The Ben Effect

I’m posting a little early due to a busy evening; but first, a scientific achievement.

Lawrence Livermore Laboratories has discovered the heaviest element yet known to science. The new element, Governmentium (Gv) , has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons.

Governmentium has a normal half-life of 2 - 6 years. It does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places. In fact, Governmentium's mass will actually increase over time, since each reorganization will cause more morons to become neutrons, forming isodopes.  Sadly true...

MARKET RECAP

Many said today was the Ben effect, i.e., the market was up on hopes the Fed will initiate QE3.  It was certainly a switch from yesterday's down day.

                                                                                                    

Here are the preliminary Friday numbers.  Friday the S&P 500 finished UP 1/2% to 1407 (rounded).  VIX fell 1.5% to 17.56.   

NTSM

I don’t have all of the final data, but I don’t think the final will be much different.  The preliminary NTSM analysis remained HOLD Friday.

The NTSM system is beating the S&P 500 by ½% for 2012.  Not much, but 89% of all hedge funds are underperforming the S&P 500 this year (per CNBC) so it could be worse. (NTSM was up 78% from 2006-2011 while the S&P 500 was essentially flat.)

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 now have a 50% stock allocation overall.  For my age, that is what most 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.

 

ENJOY THE WEEKEND! 

The VOLT - Not so shocking news

As part of the Government's GM bailout, the administration required GM to build electric cars. That’s not looking very smart now – they can’t sell them. Here's the story...

BOSTON (MarketWatch) -- "General Motors said that it plans to temporarily suspend production of the battery-powered Chevrolet Volt due to high inventory levels, according to The Wall Street Journal on Tuesday...The shutdown will be the second this year for the Volt due to weaker-than-expected demand."
Full story at...
http://www.marketwatch.com/story/gm-temporarily-suspends-volt-production-2012-08-28

 

MARKET MUSING

Some friends were incredulous when I suggested that the stock market would visit 850 again.  If we just draw a trend line going back to the last bull market start (1982) 850 is entirely possible as a reasonable target at some point in the future. 

There is a flaw in the chart since it is not plotted on log scale.  The same analysis on log scale produces a smaller drop (back to around 1,000), but that’s not really more valid.  Bear markets tend to trend between the highs and lows.  On this chart, that’s 1550 and 800, although the absolute daily low was in the high 600’s.  (The chart is not daily data.) 

If we follow the timing that we’ve seen so far, the next bear market would begin 7-years after the prior peak so maybe the next bear market will begin in 2013 or 2014.

This is all conjecture of course and the timing is a wild guess, but based on the history of past bear markets, the drop is highly likely.

MARKET RECAP                                                                               

Thursday the S&P 500 finished DOWN 3/4% to 1399 (rounded).  VIX rose 4.5% to 17.83.   

NTSM

The NTSM analysis remained HOLD Thursday.

Only the Price indicator is positive.  The others are all neutral.

The NTSM system is beating the S&P 500 by ½% for 2012.  Not much, but 89% of all hedge funds are underperforming the S&P 500 this year (per CNBC) so it could be worse. (NTSM was up 78% from 2006-2011 while the S&P 500 was essentially flat.)

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 now have a 50% stock allocation overall.  For my age, that is what most 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. 

Crossover Stock Market Strategies

CROSSOVER STRATEGIES
From the Weekly Market Commentary August 27, 2012  by John P. Hussman, Ph.D., "The Trend is Your Fickle Friend "
John Hussman did some interesting analysis in his latest market commentary. He examined trading crossover strategies for the major market indices. You may have heard of them or even used them at one point or another. Crossover strategies use crosses of the various moving averages to give buy or sell signals. For example the "Golden Cross" occurs when the 50-day moving average (50-dMA) crosses the 200-day moving average. If the 50-dMA crosses below the 200-dMA and the 50-dMA is headed down, it's a sell signal. Conversely if the 50-dMA crosses above the 200-dMA going up, it's a buy signal. Here's what Mr. Hussman has to say about these trend following strategies:

"Certainly, when one looks a chart, extended market advances always break above various moving averages, and extended market declines always break below various moving averages, so simple trend-following strategies seem utterly self-evident. Unfortunately, if you actually take that strategy to historical data, the results typically aren’t nearly as compelling. Moreover, once any amount of slippage or transaction costs are taken into account, the most widely-followed strategies generally underperform a passive buy-and-hold strategy over time, and often don’t even manage downside risk particularly well."

The NTSM system does not use any crossover strategies. I found their signals to be too late for either Buy or Sell signals when I back tested them over 15-years of so. Day/weekly traders seem to have some success with short term crossovers, but that's too much trading for me.

HUSSMAN - STILL EXPECTING A SIGNIFICANT DOWNTURN
Mr. Hussman remains bearish on the market:  "...our estimates of prospective market return/risk are presently in the most negative 0.5% of historical data, based on horizons from 2-weeks to 18-months...The phrase “most negative 0.5% of historical observations” reflects both a large magnitude and a low frequency."

MARKET RECAP                                                                               

Wednesday the S&P 500 finished UP 1pt to 1410 (rounded).  VIX rose about 3-1/2% to 17.06.    

Repeating yesterday’s comments: The S&P 500 seems to be topping out around 1410. The index first hit 1400 on 7 August.  3-weeks later it is only 9-points higher. The VIX is at levels that have brought corrections in the past. If the VIX breaks significantly higher, the VIX indicator in the NTSM analysis would switch to sell.  Whether the entire NTSM analysis would switch remains to be seen.

Breadth (percentage of stocks advancing) is going down sharply (today) while the S&P 500 has been nearly stationary.  That’s a bad sign for the short term.  The Smart Money Index isn’t looking good either because the pros are selling in the last hour of the day and that trend continued.

The above observations aren’t in the NTSM system and they represent a level of guesswork.  I use the NTSM analysis for determining buy/sell points. The NTSM is neutral today at the close.

NTSM

The NTSM analysis remained HOLD Wednesday.

The NTSM system is beating the S&P 500 by ½% for 2012.  Not much, but 89% of all hedge funds are underperforming the S&P 500 this year (per CNBC) so it could be worse. (NTSM was up 78% from 2006-2011 while the S&P 500 was essentially flat.)

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

Dividend Stocks – the next Bubble?

BARRONS (ONLINE EDITION) excerpt...
"Sectors with the highest dividends are trading at rich premiums to the broad market, relative to the historical norms, warns Vadim Zlotnikov, chief market strategist at AllianceBernstein... Utility stocks, which yield about 4%, are more expensive than they have been roughly 90% of the time. Likewise, telecoms, which yield about 4.5%, are costlier than they have been about 80% of the time..."The risk of owning these [dividend-paying] stocks is that they are 20% to 25% overvalued," and any increase in inflation or bond yields could cause them to tumble."
Full story at...
http://online.barrons.com/article/SB50001424053111904628504577593280244506506.html

My comment: Sure investors are defensive – with good reason.  The 10% mini-correction last summer was awfully small to clear the issues facing the markets.  I wouldn't give up on defensive stocks yet.

 MARKET RECAP                                                                               

Tuesday the S&P 500 finished down 1pt to 1409 (rounded).  VIX rose about 1% to 16.49. 

The S&P 500 seems to be topping out around 1410, since it has not managed to close above that value after several tries since the 16^th of August. I'll be watching the NTSM analysis to see if there is a sell indicator. There was no repeat of yesterday's huge climb in the VIX so there was little change in the NTSM recommendations today.

Breadth (percentage of stocks advancing) is going down while the S&P 500 has been nearly stationary.  That’s a bad sign for the short term.  So is the Smart Money Index, because the pros are selling in the last hour of the day as I noted yesterday.  Those negatives were not reflected in the NTSM analysis though.

NTSM

The NTSM analysis remained HOLD Tuesday based on analysis of sentiment, price, volume and VIX.

The NTSM system is beating the S&P 500 by ½% for 2012.  Not much, but 89% of all hedge funds are underperforming the S&P 500 this year (per CNBC) so it could be worse.

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

With so many indicators that I watch in positive territory, I am still considering moving back into the market to 100% invested – a truly crazy, risky position, but I am a risk taker.  At this point, it does not look like I will get a chance to move to that 100% position in August and I have decided not to push it, since as I noted above, there are a couple of technical negatives that concern me.

Ed Rendell, Co-chair of the Campaign to Fix the Debt

CAMPAIGN TO FIX THE DEBT (Yahoo Finance)
This is not a political piece because Ed Rendell (Former Democratic Governor of Pennsylvania and Chair of the Democratic National Committee) criticizes both Republicans and Democrats reasonably equally.  Ignore the grabber title: “Ryan Is a Fiscal Fraud, But Democrats Lack the Guts to Cut Entitlements: Ed Rendell.”  I found the piece interesting.

Rendell says, "It's the additional tax cuts that creates the $5 trillion deficit from the Ryan budget…and it's the reason why even in the most optimistic terms the Ryan budget doesn't produce a balanced budget until 2040," says Rendell, who is also the author the new book "A Nation of Wusses: How America's Leaders Lost the Guts to Make US Great?"

He also criticizes his fellow Democrats….’We don't have the guts to tell seniors the truth," Rendell says. ‘When Medicare was passed in 1965, the average life expectancy was 69. Today the average life expectancy is 85. Medicare was never meant to cover nearly 20 years of life. It's got to be changed...there has to be a reshaping of entitlements.’”  Full story and/or Video at…

http://finance.yahoo.com/blogs/daily-ticker/ryan-fiscal-fraud-democrats-lack-guts-cut-entitlements-120729590.html

MARKET RECAP                                                                               

Monday the S&P 500 finished down 1pt to 1410 (rounded).  VIX rose about 8% to 16.35. 

NTSM

The NTSM analysis switched to HOLD from the prior Buy at the close on Monday.

The high climb in the VIX may signal a pullback is coming.  The smart Money Index also switched to the negative today as the pros have been selling in the last hour of trading over the last month or so.  The smart Money Index is an experimental indicator that I follow, but I don’t trade it because I don’t have enough data loaded to back test sufficiently.

As the below chart indicates, the S&P 500 is now closer to the top of the channel than the bottom.  I want to see it closer to the bottom of the channel before I commit any more $ to stocks.

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 and the NTSM system is beating the S&P 500 by ½% for 2012.  Not much, but 89% of all hedge funds are underperforming the S&P 500 this year (per CNBC) so I should be happy. 

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

With so many indicators that I watch in positive territory, I am still considering moving back into the market to 100% invested – a truly crazy, risky position, but I am a risk taker.  I will wait for a better buying opportunity (as noted above).

 

Higher Gas Prices – Thanks Federal Reserve?

CNBC (Fast Money) Don’t Freak, Surge in Gas Prices Almost Over

“…we’ve got some good news. Their relentless march upward is almost over… So says, long time oil industry analyst Tom Petrie, chairman Petrie Partners on CNBC's Fast Money Halftime Report.  “The current run is late seasonal,” he says. Nothing more.  Full story at…

http://www.cnbc.com/id/48782366

I thought the rise in gas prices was a sign that the world’s economy was improving and gas prices were rising on global demand.  Shows what I know!  In fact, the Wall Street Journal reported today that European business activity contracted at a “sharp pace” in August.  “Germany faced its biggest decline in new orders in three years.”  Manufacturing in China suffered its “…biggest drop in nine months.”  The US is not out of the woods yet.  The good news is that we may not be in the woods either.

Here’s another take on high gas prices from CNN/Money.

OIL NEAR $100.  THANKS A LOT, FED! (CNN/Money)

“Analysts for KilduffReport.com, an independent energy research firm, noted in a report Thursday morning that "the monetary easing from the Federal Reserve is coming" and that "regardless of your view on the effectiveness or necessity of further easing, the markets are highly reactive to the prospects for it." The upshot is that "inflation sensitive commodities" like oil and gold, which has also been on the rise lately, should continue to head higher.”  Full story at…

http://buzz.money.cnn.com/2012/08/23/oil-economy-gas/

Lower interest rates and the threat of a devalued dollar (real or imagined) will cause commodities to go higher, just like QE1 and II.  (The Arnold bread I used to buy cost $2.39 a loaf when the recession started.  It’s now $4.39, but that’s not inflation, at least according to the Government.  They don’t count food.)

 

MARKET RECAP                                                                               

Friday the S&P 500 finished up 0.65% to 1411 (rounded).  VIX fell about 5% to 15.18. 

NTSM

The NTSM analysis returned to BUY from the its prior Hold at the close on Friday.

(The NTSM analysis is designed to call a BUY or SELL at the bottom or top respectively.  A BUY at this point is less significant than it would be at a bottom.  For that reason, the daily Buy/Sell/or Hold calls should not be used for trading, except when there is a switch from the previous Buy or Sell call. They give the general market health only.)

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 for a ½% gain on the S&P 500.  Not much, but the NTSM analysis was never designed for a 10% correction that we experienced. 

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

With so many indicators that I watch in positive territory, I am still considering moving back into the market to 100% invested – a truly crazy, risky position, but I am a risk taker.  I may wait for a better buying opportunity or move in toward the end of the month since my 401k only allows 3-moves per month and the last move must be “all-out”.  Moving in at the end of the month of August leaves more options for September.

Fiscal Cliff or Fiscal Speed Bump?

UNEMPLOYMENT CLAIMS
NEW YORK (CNNMoney) – “More people filed for their first week of unemployment benefits last week, signaling little improvement in the job market in August.
About 372,000 filed jobless claims in the week ended August 18, up 4,000 from the previous week, the Department of Labor said Thursday...This report is seen as a key predictor of monthly job creation in August...In July, the economy added 163,000 jobs , and the unemployment rate rose to 8.3%.”
http://money.cnn.com/2012/08/23/news/economy/unemployment-benefits/index.html

That isn't encouraging but it's not a disaster either. Not much change from the previous week.

FISCAL CLIFF (RANT)
There has been a lot of talk about the Fiscal Cliff, the double whammy of tax increases (due to the expiring Bush tax cuts) and across the board spending cuts of about 10%.  These cuts were passed by both parties and signed into law by the President last fall.

To me this looks more like a fiscal speed-bump than a cliff. A 10% cut? That would reduce spending by $100-million this year. Excuse me...deficits are exceeding 1-trillion dollars per year. Why is this a crisis? It should be relatively painless to absorb a 10% cut in spending. Unfortunately, the Dems are all whining about how the poor and elderly will be hurt while the Repubs are all panicked by the big money industrial complex that is afraid their favorite jet fighter project might get scaled back or put off a few years.

One of the cuts would be extremely painful: CNN/Money - "Medicare payment rates for physician services drops by 27%." That is part of a law that undoes a prior law aimed at reducing Medicare costs. Of course, simply paying less for services doesn't solve any problem and forces Doctors to turn away Medicare patients. This one issue shows how difficult it is to solve our crisis in the Medicare system and this is at the heart of our deficit problem. In its present form, Medicare is hugely underfunded.

Regarding increased taxes, it is not at all clear to me that tax increases would hurt the economy either. Oh, I understand the theory - Uncle Sam sucks up more of the money so there is less spent and the economy goes down. I've always felt that taxes should go up in a recession so those of us with jobs could help those that don't have them, but everyone likes the Keynesian way...spend, spend, spend and run up the national debt. I will point out, again, that the Japanese have been deficit spending for 20-yrs and their economy and stock market are still a wreck and now they have wrecked their country with a debt to GDP ratio over 200%, highest in the developed world and third overall.

FISCAL CLIFF
Well, enough of my rants... here is an article from CNN/Money that offers information regarding the Fiscal Cliff so you can decide for yourself.
NEW YORK (CNNMoney) -- "If lawmakers cannot agree on how to address the pending 'fiscal cliff', $7 trillion worth of tax increases and spending cuts will begin to go into effect in January."
http://money.cnn.com/2012/08/06/news/economy/fiscal-cliff/index.htm

(7-trillion? That's over 10-years. I guess fear mongering sells newspapers, clicks, ads, or whatever.)

MARKET RECAP 

Thursday the S&P 500 fell 0.8% to 1402 (rounded). VIX rose nearly 6% to 15.96.

The S&P 500 is now approaching the lower trend line (more or less) so too much more downside (a few more percent) will be a significant concern.

NTSM

The NTSM analysis switched to HOLD at the close on Thursday.

 

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

With so many indicators that I watch in positive territory, I am considering moving back into the market to 100% invested – a truly crazy, risky position, but I am a risk taker. I may wait for a better buying opportunity or move in toward the end of the month since my 401k only allows 3-moves per month and the last move must be “all-out”. Moving in at the end of the month of August leaves more options for September.

What does the Federal Reserve know that we don’t?

QE3
WashingtonPost.com: “Minutes of the last meeting of the Federal Reserve reveal that many board members see the need for additional monetary action “fairly soon” to boost the pace of economic recovery.”  Full story at…
http://www.washingtonpost.com/business/economy/federal-reserve-minutes-many-members-want-action-fairly-soon-to-boost-economy/2012/08/22/dedbe77e-ec82-11e1-9ddc-340d5efb1e9c_story.html

Frankly, that worries me.  If the economy is chugging along, slowly improving (as has been the mantra from so many) why is the Fed considering more stimulus? 

WORRY FOR THE BULLS?
As the Blog by Mark Hulbert points out, the S&P 500 has not closed above its 2 April 2012 high of 1419 (the high since the dot-com bubble is around 1550), but the 2 April high is the most recent high.  When the market hangs around the same level and can’t go up, it must go down.  It wouldn’t surprise me to see the S&P 500 fall to its lower trend line, now around 1390, or so.  The real question is whether this will break the rally.  Double tops, as this chart formation is called, can be a real test for an aging bull market.  This one is about 3-1/2 years old now and may be running out of steam.  On the other hand, as I have noted recently, just about every indicator I track and the NTSM analysis is positive now.  I’d need to see a lot of deterioration before a call could be made that the bull is over, so I am not concerned yet.  It may yet break to new highs.
 
Mark Hulbert’s blog below refers to too much bullish optimism.  The NTSM analysis of sentiment is only 52% bulls as of yesterday (latest data available) and that is neutral and not at all overly bullish.

CHAPEL HILL, N.C. (MarketWatch) — “Surprised by the Dow’s continued inability to close above its early-May highs?

You’re not alone: Tuesday was the 11th day in a row in which the Dow was less than a percentage point away from eclipsing its May 1 closing high of 13,279. And it was the 11th day in a row in which it failed…Contrarians, however, have not been surprised by the Dow’s difficulties. For a number of weeks now, contrarian analysis has suggested that the rally is living on borrowed time.”  Full story at…
http://www.marketwatch.com/story/may-june-correction-was-a-failure-2012-08-22

MARKET RECAP                                                                               

Wednesday the S&P 500 finished unchanged at 1413 (rounded).  VIX rose over 0.6% to 15.11. 

NTSM

The NTSM analysis remained BUY at the close on Wednesday.
(The NTSM analysis is designed to call a BUY or SELL at the bottom or top respectively.  A BUY at this point is less significant than it would be at a bottom.  For that reason, the daily Buy/Sell/or Hold calls should not be used for trading, except when there is a switch from the previous Buy or Sell call. They give the general market health only.)

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

With so many indicators that I watch in positive territory, I am considering moving back into the market to 100% invested – a truly crazy, risky position, but I am a risk taker.  I may wait for a better buying opportunity or move in toward the end of the month since my 401k only allows 3-moves per month and the last move must be “all-out”.  Moving in at the end of the month of August leaves more options for September.

Beating the Hedge Funds…Again

TRADER TALK WITH BOB PISANI (blog excerpt)

“1) Panic in hedge fund land: Massive underperformance argues for chasing returns. The S&P 500 is up 14 percent this year. How many hedge funds are up 14 percent this year? Not many. According to BarclayHedge, only 81 out of 736 long/short equity hedge funds they track were beating the S&P 500 as of the end of July.  That's 11 percent. As we roll into September, that kind of stat will begin to evoke mild panic in hedge fund land.”  Full blog at…

http://www.cnbc.com/id/48737384?__source=yahoo%7Cheadline%7Cquote%7Ctext%7C&par=yahoo

The Navigate the Stock Market (NTSM) blog is beating the S&P 500 by only ½% (on 1-trade) so far this year, but that seems to be a lot better than the hedge funds!!!

NEW HIGH PREDICTION

NEW YORK (Reuters) - "Wall Street hit a four-year high on Tuesday as equity markets continue to grind steadily higher on hopes that central banks will act in the near future to stimulate their economies...'I am looking for new highs in the major indexes,' said Wayne Kaufman, chief market analyst at John Thomas Financial in New York. 'Overall there is no one major negative that's out there right now that people are scared of'...Yields at a Spanish short-term debt auction dived on Tuesday, while Europe's volatility index VSTOXX (.V2TX) hit a one-month low, signaling a steady rise in investors' appetite for risk."

http://finance.yahoo.com/news/stock-futures-signal-gains-facebook-093717696.html

I’ll get very nervous if the market makes it back to the 1550 area; but I won’t complain!

MARKET RECAP                                                                               

Tuesday the S&P 500 finished down 0.35% to 1413 (rounded).  VIX rose over 7% to 15.02. 

NTSM

The NTSM analysis remained BUY at the close on Tuesday.
(The NTSM analysis is designed to call a BUY or SELL at the bottom or top respectively.  A BUY at this point is less significant than it would be at a bottom.  For that reason, the daily Buy/Sell/or Hold calls should not be used for trading, except when there is a switch from the previous Buy or Sell call. They give the general market health only.)

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

With so many indicators that I watch in positive territory, I am considering moving back into the market to 100% invested – a truly crazy, risky position, but I am a risk taker.  I may wait for a better buying opportunity or move in toward the end of the month since my 401k only allows 3-moves per month and the last move must be “all-out”.  Moving in at the end of the month of August leaves more options for September.

The Big Four Recession Indicators

The “Big Four Indicators” presented in the graph below are from the Federal Reserve and they are believed to be used for recession calls by the NBER Business Cycle Dating Committee.  (They’re the outfit that calls the official start of recession.) I took the chart of the Big Four from Doug Short who (according to his website) provides “ACTIONABLE ADVICE FOR FINANCIAL ADVISORS: Economic and Market Updates for Investment Planning.” 

Mr. Short says in his 15 August newsletter that the Big Four indicators are not rolling over as was reported by the Economic Cycle Research Institute's (ECRI) Lakshman Achuthan in July.  John Hussman is a follower of ECRI; Lakshman Achuthan and ECRI have been calling for recession.  Mr. Short says that the indicators do not show that recession is on the horizon.  Mr. Short goes into a lot more detail in his discussion.

Of course John Hussman, PhD, has numerous charts and graphs that show we are already below recession levels in important economic catogories. 

In the end the only thing I can conclude is that this “recovery” is so slow that the experts can’t agree whether we are headed into recession or not.  That is the best argument for following the market and not the economy.

NTSM analysis follows the market.  In fact most investors don’t think a recession is coming (as I noted in Friday’s blog) based on the relative strength of the Morgan Stanley Cyclical Index when compared to the S&P 500 as of last Friday.  (See the RECESSION INDICATOR paragraph in this past Fridays Blog.)

MARKET RECAP                                                                               

Monday the S&P 500 finished unchanged at to 1418 (rounded).  VIX rose over 4% to 14.02. 

NTSM

The NTSM analysis remained BUY at the close on Monday.
(The NTSM analysis is designed to call a BUY or SELL at the bottom or top respectively.  For that reason a BUY at this point is less significant than it would be at a bottom.  For that reason, the daily Buy/Sell/or Hold calls give the general market health and should not be used for trading, except when there is a switch from the previous Buy or Sell call.)

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

Watching other Indicators

While I tend to focus on the NTSM analysis of Sentiment, Price, Volume, and VIX there are other indicators that I watch to judge the health or possible direction of the market.  Here are a few of them and where they stand:

CHARTING: I look at a chart of the S&P 500 to see where the Index falls within the channel.  It is currently in the middle of the channel so I think the S&P 500 can go up another 2% or so before it may run into headwinds.

%-ABOVE THE 200-DAY MOVING AVERAGE (200-dMA)

The S&P 500 is about 6% above its 200-dMA.  The market usually tops out when the S&P 500 is about 10-15% above the 200-dMA so there is room to run there.

SMART MONEY

There are different ways to look at the “Smart Money Index.”  I follow the action in the last hour of market trading to see what the professional-traders are doing.  Recently the trend has been down at the end of the day, but over the last 2-months or so the market has moved up in the last hour of trading so, overall, I’d say this indicator is slightly positive.  This is my least tested indicator since I’ve never found easy access to past data for this indicator.  Manually loading each day of data is too much of a pain.

RECESSION INDICATOR

My recession indicator compares the Morgan Stanly Cyclical Index to the S&P 500 index.  The theory here is that the professional traders move in and out of cyclical stocks depending on the business cycle.  In other words, they would sell the cyclical stocks (those that would be most hurt by recession) prior to recession.  This indicator is currently NOT suggesting a recession.  The cyclical stocks are rapidly gaining on the S&P 500.

So that’s a quick run-down of a few indicators that are not in the NTSM analysis.  Here’s today’s recap followed by today’s NTSM analysis result.

MARKET RECAP                                                                               

Friday the S&P 500 finished UP 0.19% to 1418 (rounded).  VIX fell almost 6% to 13.45.  I had to go all the way back to June of 2007 to find a closing VIX that low.  To me, low volatility means slow steady gains so I’ll be curious to see how much longer, and lower, the VIX will drop.  While low VIX is generally good, I do worry there is a limit to how low it can go.  If it gets too low, it may signal the start of a serious bear when it begins to rise from a very low bottom.  That’s what happened in 2007 when it dropped to 10.

NTSM

The NTSM analysis remained BUY at the close on Friday.

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

Unemployment? No real change.

UNEMPLOYMENT CLAIMS

NEW YORK (CNNMoney) – “The number of first-time claims for unemployment benefits rose slightly last week, muddling the picture for the job market.  About 366,000 people filed jobless claims in the week ended August 11, up 2,000 from the previous week, the Department of Labor said Thursday.”  Full story at…

http://money.cnn.com/2012/08/16/news/economy/unemployment-benefits/index.html?iid=HP_LN

No new information in the employment data.  This isn’t a growing economy.  I did see a report last week about more job openings, so maybe there is a glimmer of hope for the future.

JOB OPENINGS

The Spokesman-Review (8 August 2012) WASHINGTON – “U.S. employers posted the most job openings in four years in June, a positive sign that hiring may pick up.  The Labor Department said Tuesday job openings rose to a seasonally adjusted 3.8 million in June, up from 3.7 million in May. That’s the most since July 2008.”  Full story at…

http://www.spokesman.com/stories/2012/aug/08/job-openings-reach-four-year-high/

“The most since July 2008?”  Great Caesar’s Ghost! That was the middle of the Great Recession!  That gives you an idea of how bad this recovery has been.

MARKET                                                                                           

Thursday the S&P 500 finished UP 0.71 to 1416 (rounded).  VIX fell 2.3% to 14.29.

I am glad to be following an analytical market timing system.  This market is impossible to figure out.   I saw a quote from an analysts somewhere (CNN/Money, I think) that said something like, “…never short a dull market.”  Apparently, low-volumes on the stock market make it subject to sharp upward swings.

NTSM

The NTSM analysis remained BUY at the close on Thursday. The VIX indicator switched back to neutral, but it was replaced by the Volume indicator(now positive) that is showing more upside volume on today’s good-day.  Price remains positive too and those 2-indicators were enough to push the overall NTSM analysis to BUY.

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

Where has all the volume gone, long time ago?

With apologies to Pete Seegar…
I’m a little late here, but I thought this was interesting.  You may remember on the first of August volume went thru the roof.  It turns out that the cause was Knight Trading and their errant software.  Here’s an article from Bloomberg on their problems:

“Knight Capital Group Inc. (KCG)’s $440 million trading loss stemmed from old computer software that was inadvertently reactivated when a new program was installed, according to two people briefed on the matter.” Full story at…

http://www.bloomberg.com/news/2012-08-14/knight-software.html

Now some are suggesting that the current low volume is related to Knight’s problems and it may be.  They stopped trading while trying to track down the problems.  It really is an indication of the pervasiveness of computer trading and how it is distorting the markets.  Here’s more on the subject from ZeroHedge.

ZEROHEDGE POST 13 Aug 2012

"NYSE volume plunged - almost unbelievably to be frank - to its lowest non-holiday-trading day volume in over a decade. Intraday ranges remain tiny and average trade size unremarkable as ES is still suffering from the post-Knight slashing in volume…

Stunningly - today's NYSE volume was 3 standard-deviations below its 9 year trend lower on an EXPONENTIAL chart!!! - this is easily the lowest NYSE volume day of trading that is not a holiday!!...Just to be clear - and with no hyperbole - NYSE volume has trended exponentially lower for over 8 years and today's volume was still a 3-Sigma (3-std deviation) outlier to the downside!!"

http://www.zerohedge.com/news/volume-crashes-sp-500-breaks-winning-streak-even-and-vix-plunges-five-year-lows

I don’t know if that low volume is good or bad for the market.  I would like to see computer trading halted, especially the high frequency trading.  It is too easy for them to manipulate the markets.

MARKET                                                                                           

Wednesday the S&P 500 finished up 2pts (0.1%) to 1406 (when rounded).  VIX fell 1.5% to 14.63.  The S&P 500 seems to be stalling here.  Could this be the top?  My crystal ball is a bit foggy so I’ll wait for the NTSM system to give some clues.  At this point, it looks positive, but that can change in a hurry.

The Morgan Stanley Cyclical index is rising faster than the S&P 500 recently and that experimental indicator flashed BUY today.  There is no action to take on that news, but there is an important point here. If investors as a whole believed that we are headed for a recession soon they would not be buying cyclical stocks faster than the top 500 stocks.  Either the investing community is clueless, or those calling for a recession are wrong.  Either is possible.

NTSM

The NTSM analysis switched back to BUY at the close on Wednesday because the VIX indicator moved back into positive territory.

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

Market Musings

You may ask why I am still long (50% invested in Stocks) now since I post extremely bearish commentary such as those by John Hussman (yesterday) and others; Robert Prechter, the Aiden Forecast newsletter, Albert Edwards, Paul B Farrell, Marc Faber, Robert Weidemer, Bob Janjuah, Harry Dent Jr, Jimmy Rogers and Abigal Doolittle (just to name a few) over the past year.  It is important to remember that the stock market remains in a secular (long term) bear market that began in 2001.  Based on the history of past bear markets, the odds are high that there will be another major collapse in price in the markets.  Almost all of the experts I named above have predicted a drop to at least 850 on the S&P 500 (my target) or lower.  What we don’t know is when, though history would suggest it’s overdue based on the averages.  I use the Navigate the Stock Market analysis to try to get out of the market before the “when”.  One indicator I look at is VIX, the Volatility Index (S&P).

VIX

It is calculated from put and call options and represents the implied change, up or down, in the S&P 500 index based on its formula.  Basically a VIX of 15 means an expected change of 4.33% over the next month.

The current Volatility Index is about what we’ve seen at previous highs (prior to corrections of about 15-20%) at least going back a few years; but back in 2007 the VIX fell all the way to 10, so the level of VIX isn’t a great indicator by itself, but it does give some cause for caution.

Today the VIX was up a lot and that is not a good sign for the near term. Today the NTSM VIX indicator switched to neutral from buy.

SENTIMENT

Sentiment is very low now.  As of yesterday’s close (my sentiment indicator is almost always a day late) sentiment was 37%-bulls.  That’s a surprise that would seem to indicate that this bull-run could keep going up.  On the other hand sometimes the masses get it right and the sentiment is correct.  That usually happens when the direction of the markets is clear.  For example, it’s not a surprise to find bearish sentiment when the market is collapsing in panic selling.  It is a surprise now, though, because it suggests that the S&P 500 can go higher from here.  Sentiment is not a great indicator though for making buy/sell decisions – it can be very early or late.  Currently, Sentiment remains neutral.

VOLUME

Volume switched to neutral several days ago as more volume began trending to the downside.

MARKET                                                                                           

Tuesday the S&P 500 finished unchanged at 1404.  VIX rose 8% to 14.85. 

NTSM

The NTSM analysis deteriorated today and switched to HOLD at the close on Tuesday.  (Only the Price indicator is currently positive. Sentiment, Volume and VIX indicators are all neutral.)

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

HUSSMAN – GLOBAL RECESSION IS AT HAND

I always enjoy John Hussman’s Weekly Market Commentary.  It’s no surprise that he remains negative on the economy and the stock market.

This week he posted a chart of “…new orders, and order backlogs components of numerous regional surveys from the Federal Reserve and the Institute of Supply Management (ISM)…” that showed data points are already below the levels at the start of the last recession.  He further noted that…"We observe the same sustained deterioration in economic data across the world, including Europe and China (where the absolute values are higher, but the standardized values are similarly bad). The overall pattern reflects what Lakshman Achuthan of ECRI often describes as the “three P’s” – pronounced, pervasive, and persistent. Those three P’s help to distinguish signals from noise. Presently, our own noise-reduction methods suggest that a global recession is at hand.” -  John Hussman, PhD, from his 13 Aug 2012 Weekly Market Commentary at Hussman Funds at http://www.hussmanfunds.com/

UCLA PULSE OF COMMERCE INDEX
The chart below is UCLA’s Pulse of Commerce Index (PCI) and it tracks fueling tickets for over the road trucking using real-time fuel consumption data.  As noted by its close correlation to Industrial Production, it was remarkably accurate in predicting the great Recession.  It is also remarkably in tune with GDP. 

When I last looked at this data it was showing a dip that seemed to be confirming a recession.  As of May (the latest data posted) that doesn’t seem to be the case.  The real question may be, “What’s the June or July curve going to look like?”  With a lag of several months this data won’t give me too much confidence that the US economy can avoid recession. 

Chart from http://www.ceridianindex.com/index.php

BULL MARKET STATS

The current Bull-market within the secular bear market has lasted roughly 39-months from the March 2009 low to present.  The gain so far has been about 100%.  Going back to 1907, the average gain has been 100% and the average length of bull has been 26-months.The longest bull was from 2002-2007 (63-months).  The greatest gain was from 1932-1934 (169%).

MARKET                                                                                           

Monday the S&P 500 finished down roughly 0.1% to 1404.  VIX fell about 7% to 13.67.  VIX usually rises when the S&P falls; divergence as much as today’s often produces an up day the following day.

NTSM - BLOG

The NTSM analysis was again BUY at the close on Monday. 
(The NTSM analysis is designed to call a BUY or SELL at the bottom or top respectively.  For that reason a BUY at this point is less significant than it would be at a bottom.  NTMS can reverse quickly, even after a buy call.)

I am cautiously optimistic in the short run, but very pessimistic in the long run.  The S&P 500 is now close to making a double top.  It will need to break the old recent high around 1410 if this bull is going to continue.

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

NTSM 2012 BLOG PERFORMANCE

So far this year NTSM is beating the S&P 500 by a whopping ½% on one trade.  For prior years see the page, "Performance of the NTSM System" on this blog page.