“Service industries expanded in December at the slowest pace in six months, indicating the biggest part of the U.S. economy cooled as the year drew to a close. The Institute for Supply Management’s non-manufacturing index fell to 56.2 from a November reading of 59.3 that was the second-strongest since 2005…” Story at…
http://www.bloomberg.com/news/2015-01-06/service-industries-in-u-s-expand-at-slowest-pace-in-six-months.html
This isn’t necessarily bad news: since 50 is a neutral reading, manufacturing is still expanding. Further, this could have been reported more positively by noting that the prior reading of 59.3 might have been too hot to be sustainable.
The economy looks OK now and is still improving. The markets will be watching the upcoming earnings season to see if the strong dollar is hurting U.S. companies. A strong dollar means that U.S. products cost more in other countries. Larry Kudlow (Economist & CNBC commentator) argues that a strong dollar also means that overseas-materials used in U.S. manufacturing cost less, and overall, the stronger dollar will help US companies rather than harm them. Let’s hope he is right.
SMALL CAPS MIGHT BE THE PLACE TO BE, BUT…
…only if the Russell 2000 can climb past its present triple-top chart formation. There are good reasons to prefer Small caps to the large caps now (primarily a weakening dollar), but the Russell 2000 stalled at about 1200 last March and has failed to get appreciably higher in three tries. If it can’t go higher it will fall and likely pull the market down with it. It needs to get above about 1245 before I am feel better. The Russell weakness may be a warning of an upcoming correction and today the Russell fell 1.7% almost twice the S&P’s drop.
On another subject, here’s an excerpt from a long commentary on commodity prices by David Stockman…
CRASHING COMMODITIES THE FAULT OF CENTRAL BANKERS? “YES,” SAYS DAVID STOCKMAN (Stockman’s Corner)
“Crude oil is not the only commodity that is crashing…today’s plunging commodity prices represent something new under the sun. That is, they are the product of a fracturing monetary supernova that was a unique and never before experienced aberration caused by the 1990s rise, and then the subsequent lunatic expansion after the 2008 crisis, of a cancerous regime of Keynesian central banking…the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.”
Chart from… http://davidstockmanscontracorner.com/why-commodity-prices-are-cliff-diving-the-iron-ore-collapse-reflects-the-end-of-the-monetary-super-cycle/“…In short, when the classical Austrians talked about “malinvestment” the pending disasters in the global steel and iron ore industries (and also mining equipment and other supplier industries) are what they had in mind. Except none of them could have imagined the fevered and irrational magnitudes of the deformations that have resulted from the actions of the mad money printers who now run the world’s central banks.” Commentary from David Stockman at…
http://davidstockmanscontracorner.com/why-commodity-prices-are-cliff-diving-the-iron-ore-collapse-reflects-the-end-of-the-monetary-super-cycle/
It is not at all clear that this commodity collapse will hurt the economy overall.
MARKET REPORT
-Tuesday, the S&P 500 was down about 0.9% to 2003 (rounded). The S&P 500 ended the day very near its lower trend-line. If it breaks much lower selling will pick up. (I suspect the NTSM system would give a Sell signal too.)
-VIX was up about 6% to 21.12. (VIX above 20 is a signal for some traders of bad news ahead. I worry more about the rise in VIX and that is high too since VIX is up 80% in a month.)
-The yield on the 10-year Treasury Note fell to 1.94% as investors sold risk and bought Treasuries. (The yield on the 10-yr fell 5% today (Tuesday) on a percentage basis and that’s pretty big move. Traders are worried.)
Two positive signs: Tuesday there was a reversal in New-high/new-low data and that is mentioned further in the Market Internal paragraph below. Tuesday was also statistically significant (a big down day) for the 2nd day in a row. Perhaps there will be a turnaround to the upside Wednesday - futures are pointing up as I write this.
200-dMA
The Index is now 2.2% above the 200-day moving average (dMA) of 1960. A drop to that level must hold or we have bigger problems.
RELATIVE STRENGTH INDEX: RSI (14-day, SMA) = 53. Oversold is 30, so the RSI suggest the index will fall further. There are many ways that RSI is calculated. I use a simple moving average method because it tracked the best for 2013. Every pullback in 2013 ended with the RSI below 30 and most of those were only about 5% down from the prior top. (RSI is a ratio of the size of gains compared to all gains over a given period; here 14-days. 50 is neutral so today’s reading of 53 means that the size of moves on up-days have been slightly larger than the size of moves on down-days over the last 14-days.)
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) fell to 54% at the close Tuesday. (A number above 50% is usually GOOD news for the markets.) In a positive reversal, New-highs outpaced New-lows Tuesday. The spread (new-highs minus new-lows) was +13. (It was -4 Monday). The 10-day moving average of change in the spread was minus -18. In other words, over the last 10-days, on average, the spread has DECREASED by 18-each day. (It was -17 yesterday, but I had a typo.)
Internals are neutral on the market, but all internals are negative except Breadth.
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
Tuesday, the long-term NTSM system analysis remained HOLD. VOLUME and VIX indicators are negative; PRICE is positive; other indicators are neutral. NTSM is close to a SELL. We’ll have to see if the Index can significantly break the lower trend line.
I have tightened up on criteria for sell signals in hopes that the NTSM will avoid false sell signals that were prevalent in 2013. There were 4 false sells and one accurate sell signal in 2013.
MY INVESTED STOCK POSITION
I remain fully invested at 50% invested in stocks. 50% is
conservative, but appropriate for a retired guy.
