“U.S. manufacturing activity expanded at a slower pace in August, according data released Tuesday, a sign global turmoil and a strong dollar could be limiting factories. The Institute for Supply Management’s manufacturing purchasing managers index fell to 51.1 in August from 52.7 in July.” Story at…
http://www.wsj.com/articles/ism-manufacturing-index-falls-to-51-1-in-august-1441116755
US CONSTRUCTION SPENDING (Reuters)
“U.S. construction spending rose in July to the highest level in just over seven years as private outlays surged, providing another sign of solid economic momentum at the start of the third quarter. Construction spending increased 0.7 percent to $1.08 trillion…” Story at
http://www.reuters.com/article/2015/09/01/us-usa-economy-construction-idUSKCN0R140R20150901
SENTIMENT SUGGESTS BIGGER TROUBLE ON THE WAY
I measure Sentiment, %-bulls, using amounts invested in selected Rydex/Guggenheim long/short funds over a 5-day period [Sentiment = Bulls/(bulls+bears)].
Sentiment peaked at 85%-bulls back on 1 July of this year. That represented dip buying on what was a small 3% pullback at the time. As of Monday, it has dropped to 75%-bulls as fewer investors have been investing in long-funds (betting bullish).
The Sentiment value (%-bulls) dropped slowly while the stock market has fallen 10% in just a few days. This isn’t “normal” behavior. If the markets are falling in a rush, one would expect Sentiment to rapidly follow the trend and switch to a bearish (<50%-bulls) value; but that hasn’t happened. During the late summer correction in 2011, Sentiment was 65% at the top as nearly 2 out of every 3 investors were betting long.
By 5 August 2011 (day 68 in the 2011 correction with the S&P 500 down 12%), Sentiment had reversed to a bearish stance with only 49%-bulls. That’s comparable to the recent loss on the S&P 500 of 12% (from the top) in 2015 (on 25 August, day 66), but the Sentiment was 78% and is still 75%-bulls as of Monday.
That means that 3 out of every 4 investors are still betting long.
What does this tell us? Complacency is huge. There is no fear. Those caught on the bullish side of the bet are simply waiting for a turn-around. In 2011 at a similar time in the correction they were already shorting the market. This high level of complacency suggests to me that investors are not prepared for any bad news; I think we are facing a deeper downturn than many expect.
I am guessing down 5-10% from the prior lows.
MARKET REPORT / ANALYSIS
-Tuesday, the S&P 500 was down about 3% to 1914at the close.
-VIX rose about 10% to 31.40.
-The yield on the 10-year Treasury dropped to 2.17%.
Another 2% drop will put the S&P 500 back at its bottom. That may happen tomorrow. We may find out then what happens next. There were some false buy signals back in 2011 when the Index bounced from its prior lows, but a test at the prior low will certainly give some information regarding investor fear and their appetite to start buying into this down-trend.
The 2011 correction lasted 108-days. The 2015 correction is at day-71.
The Death Cross remains in effect since the 50-dMA is below the 200-dMA for the S&P 500.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) was 40% Tuesday vs. 42% Monday. (A number below 50% is usually BAD news for the markets. Again, New-lows outpaced New-highs Tuesday. The spread (new-highs minus new-lows) was minus-89. (It was -30 Monday.) There were only 6 new-highs Tuesday.
The 10-day moving average of change in the spread fell to minus-1, Tuesday. In other words, over the last 10-days, on average; the spread has DECREASED BY 1 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 long term indicator was SELL. VIX and Volume indicators are negative. Sentiment and Price are neutral. Friday, there was a “Death Cross” on the S&P 500, signaled when the 50-day moving average (dMA) crosses below the 200-dMA and that remained today.
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%
When I do move back into stocks, I will initially invest a high percentage into stocks and phase back if the Index gets to prior highs.
