“The Commerce Department said new orders for manufactured goods declined 1.0 percent after a downwardly revised 2.1 percent drop in August. Factory orders were previously reported to have declined 1.7 percent in August. Orders for automobiles and parts rose 1.5 percent in September after falling 2.0 percent in August.” Story at…
http://www.reuters.com/article/2015/11/03/us-usa-economy-factory-idUSKCN0SS1SM20151103
EARNINGS DIVERGENCE SUGGESTS TROUBLE
Earnings divergence… In round numbers the current all-time high on the S&P 500 is around 2120/2130, about 1% above current values. This top region has been in place for 8-months (since early March). 8-months ago, FACTSET reported the Earnings Growth for the first quarter of 2015 (Q1) at +3.7%. Here we are in Q3 earnings season and FACTSET reported the Earnings Growth at minus -2.2% this past Friday. That’s a swing down of almost 6%. Earnings growth has dropped 6% while the price on the S&P is nearly unchanged. Similarly, FACTSET pointed out that the Earnings per Share estimate dropped 2.8% for the S&P 500 during the month of October while the S&P 500 price increased almost 9%. I remain surprised by the continuing strength of the rally.
BEAR MARKET SIGNAL
As noted before, the small cap stocks (Russell 2000) are underperforming the S&P 500; this is often the first sign of an approaching bear market. That divergence started in April 2014. A second signal, mid-cap underperformance, is just beginning. This is an accurate bear market indicator because as stock performance falters, investors get more selective and demand higher quality. Small caps fail first; followed by the mid-caps; last, the biggest and best form a top as the bear market begins. On the charts below, Red is the S&P 500; blue is small cap, Russell 2000 (IWM).
Basic chart from Yahoo Finance.
Mid-cap divergence is beginning now. Red is the S&P
500. Blue is the I-shares Russell Mid-cap (IWR).
MARKET REPORT / ANALYSIS
-Tuesday, the S&P 500 was up about 0.3% to 2110 at the close. (There was late day selling for the third day in a row so perhaps the rally is finally going to lose some steam.)
-VIX was rose about 3% to 14.54.
-The yield on the 10-year Treasury rose to 2.22%.
RSI is “overbought" (SMA, 14-day) and we have seen late day selling for 3-days in a row; the bounce is probably over. On the other hand, the S&P 500 is 2% above its 200-dMA and that is fueling “correction-over” euphoria, so as usual, nothing is ever clear. Even if the bounce is over, I expect about a 5% retracement rather than a big move. We’ll see.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) rose to 53.9% Tuesday vs. 54.2% Monday. (A number above 50% is usually GOOD news for the markets. On a longer term, the 50-day moving average of advancing stocks rose to 54.2%. The 100-dMA of advancing stocks is 50%. The McClellan Oscillator (a Breadth measure) remained positive Tuesday.
New-highs outpaced New-lows Tuesday. The spread (new-highs minus new-lows) was +83. (It was +69 Monday.) The 10-day moving average of the change in spread was +4 Tuesday. In other words, over the last 10-days, on average; the spread has increased by 4 each day. The internals switched to positive 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 BUY. Price, VIX and Volume indicators are positive. Sentiment is neutral. I am not following this guidance for the time being; I am waiting for a better entry point.
I will wait
before increasing stock holdings; I think there will be a better entry point.
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%
