ADP Employment … Chicago PMI Shows Contraction … “It’s too early to buy this market” - Steve Grasso … Stock Market Analysis

ADP EMPLOYMENT (CNN/Money)
“Private sector employment increased by 200,000 jobs from August to September according to the September ADP National Employment Report®.” Story at…
http://money.cnn.com/news/newsfeeds/articles/marketwire/1220096.htm
 
CHICAGO PMI (Business Insider)
“Manufacturing activity in the Midwest is back in contraction. The Chicago purchasing manager's index (PMI) for September was reported at 48.7 by the Institute for Supply Management (ISM).” Story at…
http://www.businessinsider.com/here-comes-chicago-pmi-2015-9
 
STEVE GRASSO (CNBC)
Steve Grasso of Stuart Frankle and frequent CNBC contributor said on Tuesday that the market needs to show some stability, but “You know where I’ve been…I’ve been negative on the market, I think we go much lower from here…it’s too early to be buying into this market.” Video at…
http://video.cnbc.com/gallery/?video=3000426423&play=1
 
MARKET REPORT / ANALYSIS        
- Wednesday, the S&P 500 was up about 1.9% to 1920 at the close.
-VIX finished down 9% at 24.50.
-The yield on the 10-year Treasury rose to 2.06%.
 
Sentiment remains at a very high 59% bulls based on amounts invested in Rydex/Guggenheim Bull/Bear funds smoothed to a 5-day moving average.  A 59%-bulls value means that nearly 2 out of 3 investors are betting long. There was one small pullback of 7% last year that ended with a sentiment value of 67%.  All other pullbacks greater than 10% have ended with a sentiment value below 50%.  In 2011, sentiment was 24% at the bottom. The reason Sentiment is high now may be that the drop in this correction took place so quickly that very few investors were able to get short.  The risk is that bad news may send investors scrambling for the exits since many apparently have remained long.  When asked in surveys, investors are bearish; but in the funds I track, investors are still betting bullish. This could be a problem.
 
Any bad news may create panic.  Look what happened in bio-tech when Hillary Clinton tweeted about reducing drug costs. Still, I wouldn’t be surprised to see the markets move up. There have been a lot of down days recently and the market doesn’t move in one direction forever. So my upside target is again around 1995 - 2000.  The market needs to break above the recent high (1995) before it would have any credibility that this correction is over. Based on technicals so far, it doesn’t look over to me, but nothing is ever certain.
 
Because of the big up-day that exceeded my statistical parameters, Thursday is

likely to be a down-day.

 
The Death Cross remains in effect since the 50-dMA is below the 200-dMA for the S&P 500. This is a long term signal for many.  In 2011, the Death cross occurred about 7% before the low.  In 2010, the Death Cross first occurred at the low so it was not a good signal then. 
 
This correction is very similar to the 2011 correction. In 2011, the correction lasted 108-trading-days. The current correction has lasted 91-trading-days so far.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) fell to 43% Wednesday vs. 43.2% Tuesday.  (A number below 50% is usually BAD news for the markets.  On a longer term, the 50-day moving average of advancing stock rose to 46.9%.  That’s remains a negative.
 
New-lows outpaced New-highs Wednesday. The spread (new-highs minus new-lows) was minus-186. (It was -475 Tuesday.)   The 10-day moving average of change in the spread fell to -17 Wednesday.  In other words, over the last 10-days, on average; the spread has fallen by 17 each day.  The 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         
Wednesday, the NTSM long term indicator was SELL. Price is positive because this correction is long in the tooth; this particular indicator within the “Price” category has a very low weighting in the overall system. The Sentiment indicator is neutral. VIX and Volume indicators are negative. VIX and Volume are the highest weighted. Since the Index is 1% above the prior low it may be too late to sell now.  This indicator shows that the market is not healthy, but we could still see a quick turn-around at the bottom.

MY INVESTED STOCK POSITION:

TSP (RETIREMENT ACCOUNT – GOV EMPLOYEES) ALLOCATION
G-Fund (Cash, risk-free yielding 2.1% over the last 12-months): 70%
C-Fund (S&P 500): 15%
I-Fund (EFA): 15%
 
This is a conservative allocation.  The number one priority now is return of capital; not return on capital.
 
While I don’t expect a test of 1868 immediately, it could happen.  If I am able to identify a BUY point before the close on a test-day, I will post it late in the day.  If so, I will buy SSO or QLD in the trading portfolio. These are 2x ETF’s that double market moves up or, dangerously, down. (XIV is also a good play on a falling VIX.) I would also move to a 75% invested position in the Retirement account.
 
These are high risk moves, so don’t do it unless you have a high tolerance for risk.  There were several bottoms in the 2011 correction, but fortunately, the market didn’t fall much further after those false bottoms.

Personal Spending … Consumer Confidence … Stock Market Analysis

PERSONAL SPENDING (Briefing.com)
“A disappointing August retail sales report suggested that consumers were again holding off on spending in order to keep a higher savings rate. While goods spending growth did slow in August to 0.4% after increasing 0.7% in July, the softness was offset by an unexpectedly strong 0.5% increase in services spending.” Details and charts at…
http://www.briefing.com/Investor/Calendars/Economic/Releases/income.htm
 
CONSUMER CONFIDENCE (Reuters)
“The Conference Board, an industry group, said its index of consumer attitudes rose to 103.0, the highest since January…” Story at…
http://www.reuters.com/article/2015/09/29/us-usa-economy-confidence-idUSKCN0RT1PQ20150929
This measure of consumer confidence seems to be tracking hiring rather than the Michigan Sentiment survey that reflects the recent stock market decline.
 
MARKET REPORT / ANALYSIS        
-Tuesday, the S&P 500 was up about 0.1% to 1884 at the close.
-VIX finished down 3% at 26.83.
-The yield on the 10-year Treasury fell to 2.05%.
 
The Russell 2000 fell below its 25 August correction low yesterday (Monday) and again today as it closed about 2% below its correction low.  Volume declined both days, but not dramatically. It looks like the Russell may be putting in a bottom, but the signal is not strong. It could also lead the markets down.
 
The Death Cross remains in effect since the 50-dMA is below the 200-dMA for the S&P 500. This is a long term signal for many.  In 2011, the Death cross occurred about 7% before the low.  In 2010, the Death Cross first occurred at the low so it was not a good signal then. 
 
This correction is similar to the 2011 correction. In 2011 the correction lasted 108-days. The current correction has lasted 90-days so far.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) fell to 43% Tuesday vs. 46% Monday.  (A number below 50% is usually BAD news for the markets.  On a longer term, the 50-day moving average of advancing stock rose to 46.2%.  That’s remains a negative.
 
New-lows outpaced New-highs Tuesday. The spread (new-highs minus new-lows) was minus-475. (It was -479 Monday.)   The 10-day moving average of change in the spread fell to -41 Tuesday.  In other words, over the last 10-days, on average; the spread has fallen by 41 each day.  The 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         
Tuesday, the NTSM long term indicator was SELL. Price is positive because this correction is long in the tooth; this particular indicator within the “Price” category has a very low weighting in the overall system. The Sentiment indicator is neutral. VIX and Volume indicators are negative. VIX and Volume are the highest weighted. Since the Index is 1% above the prior low it may be too late to sell now.  This indicator shows that the market is not healthy, but we could still see a quick turn-around at the bottom.

MY INVESTED STOCK POSITION:

TSP (RETIREMENT ACCOUNT – GOV EMPLOYEES) ALLOCATION
G-Fund (Cash, risk-free yielding 2.1% over the last 12-months): 70%
C-Fund (S&P 500): 15%
I-Fund (EFA): 15%
 
This is a conservative allocation.  The number one priority now is return of capital; not return on capital.
 
While I don’t expect a test of 1868 immediately, it could happen.  If I am able to identify a BUY point before the close on a test-day, I will post it late in the day.  If so, I will buy SSO or QLD in the trading portfolio. These are 2x ETF’s that double market moves up or, dangerously, down. (XIV is also a good play on a falling VIX.) I would also move to a 75% invested position in the Retirement account.
 
These are high risk moves, so don’t do it unless you have a high tolerance for risk.  There were several bottoms in the 2011 correction, but fortunately, the market didn’t fall much further after those false bottoms.

Pending Home Sales Down … Bear Market Likely … Valuation and Mean Reversion – John Hussman … Stock Market Analysis

PENDING HOME SALES DOWN (ABC News)
“Fewer Americans signed contracts to buy homes in August, as pending sales slumped amid broader concerns about the U.S. stock market and global economy. The National Association of Realtors said Monday its seasonally adjusted pending home sales index fell 1.4 percent to 109.4 last month.” Story at…
http://abcnews.go.com/Business/wireStory/us-pending-home-sales-fall-august-34101602
 
BEAR MARKET LIKELY (McClellan Financial Publications)
“…when investors’ willingness to accept risk is starting to wane, [as it is now] that is a setup for a bear market for stock prices. With a divergence now in place between the DJIA and the Bund-Treasury spread, we can have a reasonable expectation that a bear market for stock prices should ensue…The eurodollar COT leading indication already tells us to expect a downward trend until April 2016, so that gives us at least several months to see how the Bund-Treasury spread behaves.” -  Tom McClellan, Editor, The McClellan Market Report
http://www.mcoscillator.com/learning_center/weekly_chart/bund_spread_gives_permission_for_bear_market/
My cmt: Good commentary and well worth the read, but until the 1868 low is tested, I can't say that I agree.
 
VALUATION MEAN REVERSION/INVERSION (Hussman Funds)
“The central lesson that investors should infer from history, and from the advancing half-cycle since 2009, is not that valuations are irrelevant, or that market risk should always be embraced, or even that Fed easing provides reliable support to the market (it certainly didn’t during the 2000-2002 and 2007-2009 collapses). Rather, the central lesson is about the impact of valuations on long-term investment outcomes, and the impact of investor risk preferences on shorter-term outcomes…
…investors…might also consider that the market peak in May of this year reached valuations more extreme than we observed at the beginning of every secular bear phase except 2000.”  – John Hussman, PhD.  Weekly Market Commentary from Hussman Funds at…
http://www.hussmanfunds.com/wmc/wmc150928.htm
My cmt: John Hussman presented a good piece on valuation and investor risk preferences.  Bottom line: Valuations take 20-yrs to bottom though price generally bottoms beforehand in Secular bear markets.  Year 2000 + 20yrs = 2020
 
MARKET REPORT / ANALYSIS        
-Monday, the S&P 500 was down about 2.6% to 1882 at the close.
-VIX finished up 17% at 27.63.
-The yield on the 10-year Treasury fell to 2.10%.
 
Up until 15 May, the 100-day moving average of the percentage of stocks advancing (a measure of long-term breadth) was keeping level with the S&P 500. It began to diverge and dropped as the S&P 500 remained flat after mid-May.  Since the August low, the 100-dMA of advancing stocks has leveled out; it is no longer falling while the S&P 500 has bounced around.  This suggests that the August low of 1868 may hold and that would be my guess at this point. That data is shown in the following graph.

 

A re-test of the 1868 level will give us the answer and may even signal a buy.
 
(As a side note it might appear that the above graph would be a good sell signal for the S&P 500: i.e., if the 100-dMA of advancing stocks drops below 50%, “Sell.”  Unfortunately it isn’t that simple and a review of past market declines shows that such an indicator would have been frequently wrong with false positives and sell signals often at the bottom of declines.)
 
The Death Cross remains in effect since the 50-dMA is below the 200-dMA for the S&P 500. This is a long term signal for many.  In 2011, the Death cross occurred about 7% before the low.  In 2010, the Death Cross first occurred at the low so it was not a good signal then. 
 
Monday, the NASDAQ joined the other indices with its own death cross. Most of the time, this does not lead to a major crash.  Major crashes are rare while death crosses are not.
 
Because of the big down day that exceeded my statistical parameters, Tuesday is likely to be an up-day. The low % of stocks-advancing today also sometimes precedes a reversal. There was too much volume today for today to have been a true reversal, but it does indicate Tuesday is more likely to be up than down.
 
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) fell to 46% Monday vs. 48% Friday.  (A number below 50% is usually BAD news for the markets.  On a longer term, the 50-day moving average of advancing stock fell to 46%.  That’s remains a negative.
 
New-lows outpaced New-highs Monday. The spread (new-highs minus new-lows) was minus-479. (It was -120 Friday.)   The 10-day moving average of change in the spread fell to -38 Monday.  In other words, over the last 10-days, on average; the spread has fallen by 38 each day.  The internals switched to negative on the markets and they were really bad.

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         
Monday, the NTSM long term indicator was SELL. Price is positive because this correction is long in the tooth; this particular indicator within the “Price” category has a very low weighting in the overall system. The Sentiment indicator is neutral. VIX and Volume indicators are negative. VIX and Volume are the highest weighted. The S&P 500 is about 50pts above the lowest low of 1868 or 3% below the current level.  Since the Index is 1% from the prior low it may be too late to sell now.  This indicator shows that the market is deteriorating, but we could still see a quick turn-around at the bottom.

MY INVESTED STOCK POSITION:

TSP (RETIREMENT ACCOUNT – GOV EMPLOYEES) ALLOCATION
G-Fund (Cash, risk-free yielding 2.1% over the last 12-months): 70%
C-Fund (S&P 500): 15%
I-Fund (EFA): 15%
 
This is a conservative allocation.  The number one priority now is return of capital; not return on capital.
 
While I don’t expect a test of 1868 Tuesday, it could happen.  If I am able to identify a BUY point before the close on a test-day, I will post it late in the day.  If so, I will buy SSO or QLD in the trading portfolio. These are 2x ETF’s that double market moves up or, dangerously, down. (XIV is also a good play on a falling VIX.) I would also move to a 75% invested position in the Retirement account.
 
These are high risk moves, so don’t do it unless you have a high tolerance for risk.  There were several bottoms in the 2011 correction, but fortunately, the market didn’t fall much further after those false bottoms.