CORRECTION IS FINALLY HERE (Yahoo Finance)
“Hammered by weak economic data in Asia, South American
turmoil and a stream of weak earnings reports from blue chips like IBM (IBM) and McDonalds (MCD) the S&P500 (^GSPC) is down sharply for the weak and off
more than 1% in 2014. The drop wouldn’t even both worth mentioning if not for
the fact that it’s been well over 2 years since the last stock market
correction. With stocks up more than 50% since August of 2011 experienced
investors are bracing themselves for a meaningful equity pullback…[Is it just
because the market is up 50%?]…’It is different now. We now have a catalyst…the Fed doesn’t
control…[emerging markets].’” Full story and video at...
CORRECTION
In 2013 pullbacks got no further than the lower trend line. My estimate of the lower trend line is 1775
and, absent news, the pullback would be expected to stop there. With so much news out of China and the
emerging markets, that may not happen this time. I can make a case for a 10-15% correction now
based on: nervous US investors who don’t want to lose last year’s profits;
China/emerging market news; technicals (I’ve noted ad nauseam) such as the
S&P 500 10.1% above the 200-dMA at the high of 1848 and a complacent market
measured by lack of price-volume movement leading up to the highs. Then there’s the chart too, where the S&P
500 made a double top at 1848 and also exhibits a bearish rising wedge pattern
that is resolving to the downside. Now
we have the VIX that has gone thru the roof this week. All of these clues are pointing to a pullback
bigger than a 5% move to the lower trend line.
At this point, the pullback is not likely to be the
“Big One” that so many have been calling for more than a year, but there is no
way to be sure.
EMERGING MARKET CRISIS (Bloomberg)
“The worst selloff in emerging-market currencies in five
years is beginning to reveal the extent of the fallout from the Federal
Reserve’s tapering of monetary stimulus, compounded by political and financial instability.
The Turkish lira plunged to a record and South Africa’s
rand fell yesterday to a level weaker than 11 per dollar for the first time
since 2008. Argentine policy makers devalued the peso by reducing support in
the foreign-exchange market, allowing the currency to drop the most in 12 years
to an unprecedented low….Investors are losing confidence in some of the biggest
developing nations, extending the currency-market rout triggered last year when
the Fed first signaled it would scale back stimulus.” Full story at…
CHINA BANK REGULATOR ISSUES ALERT (Bloomberg)
“China’s banking regulator ordered its regional offices
to increase scrutiny of credit risks in the coal-mining industry…signaling government
concern about possible defaults….The coal industry has come under scrutiny as
investors seek repayment of a 3 billion-yuan ($496 million) trust product
that’s facing default because the miner that borrowed the funds collapsed. A
default threatens to shake investor faith in China’s $1.67 trillion trust
industry and add to challenges to the Communist Party’s ability to ensure
stable growth in the world’s second-biggest economy.” Full story at...
MARKET REPORT
Friday, the S&P 500 was down 2% to 1790 (rounded).
VIX was UP about 32% to 18.14. (Holy correction batman!)
The 10-year Treasury Note yield closed lower to 2.73% as
investors sold stocks and bought bonds. (As bond prices rise, yield falls.)
Rates at 3% or above are considered by some traders to be “trouble-for-stocks”.
Today (Friday) was a statistically significant day in
price/volume action based on statistical analysis of price/volume
movement. These days are followed by a
reversal about 60% of the time so an up-day is favored for tomorrow, but with a
caveat. The market appears to be rolling
over now so the 60%-rule may not hold true this time.
MARKET INTERNALS (NYSE DATA)
No surprise, Market Internals are deteriorating and only Breadth
remains positive.
The 10-day moving average of stocks advancing fell to 51%
at the close Friday. (A number above 50%
for the 10-day average is generally good news for the market.) New-lows outpaced new-highs Friday, leaving
the spread (new-hi minus new-low) at +48 (It was +46 Thursday so this represents
a reversal). The 10-day moving average of change in the spread fell to -23. In
other words, over the last 10-days, on average, the spread has decreased by 23
each day.
Same as yesterday, Internals are still neutral, but only
because the 10-dMA of Breadth remains above 50%. Breadth (as I measure it) can be the slowest
indicator. New-high/new-low data has
turned down sharply and it frequently calls short-term market direction
correctly.
Overall, Internals are almost negative.
Market Internals are a decent trend-following analysis of
current market action, but in 2013, if I had been buying the positive ratings
and selling negative ratings I would have under-performed a buy-and-hold
strategy.
NTSM
The NTSM system switched from Hold to SELL today.
The four areas of analysis, Sentiment, Price, Volume and
VIX are currently rated as follows:
Sentiment, VIX and Volume are all issuing sell signals.
In addition, the “panic indicator” also flashed sell. The panic indicator is a statistical analysis
of the market and it is very accurate at identifying reversals at tops and
bottoms. Since the market is at a top,
the indicator is telling us there is a strong likelihood of more sell-off to
come.
The Price indicator remains neutral.
MY INVESTED POSITION
I am about 30% invested in stocks as of 20 December
(S&P 500-1540) because I upped my stock holdings by 10% on the 20th
of December. 30% is a reasonable level
of stock holdings for a correction, so I don’t need to reduce holdings since I
don’t think this will be a major crash.
Even if a surprise collapse did take the stock market down by 50%, I’d
only lose 15% in the stock portfolio. On
the other hand, if I am wrong, leaving 30% invested in stocks hedges the bet
since no system is perfect.
