GDP Falls…Chicago PMI Falls…Michigan Sentiment Falls…Stocks are Cheap

GDP FALLS (WSJ)
“U.S. gross domestic product contracted at a 0.7% seasonally adjusted annual rate in the opening months of the year, a significant downward revision from an initial estimate of 0.2% growth. This marks the third time since the recession ended that the official measure of GDP fell into negative territory.” Story at…
http://blogs.wsj.com/briefly/2015/05/29/why-u-s-gdp-shrank-at-a-glance/
My cmt: This wasn’t a surprise and was widely expected by economists.
 
CHICAGO PMI (Morningstar.com)
“An economic yardstick for the manufacturing-heavy U.S. Midwest saw growth slip into contraction in May, casting doubt on a widely expected bounceback for the U.S. economy in the second quarter. The Chicago Business Barometer, commonly known as the Chicago PMI, shrank to 46.2 this month from 52.3 in the prior one.” Story at…
http://news.morningstar.com/all/dow-jones/us-markets/201505296829/chicago-pmi-swings-to-contraction-in-may.aspx
 
STOCKS ARE CHEAP – HERE’S WHY (CNBC)
"When people say 'Oh, well stocks look cheap or expensive compared to history,' it doesn't mean anything," said Golub, chief U.S. market strategist at RBC Capital Markets.  The fact of the matter is, the value of stocks has to be compared to other options the investors may choose from…"When you have a 10-year bond yield at 2.2 percent, you should have a valuation of stocks with a P/E over 20," he said. The math here is strikingly simple. Golub values the market simply by dividing S&P 500 earnings by the average yield on Baa-rated corporate bonds—currently around 4.7 percent. By dividing 1 by 0.047, Golub arrives at his "justified" earnings multiplier of 21.” Story at…
http://www.cnbc.com/id/102718012
My cmt: I refer you back to Liz Ann Sonders excellent discussion of PE values at…
http://www.advisorperspectives.com/commentaries/20150519-charles-schwab-devil-inside-dissecting-the-most-popular-valuation-metrics
 
MICHIGAN SENTIMENT FALLS (Fox News)
“The University of Michigan says its index of consumer sentiment dropped to 90.7 from 95.9 in April. The May reading was the lowest since November. Consumers of all ages and income levels were gloomier this month.” Story at…
http://www.myfoxchicago.com/story/29188979/us-consumer-sentiment-drops-in-may
 
STOCK MARKET SENTIMENT:  I measure sentiment using a 5-day moving average of funds invested in selected Rydex/Guggenheim funds calculated as {bulls/(Bulls+bears)} . Sentiment was higher again Thursday (data is a day late) and is close to giving a sell indication. Sentiment alone won’t trigger a sell; in addition to sentiment, it will take one or more indicators to give a true sell signal.
 
MARKET REPORT
-Friday, the S&P 500 was down about 0.6% to 2107 at the close.
-VIX rose about 4% to 13.84.
-The yield on the 10-year Treasury Note inched dipped to 2.12%.
 
-Market action. The S&P 500 tested 2105 a couple times Friday and finally closed about 2pts higher at 2017.  2105 is about where the lower trend line is now so it is good to see that support level hold. (The value associated with the lower trend-line changes as the trend-line rises; it is also somewhat subjective where one draws the line.)
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) slipped to 47% at the close Friday.  (A number below 50% is usually BAD news for the markets. In a negative reversal, New-lows outpaced New-highs Friday. The spread (new-highs minus new-lows) was minus-5. (It was +8 Thursday.)  The 10-day moving average of change in the spread fell to -8.  In other words, over the last 10-days, on average; the spread has decreased by 8 each day.

Internals are now negative on the markets.

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 2014, using these internals alone would have made a 9% return vs. 13% 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, nearly straight-up year like 2014.

 
NTSM         
Friday, the NTSM analysis remained HOLD. PRICE is positive. VOLUME, VIX and SENTIMENT indicators are neutral, although (as always) sentiment remains extremely high.

MY INVESTED STOCK POSITION

I remain fully invested at 50% invested, mostly in smaller cap-stocks in the long-term portfolio with some international stocks. 50% is conservative, but appropriate for a conservative retired guy. 
 
The Dow Jones US Completion Index (all stocks except the S&P 500 – the “S” fund in the TSP) remains ahead of the S&P 500.  Since 1 February it is 2.7% ahead of the S&P 500. Since 1 March the Euro-Pacific ETF (EFA) (“I”-fund) is 2.4% ahead of the S&P 500.
 
THRIFT SAVINGS PLAN (TSP) MEMBERS
My new TSP Allocation: 50%-G; 10%-C; 20%-S; 20%-I.  (50% cash is too high for non-retirees, however, the “G”-fund did return 2.2% over the last 12-months and that is exceptional for risk-free money.) 

Jobless Claims…Crude Inventories...TSP Changing Allocation

JOBLESS CLAIMS (Bloomberg)
“For the 12th consecutive week, the number of applications for jobless benefits remained below 300,000, according to figures from the Labor Department issued Thursday. The report for the seven days ended May 23 showed that claims are hovering just above 15-year lows reached at the end of April…Jobless claims increased last week by 7,000 to 282,000, the Labor Department’s data showed. The prior week’s reading was revised to 275,000 from an initially reported 274,000.” Story at…
http://www.bloomberg.com/news/articles/2015-05-28/jobless-claims-in-u-s-hold-below-300-000-for-12th-straight-week
 
CRUDE INVENTORIES (Reuters)
“Oil prices rose in choppy trade on Thursday, snapping two days of sharp losses, after data showed a fourth weekly drawdown in U.S. crude stocks. The U.S. Energy Information Administration (EIA) said crude oil inventories fell by 2.8 million barrels last week…” Story at…
http://www.reuters.com/article/2015/05/28/us-markets-oil-idUSKBN0OD04820150528
My cmt: Most traders seem to think oil will fall again.
 
MARKET REPORT
-Thursday, the S&P 500 was down about 0.1% to 2121 at the close.
-VIX rose about 0.3% to 13.31. (The options boys weren’t too worried about today’s down day.)
-The yield on the 10-year Treasury Note inched up to 2.14%. 
 
SENTIMENT:  I measure sentiment using a 5-day moving average of funds invested in selected Rydex/Guggenheim funds calculated as {bulls/(bulls+bears)} . Sentiment is screaming higher from 78%-bulls, 6-days ago, to 82%-bulls yesterday. It may not sound like much, but it is a big move in a short amount of time. That trend must be watched.  Too much bullishness will suggest trouble ahead, sooner rather than later.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) slipped to 51% at the close Thursday.  (A number above 50% is usually GOOD news for the markets. New-highs outpaced New-lows Thursday. The spread (new-highs minus new-lows) was +8. (It was +19 Wednesday.)  The 10-day moving average of change in the spread fell to -1.  In other words, over the last 10-days, on average; the spread has decreased by 1 each day.

Internals deteriorated, but remained neutral on the markets.

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 2014, using these internals alone would have made a 9% return vs. 13% 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, nearly straight-up year like 2014.

 
NTSM         
Thursday, the NTSM analysis remained HOLD. PRICE is positive. VOLUME, VIX and SENTIMENT indicators are neutral, although (as always) sentiment remains extremely high.

MY INVESTED STOCK POSITION

I remain fully invested at 50% invested, mostly in smaller cap-stocks in the long-term portfolio with some international stocks. 50% is conservative, but appropriate for a conservative retired guy. 
 
The Dow Jones US Completion Index (all stocks except the S&P 500 – the “S” fund in the TSP) remains ahead of the S&P 500.  Since 1 February it is 2.6% ahead of the S&P 500. Since 1 March the Euro-Pacific ETF (EFA) (“I”-fund) is 2.5% ahead of the S&P 500.
 
THRIFT SAVINGS PLAN (TSP) MEMBERS CHANGE
Friday, I am reducing my S-fund allocation slightly and increasing the I-fund a commensurate amount as follows:

My new TSP Allocation: 50%-G; 10%-C; 20%-S; 20%-I.  (50% cash is too high for non-retirees, however, the “G”-fund did return 2.2% over the last 12-months and that is exceptional for risk-free money.) 

Summer Stock Market Correction…Inflation…Why Dow Theory is Wrong This Time

SUMMER CORRECTION OPINION (MarketWatch)
“While near-term stock-market volatility remains muted now…the summer could be a difficult one should utilities, Treasurys, and gold outperform…I believe the long-awaited correction may finally come in the months ahead, hitting in the summer with the same kind of surprise as the Summer Crash of 2011. Some will say that is a "call" on markets. That is a conclusion based on probabilities and proven leading indicators of heightened volatility. Maybe the volatility doesn't come, just like a [car] crash doesn't occur after driving through a storm. That doesn't mean you still shouldn't slow down.” – Michael Gayed
http://www.marketwatch.com/story/making-the-case-for-a-summer-correction-2015-05-26?page=2
My cmt: There is a big “if” in the opinion above. Utilities, treasuries, and gold must all outperform the major indices. We’re not there yet, but this is a reasonable approach and Michael may well be right this summer.
 
INFLATION
Yesterday I included a chart from Advisor Perspectives with a link to an inflation discussion by Doug Short.  It showed that college tuition costs have risen by 130% in 15-years.  I thought it was interesting, but I wondered what inflation has done over the past 15-years.  I looked at CPI data and found it has averaged 2.3%, with a high of 4% in 2007 to near zero in 2008. On a compound basis, inflation has reduced buying power by 40%. (In fact, Doug had included that data in one of his charts.) 
 
College tuition has increased over 3-times the rate of inflation.

Medical costs have increased at nearly double the cost of inflation.

 
A person would need 40% more income just to stay even with inflation over the 15-year period (2000-2014). It is easy to see why the middle class is getting squeezed.
 
Regarding college costs, we’ve been throwing more federal money at the problem for years with student-loans and direct-grants to colleges.  College loans are now the largest payments due to the US; higher than tax revenue.  The colleges responded by building swimming pools, tennis courts, and elaborate dining facilities to attract students.  Since there was plenty of money, there was little need to prioritize spending.  It is time the colleges worried about education and reducing costs. A country can’t survive if it can’t afford to educate its citizens.
 
WHY DOW THEORY IS WRONG: THE TRANSPORT STOCKS – REPEATING THIS BECAUSE…
Over the weekend, I read a couple of doom and gloom reports based on Dow Theory.  I’m not a Dow Theory expert, but the make-up of the economy is very different than it was 100-years ago when Dow first presented his basic theories.  One must wonder how relevant it is. Dow Theory also uses volume to confirm trends.  With volume down recently, I’m not sure if the Dow Theory proponents are even using it correctly. 
 
Further, as I questioned in the 18 May blog, the Cass Freight Index showed that North American tonnage has increased for both rails and trucks. (See:  http://navigatethestockmarket.blogspot.com/2015/05/cass-freight-index-upstock-market-is.html ); so what’s up with the transports? Cramer at CNBC had a good explanation: “Cramer took a closer look at the transports group, he was able to pinpoint the source of the problem down to the airlines. ‘Sometimes though, this kind of action is a sign not of weakening trade, but of potentially ruinous, cutthroat competition. And that's what is driving the group down at this very moment,’ Cramer said.” Commentary from CNBC at…

http://www.cnbc.com/id/102696018

Conclusion: I am not presently concerned about Dow Theory and its suggestion of a selloff. It is wrong.
 
MARKET REPORT
- Wednesday, the S&P 500 was up about 0.9% to 2123 at the close.
-VIX fell about 6% to 13.27.
-The yield on the 10-year Treasury Note slipped to 2.13%. 
 
As I expected, markets moved up today and, given the size of the move, it looks like many agreed with my assessment. Chip stocks were particularly strong. Intel was up nearly 2% and NXP Semiconductors (an Apple’s watch and phone component and soon to be a player in cars) was up 3.5%.
 
Also as expected, Market internals improved.  I think now that earnings season is over we’ll move up.  Summer swoon? Maybe late summer or fall.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) bounced up to 52% at the close Wednesday.  (A number above 50% is usually GOOD news for the markets. On a positive reversal, New-highs outpaced New-lows Wednesday. The spread (new-highs minus new-lows) was +19. (It was -43 Tuesday.)  The 10-day moving average of change in the spread rose to +5.  In other words, over the last 10-days, on average; the spread has increased by 5 each day.
Internals switched to neutral on the markets.  Up volume is lagging a bit, on a 10-day basis, but that is often the case, so I am positive on the markets overall.

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 2014, using these internals alone would have made a 9% return vs. 13% 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, nearly straight-up year like 2014.

 
NTSM         
Wednesday, the NTSM analysis remained HOLD. PRICE is positive. VOLUME, VIX and SENTIMENT indicators are neutral, although (as always) sentiment remains extremely high.  

MY INVESTED STOCK POSITION

I remain fully invested at 50% invested, mostly in smaller cap-stocks in the long-term portfolio with some international stocks. 50% is conservative, but appropriate for a conservative retired guy. 
 
The Dow Jones US Completion Index (all stocks except the S&P 500 – the “S” fund in the TSP) remains ahead of the S&P 500.  Since 1 February it is 2.5% ahead of the S&P 500. Since 1 March the Euro-Pacific ETF (EFA) (“I”-fund) is 3.3% ahead of the S&P 500.
 
THRIFT SAVINGS PLAN (TSP) MEMBERS
My TSP Allocation: 50%-G; 10%-C; 25%-S; 15%-I.  (50% cash is too high for non-retirees, however, the “G”-fund did return 2.2% over the last 12-months and that is exceptional for risk-free money.)  I may increase EFA (“I”-fund) exposure at the end of the month.

Durable Goods Orders…Capital Equipment…Consumer Confidence

DURABLE GOODS ORDERS FALL (Nasdaq.com)
“Demand for big-ticket manufactured goods fell last month, but underlying figures suggest business investment is slowly starting to pick up. Orders for durable goods--products such as power saws and hot tubs designed to last at least three years--declined a seasonally adjusted 0.5% in April from a month earlier…the broader trend suggests demand may be stirring after several weak months.” Story at…
http://www.nasdaq.com/article/us-april-durable-goods-orders-fall-05-20150526-00442
 
CAPITAL EQUIPMENT (Bloomberg)
Orders for capital equipment rose in April for a second straight month, a sign U.S. business investment could pick up in the second half of the year…Bookings for non-military capital goods excluding aircraft, a proxy for future corporate spending on new equipment, advanced 1 percent after a 1.5 percent gain in March…” Story at…
http://finance.yahoo.com/news/orders-capital-equipment-u-climb-124906432.html
Capital equipment: “Any equipment used by an organization to produce other commodities.” - Wiktionary
 
CONSUMER CONFIDENCE UP SLIGHTLY (WSJ)
“The Conference Board, a private research group, said Tuesday its index of consumer confidence increased to 95.4 from a revised 94.3 in April…“This moderate firming in confidence is a positive, suggesting that consumers are looking beyond the soft first quarter and believe that conditions have stabilized,” wrote Jim Baird, chief financial officer at Plante Moran Financial Advisors…” Story at…
http://www.wsj.com/articles/u-s-consumer-confidence-edges-up-to-95-4-in-may-1432650070
 
CONSUMER PRICE INDEX (Doug Short)
This piece was an interesting read, even if it did tweak a pet peeve of mine.  (Hint… college tuition; brought to you by incompetent administrators and tax-dollar handouts that don’t encourage cost cutting.)  Doug presented a number of enlightening charts with analysis on CPI.  I’ve included one below along with his commentary.
“The next chart will come as no surprise to families footing the bill for college tuition. Here we've separately plotted the College Tuition and Fees subcategory of the Education and Communication expenditure category. Note that the steady staircase in this cost matches the annual cost increases in late summer for each academic year.” – Doug Short

Chart and commentary from Advisor Perspectives at…
http://www.advisorperspectives.com/dshort/updates/CPI-Category-Overview.php
 
MARKET REPORT
- Tuesday, the S&P 500 was down about 1% to 2104 at the close.
-VIX rose about 16% to 14.06.
-The yield on the 10-year Treasury Note fell to 2.15%. 
 
The S&P 500 closed at its lower trend line today. The move down was statistically significant (exceeding a multiple of standard deviations in price and volume that often leads to a reversal in the opposite direction). Therefore, the lower trend line will probably hold and I’d expect to see further upside ahead.
 
Market internals don’t look good now, but I expect them to improve based on today’s big move down, i.e., statistics indicate the most likely direction is up from here.
 
As of Tuesday, there still have been only 46-up days in the last 5-months and that is a low number that suggests further upside in a Bull market. For the time being, we are still in a bull-market and I remain bullish for the next few months…BUT…data can be interpreted in many ways – this stat could be foreshadowing problems.  Why? If more than half of the trading-days over the last 5-months have been down, it could mean trouble ahead for the markets.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) dropped to 49.6% at the close Tuesday.  (A number below 50% is usually BAD news for the markets. On a negative reversal, New-lows outpaced New-highs Tuesday. The spread (new-highs minus new-lows) was minus-43. (It was +25 Friday.)  The 10-day moving average of change in the spread dropped to minus-8.  In other words, over the last 10-days, on average; the spread has decreased by 8 each day.

Internals switched to negative on the markets.

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 2014, using these internals alone would have made a 9% return vs. 13% 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, nearly straight-up year like 2014.

 
NTSM         
Tuesday, the NTSM analysis remained HOLD. PRICE is positive. VOLUME, VIX and SENTIMENT indicators are neutral, although (as always) sentiment remains extremely high.

MY INVESTED STOCK POSITION

I remain fully invested at 50% invested, mostly in smaller cap-stocks in the long-term portfolio with some international stocks. 50% is conservative, but appropriate for a conservative retired guy. 
 
The Dow Jones US Completion Index (all stocks except the S&P 500 – the “S” fund in the TSP) remains ahead of the S&P 500.  Since 1 February it is 2.5% ahead of the S&P 500. Since 1 March the Euro-Pacific ETF (EFA) (“I”-fund) is 3.3% ahead of the S&P 500.
 
THRIFT SAVINGS PLAN (TSP) MEMBERS
My TSP Allocation: 50%-G; 10%-C; 25%-S; 15%-I.  (50% cash is too high for non-retirees, however, the “G”-fund did return 2.2% over the last 12-months and that is exceptional for risk-free money.)