Michigan Sentiment … Chicago PMI … Stock Market Analysis

MICHIGAN SENTIMENT (US News and World Report)
“U.S. consumer sentiment slipped this month but remains at healthy levels, the University of Michigan said Friday. Michigan's index of consumer sentiment fell to 93.1 in July from 96.1 the previous month.” Story at…
http://www.usnews.com/news/business/articles/2015/07/31/university-of-michigan-consumer-sentiment-dips-this-month
 
CHICAGO PMI (CNBC)
“Business activity in the U.S. Midwest jumped to a six-month high in July, topping economists' forecasts and showing expansion in the region for the first time since April…The Chicago Business Barometer for July was 54.7, according to the MNI Chicago Report.”  Story at…
http://www.cnbc.com/2015/07/31/chicago-pmi-in-july-2015.html
 
MARKET REPORT / ANALYSIS
-Friday, the S&P 500 was down about 0.2% to 2104 at the close. 
-VIX was down about 3% to 12.13.
-The yield on the 10-year Treasury dropped to 2.21%.
 
Improving Market Internals suggests a return to risk-on and further advances in the stock markets.  It remains to be seen whether Sentiment and VIX will move enough to make new highs more likely. The low VIX and high Sentiment are suggesting that the S&P 500 won’t make new highs anytime soon; but, those indicators can improve “allowing” the markets to go higher.  The S&P 500 is only about 1.3% below its all-time high.
 
The Shanghai Composite was down another 1.1% yesterday, but it is testing prior recent lows.  That could make a world of difference for U.S. stocks if the Shanghai moves up from here.
 
Volume was huge today, mostly in the last hour of trading. I suppose the Mutual Funds, Indexes and ETF’s were making adjustments.  It made for an odd day since fully 63% of all stocks on the NYSE were up, but the S&P 500 was down 0.2%. Normally, I’d guess Monday would be an up-day since the Index will sometimes play catch-up when most stocks are moving up and the Index is moving down - This time? I’m not sure since the volume was unusual.  
 
LONG TERM BREADTH
The 50-dMA of stocks advancing on the NYSE was 47.5% Friday, up from 47.3% yesterday.  Below 50% is not good; it simply means that more than half of the stocks on the NYSE have gone down over the past 2-1/2 months. Further, I read a surprising fact on CNBC that over half of the stocks in the S&P 500 are down over 10%.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) was 46% Friday vs. 43% yesterday.  (A number below 50% is usually BAD news for the markets.  New-highs outpaced New-lows Friday (good news!). The spread (new-highs minus new-lows) was +49, a huge improvement from just a few days ago. (It was +9 Thursday and much worse earlier in the week.)  
 
The 10-day moving average of change in the spread rose to +18, Friday.  In other words, over the last 10-days, on average; the spread has INCREASED by 1 each day. Internals remained neutral on the markets and again, improved significantly today.
 

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 long term indicator is HOLD.  All long-term indicators remain neutral.
 
MY INVESTED STOCK POSITION
On 13 July, I increased my investments from 30% invested to 50% invested in stocks.
 
NEW TSP (RETIREMENT ACCOUNT – GOV EMPLOYEES) ALLOCATION FOR FRIDAY 31 JULY
The allocation below is a flight to safety – sticking with large caps and international stocks.
G-Fund (Risk-free yielding 2.1% over the last 12-months): 50%
C-Fund (S&P 500): 25%
I-Fund (EFA): 25%
(This is a conservative position most appropriate for retirees or conservative investors.)  I think all investors would be well served to cut their stock investments to a lower than normal (for each individual) allocation. Until longer term technicals look better, the old adage that one’s stock allocation should equal your age subtracted from 100 seems reasonable.  (40years old: 100-40 = 60% in stocks) 50% would be the lowest stock allocation unless conditions deteriorate.
 
I did take a small position in the ETF, SSO (2x S&P 500) Thursday, but after looking at the final numbers Thursday night, I am far from confident that trade will pan out. 

Unemployment Claims … GDP … Hussman Funds – Best Post Ever … New TSP Allocation

UNEMPLOYMENT CLAIMS AT 42-YR LOW (USA Today)
“First-time claims for the week ending July 18 dropped by 26,000 to 255,000, the lowest level since 1973...” Story at…
http://www.usatoday.com/story/money/business/2015/07/23/applications-unemployment-aid-plummet-42-year-low/30558787/
 
GDP (Reuters)
“Gross domestic product expanded at a 2.3 percent annual rate, the Commerce Department said on Thursday. First-quarter GDP, previously reported to have shrunk at a 0.2 percent pace, was revised up to show it rising at a 0.6 percent rate.” Story at…
http://www.reuters.com/article/2015/07/30/us-usa-economy-idUSKCN0Q40BT20150730
 
JOHN HUSSMAN’s, PhD, BEST POST EVER - EXCERPT (Hussman Funds)
“The…signals (record high on a weekly closing basis, fewer than 27% bears, Shiller P/E greater than 18, fewer than 60% of S&P 500 stocks above their 200-day average), are shown below. What’s interesting about these warnings is how closely they identified the precise market peak of each cycle. Internal divergences have to be fairly extensive for the S&P 500 to register a fresh overvalued, overbullish new high with more than 40% of its component stocks already falling – it’s evidently a rare indication of a last hurrah. The 1972 warning occurred on November 17, 1972, only 7 weeks and less than 4% from the final high before the market lost half its value. The 2000 warning occurred the week of March 24, 2000, marking the exact weekly high of that bull run. The 2007 instance spanned two consecutive weekly closing highs: October 5 and October 12. The final daily high of the S&P 500 was October 9 - right in between. The most recent warning was the week ended July 17, 2015.”

Chart and analysis from John Hussman, PhD, Hussman Funds Weekly Market Commentary at…
http://www.hussmanfunds.com/wmc/wmc150727.htm
My cmt:Whether you agree or not,  I think it’s the best Hussman post because it’s so rational and presented with a lot of understandable data.  This is but a small excerpt in a very good piece.  The NASDAQ Composite chart supports this thesis to a degree.
 
Most secular bear markets have 3-major pullbacks and so far the U.S. has had only 2: The Dot.com crash of 2000 and the Financial Crisis of 2007-08. I have stated many times that the major indices would not climb above their prior highs before another major retreat occurred in the markets.  I thought the S&P 500 would be the measuring stick, but that was not the case; the S&P 500 broke thru old highs and never looked back as did the Dow.  The index that was most extremely overvalued back in the dot.com valuation-bubble was the Nasdaq.  So where is the Nasdaq now? It’s above its prior high, but not by much.  Here’s a chart of the NASDAQ Composite.

Chart from…
https://www.google.com/finance?q=nasdaq+composite&ei=n0y6VZnEOoOsmAGU9IvYDA
To me the above chart is suggesting a major top is near, of course I was wrong when I said that about the S&P 500 chart a few years ago – this time may be different.  China is leading the way.
 
China is the World’s first or second biggest economy (it depends on who is counting the beans). With China currently experiencing a stock market crisis, one wonders whether the U.S. stock market can remain immune. I doubt it, but we’ll see.
 
MARKET REPORT / ANALYSIS
-Thursday, the S&P 500 was unchanged at 2109 at the close. 
-VIX was down about 3% to 12.13 (a number that has preceded pullbacks of around 5% in recent years).
-The yield on the 10-year Treasury dipped to 2.27%.
 
While the recent price action and improving Market Internals certainly were positive over the past several trading sessions, there are some disquieting signals present.  VIX at 12.13 and extremely high Sentiment are suggesting that even if the S&P 500 advances, it may not get above the old highs. In addition, the Russell 2000 has not kept pace for a couple of weeks.
 
For the immediate future, the stock market correction appears to have been postponed a bit, but Breadth is still not good and until it improves the markets remain at risk.
 
LONG TERM BREADTH
The 50-dMA of stocks advancing on the NYSE was 47.3% Thursday, up from 47.1% yesterday.  Below 50% is not good; it simply means that more than half of the stocks on the NYSE have gone down over the past 2-1/2 months. 
 
I read a surprising fact on CNBC that over half of the stocks in the S&P 500 are down over 10% while the S&P 500 hasn’t moved much.  That can happen because the 500 is heavily weighted toward the largest companies, but it still reflects a scary condition where even the biggest companies are beginning to go into correction mode.  It is likely the biggest of the big will follow pulling down the Index eventually. Even AAPL has been struggling over the past several sessions.
 
No point in getting too worked up though; I will follow the NTSM indicators and currently they are neutral and not looking too bad.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) was 43% Thursday vs. 45% yesterday.  (A number below 50% is usually BAD news for the markets.  In a positive reversal, New-highs outpaced New-lows Thursday (good news!). The spread (new-highs minus new-lows) was +9, a huge improvement from just a few days ago. (It was -8 Wednesday and much worse earlier in the week.)  
 
The 10-day moving average of change in the spread remained minus-1, Thursday.  In other words, over the last 10-days, on average; the spread has DECREASED by 1 each day. Internals switched to neutral on the markets and improved significantly today.
 

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 long term indicator is HOLD.  Price is positive, because up moves have exceeded down moves recently. All other long-term indicators remain neutral.
 
MY INVESTED STOCK POSITION
On 13 July, I increased my investments from 30% invested to 50% invested in stocks.
 
NEW TSP (RETIREMENT ACCOUNT – GOV EMPLOYEES) ALLOCATION FOR FRIDAY 31 JULY
Since TSP only allows 2-unrestricted changes per month, changing allocation at the end of the month preserves moves for next month. {After 2-changes in a month, only changes that increase holdings in cash (G-fund) and reduce other investment percentages are allowed.} The allocation below is a flight to safety – sticking with large caps.
 
G-Fund (Risk-free yielding 2.1% over the last 12-months): 50%
C-Fund (S&P 500): 25%
I-Fund (EFA): 25%
 
(This is a conservative position most appropriate for retirees or conservative investors.)  I think all investors would be well served to cut their stock investments to a lower than normal (for each individual) allocation. Until longer term technicals look better, the old adage that one’s stock allocation should equal your age subtracted from 100 seems reasonable.  (40years old: 100-40 = 60% in stocks) 50% would be the lowest stock allocation unless conditions deteriorate.
 
I did take a small position in the ETF, SSO (2x S&P 500) Thursday, but after looking at the final numbers Thursday night, I am far from confident that trade will pan out.