are only down 15%.  Also, most people have some non-tax sheltered investments that you may want to hold so you don’t have the taxes and accounting associated with the capital gains (or losses).  Also, if the bet is wrong and stocks go up, you are hedged since you will make some money.

How Low can the Stock Market Go? (August 2011)

Worst day since December 2008...at least that’s what MSN.com reported.  My records show that on 1 Dec 2008 the S&P dropped almost 9% in one day.  If you want to review 2008, the Buy/Sell record for the NTSM system is shown on the Page titled “Output of the NTSM System Showing BUY/SELL Points” linked on the right side of this page.  2008 was extremely volatile and painful year, down over 37% for the year.  Let’s hope that 2011 is not a repeat of 2008. 

Unfortunately, the NTSM system doesn’t give too many clues about how deep a correction will be.  It just gives us Buy and Sell signals.

To make a guess on the size of the correction we can look at past history.

We are now 4-years from the previous high.  In 1966 the market fell hard 4-years after the previous high.  You can see from the “Compare 1966 Bear Market to the Current Bear Market” page (also linked in this blog) that in 1966 there was a 25% decline in the Dow at this point.  Here’s some more historical data if you want to get a better idea of the range of past market action. (from a prior Weekly Market Comment by John Hussman, PhD., Hussman Funds, at  http://www.hussman.net/.)

As far as valuation, many advisors feel that valuations are OK.  Of course we often quote John Hussman, PhD, here and he has been writing regularly that valuation is terrible based on the 10-yr averages that he uses.  

We are already 7% below the 200-day moving average so we crashed that line of defense.

VIX went up over 35% to 31.66 today.  That’s a stunning move.   It implies a 66% likelihood of a 9% move in the S&P 500 within the next 30-days.  Technically, either up or down, but with the VIX up, the move is usually down.

Checking the charts, the S&P 500 chart shows pretty good support in around 1175.  If we don’t stop at 1175 there is also strong support all the way down at 1050.  Let’s hope we don’t have to drop that far, but coincidentally (or perhaps not), that would be about a 25% drop from the 1364 high we saw last May.  I hate Bear markets! 

The drop is due to the bad economic data we’ve seen recently and the revised belief that we may indeed have another recession.  So while earnings have been OK (not great, but not bad either) those earnings are now in doubt for the future and the market looks about a quarter or two into the future.  So many investors/traders are taking a more risk averse position (selling stocks & buying bonds) given the questions about future earnings.

I don’t really have an opinion about the economy…I just watch how the market behaves (via the NTSM analysis) and Buy and Sell accordingly.

Today the NTSM system was SELL.  I sold last week on the 27 July sell signal.  I am defensively positioned with only 30% invested in stocks.

NTSM is SELL again

Not much to add over yesterday; NTSM is SELL again today.

I remain defensivly positioned with only 30% invested in stocks.

Consumer spending down and NTSM is Sell

The Commerce Department reported that consumer spending fell 0.2 percent, the first decline since September 2009.

After the ISM and GDP data, add poor consumer spending and today is what you get.  The market is trying to digest all this bad data and revalue stocks.

I believe that high Government debt brings about reduced consumer spending.  First, the Government is running up huge debts that you will have to pay (eventually) thru higher taxes.  Given that news, would you be inclined to spend-spend-spend?  Not me.  Not rich people either – they are saving it for their children.

Second, since the Government now accounts for 25% of GDP (compared to 18% during Clinton’s term when he balanced the budget) the Government is itself sucking up a greater part of the capital of our country and spending it less efficiently than the free enterprise system that this country was founded upon. 

Today, we tested the 16 March low of 1256 on the S&P.  Both volume and market internals were worse today, so it was a failed test.  We’ll have to wait for a successful test before we can declare the correction over.  It is possible that we have seen the top for this cycle of the cyclical Bull market within the secular Bear trend.  The chart looks ugly – we were unable to break thru to higher territory and now we seem to be headed down.  Time wise, we are due for the end.  If that’s the case, we would expect a 25 to 50% drop in the S&P 500.

The Navigate the Stock Market analysis was SELL today and the trends in all indicators got worse. 

I sold last week on an earlier signal from NTSM.  I am defensively positioned with only 30% invested in stocks.

Friday’s GDP and Today’s ISM Worse than expected

The Institute for Supply Management reported the PMI at 50.9 indicating expansion in the manufacturing sector, but just barely.  A number below 50 indicates contraction.  The New Orders Index registered 49.2 percent, indicating contraction for the first time since June of 2009, when it registered 48.9 percent.

“Today’s decline in the manufacturing ISM to the lowest level since mid-2009 in combination with last Friday’s highly disappointing GDP report unequivocally makes it very hard to even remain slightly optimistic for the future economic outlook in the U.S.” – Harm Bandholz, Chief U.S. Economist, Unicredit Research

 The ISM, combined with anemic GDP (shown in the following chart from Econoday) reported last Friday, is cause for concern.  While most of the talking heads on CNBC said, “No problem, it’s just a soft patch….” (paraphrasing).  That is far from certain.  Both the ISM and IDP were surprises and not very good ones.

Here’s the GDP chart from Econoday at

http://mam.econoday.com/byshoweventfull.asp?fid=446920&cust=mam#top

Wells Fargo's senior economist Mark Vitner pointed out that since 1950, year-over-year growth in real GDP has dipped below 2% on 12 occasions. In 10 of those instances, the economy was already in recession or quickly entered one. The exceptions were 1956 and 2003.

Unfortunately, the Debt problem has not been dealt with at all.  The politicians are falling all over themselves declaring victory.  That’s absurd.  So they cut 2-trillion over 10-years?  That’s only 200-million dollars per year.  Our deficit will be more than 1.4-trillion dollars for this one budget year, (2011) alone…and after all this debate, panic, and crisis our politicians managed to cut $200-billion with no tax increase to trim the deficit further.  I agree with John Hussman’s comment below.

“I continue to believe that the primary drag on the economy is not "uncertainty," or taxes, or budget concerns, or health care reform, or regulation. No. What is weighing the economy down, and what will continue to weigh the economy down, is bad debt that our policy makers are transfixed on making whole rather than restructuring. This will eventually happen, because it has to happen. Yet even with that expectation, it will be an extended process, and meanwhile, I believe that we'll have numerous opportunities to take constructive investment stances amidst it all.” –  reprinted from the 1 Aug 2011 Weekly Market Comment by John Hussman, PhD. http://www.hussman.net/wmc/wmc110801.htm

When he says, “…we'll have numerous opportunities to take constructive investment stances…” he means the market will be in trouble and we’ll be able to “buy low”.

I am still not certain our Sell signal last week was really an error.  The NTSM system is based on closing data from all exchanges.  Yahoo is my source (and they get it from elsewhere – I’ve forgotten where) for the “all-exchanges” volume for the S&P 500.  Since there was a discrepancy, it is hard to know if the “closing number” was wrong or if the “historical” data published later was wrong.  At this point, I suppose it doesn’t matter.  I sold and I remain only 30% invested in the stock market.

Market action was surprisingly good today when you consider the bad GDP and ISM numbers. 

I am worried that “Breadth” looks bad as the number of advancing stock continues to decline.  Deteriorating market internals are not good.  The NTMS remains unconvinced with another HOLD value.

It’s late and I am going to bed.  Here’s the final run-down.

 
The NTSM analysis was HOLD today.  I am 30% invested and will watch market action before I move back in.   Frankly, I am in no rush and I may just wait for the market to improve enough to give us a buy signal.