IS THIS THE BOTTOM? (CNBC)
“The VIX has been up more than 10 percent three days in a row, which is a rare occurrence. This is such an unusual move that we may be approaching some kind of at least-short bottom.” – Bob Pisani. Commentary at…
http://www.cnbc.com/2015/08/21/are-we-at-a-bottom-two-sentiment-indicators-are-at-extremes.html
DOW THEORY FLASHES SELL (MARKETWATCH)
“The venerable Dow Theory, the oldest stock market timing system that remains in widespread use today, flashed a “sell” signal at Thursday’s close.” – Mark Hulbert. Commentary at…
http://www.marketwatch.com/story/a-dow-theory-sell-signal-is-upon-us-2015-08-20?link=MW_popular
PREPARE FOR A CORRECTION (MarketWatch)
“…investors would be wise to get defensive now, because stocks are in a world of hurt, and the pain is likely to intensify in the weeks ahead…The pain in China is far from over, and that means trouble for investors everywhere…Closer to home, with almost the entirety of S&P 500 member companies having reported quarterly results, the blended earnings growth rate — if it can be called that — is a 1% decline, according to FactSet. That’s the first year-over-year decline in corporate profits since the third quarter of 2012.” More at…
http://www.marketwatch.com/story/investors-its-time-to-prepare-for-a-correction-in-stocks-2015-08-21?dist=lcountdown
The above article appears to be a day late.
CHINA FLASH MAUFACTURING PMI DOWN (MarketWatch)
“An early gauge of China's factory activity fell to a six-and-a-half year low in August despite China's efforts to reinvigorate slowing growth.” Story at…
http://www.marketwatch.com/story/china-caixin-manufacturing-pmi-hits-6-12-year-low-2015-08-21
PHILLY FED INDEX (Business Insider)
"The Manufacturing Business Outlook Survey suggests a continuation of modest expansion of the region’s manufacturing sector. The indicators for general activity and new orders and shipments remain positive, and firms reported a slight increase in employment in August." Story at…http://www.businessinsider.com/philadelphia-fed-manufacturing-august-2015-8
…a bit of good news after the poor Empire State Fed report.
MARKET REPORT / ANALYSIS
-Friday, the S&P 500 was down about 3.2% to 1971 at the close.
-VIX was up about 46% to 28.03.
-The yield on the 10-year Treasury fell to 2.05%. (The only sanity today was in the bond market.)
A huge down day like Friday is infrequent, but far from rare. It is worth examining past corrections for some perspective. For example, let’s looks at the Oct 2011 correction.
There were 15 days with volume higher than Friday during the 29 Apr 2011-3 Oct 2011 correction. That correction was 108-days long and clocked a 19% drop, top to bottom. The 2011 correction had been underway for 67-days before there was a drop exceeding 3%. After the 3% drop, the S&P 500 was down 12% from its prior high. That occurred on volume about 50% higher than Friday’s volume.
It may not seem like it, but the current correction has been underway for 64-days as of Friday counting from the prior high of 2131 on 21 May 2015. Friday was the first >3% down day (and that seems to confirm the correction). That’s 64-days in the current correction vs. 67-days in 2011. As of Friday’s close the S&P 500 is down 7.5%.
A day like Friday can be downright scary (I was at the Beach and clueless), but as noted above it’s not all that unusual – we just have gotten used to “up” all the time, especially with the FED supporting the markets with QE.
The big question is: Was Friday a capitulation bottom? The volume was high enough to represent capitulation, or a throw-in-the towel sell-everything day; but as noted above, there were 15-such days during the 2011 correction. It’s possible Friday was the bottom, but it seems unlikely. Another way to consider the question is to compare today’s drop to a prior higher low. One can look back and see a strong prior low last December at S&P 500 value of 1973.
Friday’s low at 1971 was a test of the 16 Dec 2015 low of 1973 on the S&P 500. One can compare the two days and infer whether the markets will move up from here. The problem is that Friday’s volume was 30% higher on than it was when this level was last visited in December – thus, market conditions are worse now. That suggests more selling ahead, or at least further tests are required to squeeze out the last of the sellers. That could be a long way out (another 44-days if we follow the 2011 model) or it could happen next week if selling slows and volume drops.
RSI fell to 21 at the close Friday and that is oversold so there is one vote for Friday being the bottom. On the other hand, the first RSI oversold-day in the 2011 correction was 65-days after the top and 43-days before the bottom. Low RSI might make a bounce more likely, but it doesn’t, by itself, signal a bottom.
For now, I don’t think the bottom is in yet, but I do expect a bounce. I doubt that this correction will be over before September/October, but I don’t know whether the Index will fall another 10% or only 3 to 5%. In 2011, the market bounced upward after its first 3% down day, but then fell an additional 11.4% before the end of the correction.
The low of October 2014 appears to be a likely support level for a correction. That would project a 6% drop (from current levels) to 1862 for a 13% correction from the top. That seems about right. It’s mostly guesswork, though; nothing is certain.
I will sell the bounce and cut stock holdings to 30% Monday.
LONG TERM BREADTH
The 50-dMA of stocks advancing on the NYSE dipped to 46.5% Friday, from 47.4% Thursday. 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.
Stocks on the NYSE that are above their 200-day moving average dropped to 27% as of Friday (data is a day late). (The average is 64% over the past 3-years.)
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) was 42% Friday vs. 45% Thursday. (A number below 50% is usually BAD news for the markets. Again, New-lows outpaced New-highs Friday. The spread (new-highs minus new-lows) was minus-644. (It was -344 Thursday.) There were no new-highs Friday.
The 10-day moving average of change in the spread fell to minus-45, Friday. In other words, over the last 10-days, on average; the spread has DECREASED by 45 each day. Internals remained 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 long term switched to SELL. VIX and Volume indicators are negative. Sentiment and Price are neutral.
TSP (RETIREMENT ACCOUNT – GOV EMPLOYEES) ALLOCATION AS OF MONDAY
G-Fund (Risk-free yielding 2.1% over the last 12-months): 70%
C-Fund (S&P 500): 15%
I-Fund (EFA): 15%
