“Current market conditions provide an ideal moment to
highlight the distinction between investment and speculation. Sound investment
is a) the purchase of an expected stream of future cash flows that will be
delivered to the investor over time, where b) the price paid today will result
in an acceptable long-term return if those expected cash flows are delivered,
and c) the expectations are set using assumptions that allow a reasonable
margin of safety…Speculation relies much less on calculation than on
psychology…I’ll reiterate that while secular bear market lows do not occur
frequently, they do tend to average about 50% of typical valuation norms
(compared with current valuations, which are about 210% of the historical norm,
using an average of numerous historically reliable measures).” John Hussman,
PhD, weekly Market Commentary from Hussman Funds at...
http://www.hussmanfunds.com/wmc/wmc140721.htmThis suggests that based on past history, the S&P 500 could bottom out (in a future decline) at one-fourth of today’s value assuming the earnings (E) of the PE equation remains constant. The most likely decline is in the 50% range and that probably will occur after a smaller correction and recovery.
CHICAGO FED: GROWTH SLOWED IN APRIL (Fox Business News)
“Economic growth moderated in April, according to the
Chicago Fed national activity index released Thursday. The index fell to
negative 0.32 in April from positive 0.34 in March. However, the three-month
average rose to 0.19 from 0.04 in March -- the highest level since November
2013. The index is a weighted average of 85 different economic indicators,
designed so that a reading of zero is equivalent to trend growth.” Story from…http://www.foxbusiness.com/economy-policy/2014/05/22/economic-growth-slowed-in-april-chicago-fed-national-activity-index-shows/
LOAN QUALITY DECLINES (Bloomberg)
“The Fed’s Board of Governors told Congress last week
that it’s engaged in “strong supervisory follow-up” to guidance given to banks
in 2013 to improve their underwriting standards for high-yield loans. Despite those efforts, Chair Janet Yellen said she’s still seeing a “marked
deterioration” in quality. For the first time, more than half of the junk-rated
loans arranged in the U.S. this year lack typical lender protections like
limits on the amount of debt borrowers can amass relative to earnings.” Story
at… http://www.bloomberg.com/news/2014-07-21/fed-s-bubble-busting-in-junk-loans-seen-failing-as-sales-surge.html
MARKET REPORT
Monday, the S&P 500 was
down about 0.2% to 1974 (rounded).
VIX rose about 6% to 12.81. The yield on the 10-year Treasury Note was down slightly to 2.47% at the close.
The S&P 500 is somewhat directionless right now with
a lot of choppiness; it looks like the index is making a top. It still could go a bit higher though. For now this top is just a normal short-term
top and a 5% decline would be normal.
CORRECTION WATCH
(1) No Correction:
Market Internals are neutral. The Percentage of Stocks
above their 200-dMA rose to 62% Friday (data is a day late) and 61% is the
trouble point.
(2) Correction Now:
Statistically, the index is too “quiet” (as it has been
since mid-May) and a pullback is suggested anytime. Chart wise, the index moved
up to near the top of the 3-month chart upper trend line today (Friday) and
that could mean the Index is ready for (or already in) pullback mode.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks
advancing (NYSE) rose to 47% at the close Monday. (A number below 50% for the 10-day average is
generally BAD news for the market.) New-highs outpaced New-lows Monday. The spread (new-highs minus new-lows) was +59.
(It was +100 Friday.) The 10-day moving average of change in the spread rose to
minus-2. In other words, over the last 10-days, on
average, the spread has DECREASED by 2 each day. The smoothed 10-dMA of up-volume
was UP today and the Internals remained “neutral” on the market. 
Market Internals are a decent trend-following analysis of
current market action, but should not be used alone for short term trading.
They are usually right, but they are often late. They are most useful when they diverge from
the Index. In 2013, using these
internals alone would have made a 16% return vs. 30% for the S&P 500 (in on
Positive out on Negative – no shorting).
Of course, few trend-following systems will do well in an extreme
low-volatility, straight-up year like 2013.
NTSM
The NTSM analytical model for LONG-TERM MONEY remained
HOLD Monday. Sentiment fell to 76%-bulls
(5-dMA of {bulls/(bulls+bears)} for funds invested in selected Rydex/Guggenheim
funds at the close on Thursday (data is a day late). (83% is the current negative
level for the Sentiment indicator.) This value was 85%-bulls on 19 May. The
Price indicator is positive because up moves have been higher than down
recently. Sentiment, Volume & VIX indicators are neutral.
MY INVESTED POSITION
I increased my stock allocation to 50% invested in stocks
on 26 March because of the NTSM indicators turned positive 24 Mar at the
close. 50% in stocks is fully invested
for me, given my age (semi-retired) and the risk inherent in today’s stock
market. I am watching closely to see if it is time to reduce my long-term stock
holdings.--INDIVIDUAL STOCKS--
ENSCO (ESV): HOLD (Earnings announce 31 July)
For my initial discussion see the NTSM blog at:
http://navigatethestockmarket.blogspot.com/2014/05/coppock-curve-says-stock-crash-nowblow.html
Ensco has surpassed the mean and median analyst price targets so I rate it hold, but the 6% yield is worth owning.
