Fed Policy...there are many Finance Professionals who are very concerned

Diverging Monetary Policies, Again
“So, here we are again. Fed policy has once again proved instrumental in inciting a commanding speculative Bubble throughout global risk markets….This is a dangerous period. Global liquidity is way too plentiful, while speculation has become too all-embracing and rewarding. Indications of monetary excess are everywhere. Indeed, we’re in the midst of the biggest financial Bubble in history (the “Global Government Finance Bubble”) – yet everyone seems comfortably oblivious….

Let the world adjust; just ensure that the Fed keeps doing what it's doing. And I just scratch my head in disbelief at how little we’ve allowed ourselves to learn over a turbulent 20 year period of interplay between “activist” policymaking and serial market Bubbles.  

After doubling mortgage Credit in seven years, our system is now on track to double federal debt in 4 years. And the markets couldn’t be more pleased with it all. It leaves one pondering what type of circumstance will be necessary to finally force us to start getting our house in order – to return to some semblance of disciplined central banking and fiscal responsibility.” - Doug Noland, Prudentbear.com, http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10521 (Doug Noland is the Senior Portfolio Manager of the Federated Prudent Bear Fund and Federated Prudent Global Income Fund)

For the past three days the S&P 500 has been trending down at a slope that is typical of previous corrections.  That may indicate another break down this week, but I have no data on which to base that guess.  I have been suggesting since the NTMS turned negative on 22 February that I believed the most likely direction of the market in the near term is down.  I still think we are headed down.  Normally, I use “statistically significant” days (large moves that meet a statistical test for both price and volume) to help identify the trend.  As I commented a while back we have not had a statistically significant day since 16 March.  That alone can be an indicator of trouble ahead. (see my blog post of 4 April)

I must say that the market action has been very unusual from my experience.  There is little market direction probably, because we have seen very low volumes for some time.  It is always possible that we will continue to trend sideways without a down turn, but I don’t think that is as likely as a drop.   

NTMS switched to SELL on 22 February.  Since then, NTMS analysis has been Sell or Hold (it remained Hold today); therefore, I am still conservatively positioned with only 30% invested in stocks.

Still waiting for some direction in the stock market…

The political hysteria over the potential shutdown of Government was fodder for the news media today and the major networks just couldn’t get enough.  Sadly, lost in all the shuffle is a simple truth; the proposed budget is 3.69 trillion dollars.  A budget cut of 100 billion is less that 3% of the total budget.  Republicans claimed 100-billion would make a positive difference in the debt. Democrats said it would ruin the economy. Both are lying – such a small cut would have virtually no impact (good or bad).  The compromise number is about 1% of the budget – a meaningless pittance.

Sentiment was 69%-Bulls at the close today and the 5-day moving average was 67%-Bulls.  These are both high numbers and, as I noted yesterday, have almost always resulted in a pullback of at least 6%.  A 6% pullback would put us back around the recent S&P 500 low 1257.  If we do revisit the prior low, we should be able to tell if we are going to bounce up or drop further by analyzing market internals.

To list just a few issues troubling investors: there has been a lot of talk that we are reaching oil price levels that will cause problems for the economy;  QE2 is ending this summer (by artificially keeping interest rates low the Fed has forced people into the stock market); Ford will idle plants in Belgium for 5-days due to parts shortages associated with the earthquakes; Toyota will temporarily shut down all of its North American factories because of similar parts shortages (more impacts to show later?); political unrest continues in the Middle East; and one more, as noted above, the National Debt is not being addressed.   

From a technical standpoint Sentiment is too Bullish; the S&P is 10.5% above its 200-day moving average; the VIX is still higher than it was before the high of 1243; leadership is failing (since 16 Feb, Nasdaq 100 is trailing the S&P 500 as is Apple )…well you get the idea.

In spite of all the negatives the S&P has been holding around the 1333 mark.  I am doubtful that will last.  I still feel that we will at least retest the recent low of 1257 and may go below that level.  As always…we’ll have to wait and see.

NTMS switched to SELL on 22 February.  Since then, NTMS analysis has been Sell or Hold (it’s Hold today); therefore, I am still conservatively positioned with only 30% invested in stocks.

Double Top?

“The psychology behind a double top is that it wipes out the shorts and pulls everyone into the market. It is usually on declining volume which we have had. I think there is a fair chance here that we see a decent pullback. However, it could also reverse course and breakout to the upside. I just think we are overdue for a more significant pullback and this ugly topping pattern is classic. Every day looks like a reversal break out wiping out more shorts and pulling more longs in. I can't imagine there are many people left who are heavily short this market. Oh, and we are almost at the 2 year anniversary of this bull!” – dmorse (ClearStation poster today)

Not much change today in the NTSM analysis.  Still HOLD.

NTMS switched to Sell on 22 February.  Since then, NTMS analysis has been Sell or Hold; therefore, I am still conservatively positioned with only 30% invested in stocks.

The Wednesday Update of the Navigate the Stock Market System

The Investment Company Institute reported yesterday that Long term US mutual funds experienced $375-million in inflows for the week ending   23 March so Mom & Pop investor (whoever they are) are starting to come back…again. 

The ICI data is good news.  Here’s some from the other side.  CNNMoney reported, “Of the 16 economists surveyed by CNNMoney, all but two have reduced their first quarter economic growth predictions within the last month. Eleven have cut their expectations for the entire year.”  Predictions were for a growth rate of 3.3% in the first three months of this year. But now, those predictions are only 2.7%.  Robert Reich economist and former Labor Secretary in the Clinton Administration wrote on his blog recently, “Why aren't Americans being told the truth about the economy? We're heading in the direction of a double dip -- but you'd never know it if you listened to the upbeat messages coming out of Wall Street and Washington.”

Be vigilant….

SUMMARY OF NTSM INDICATORS:

As of today’s close, our 4-areas of market analysis present the following picture:

SENTIMENT:  Sell.  %-bulls indicator is 66% as of tonight.  As I said yesterday, when 2 out of every 3-people think it is time to buy, it is really time to sell.  The last 2-times sentiment hit 66% we had pullbacks of 8% and 15% in 2010.  The 2-times before that resulted in 6% pullbacks in 2009. 

PRICE: Neutral.  The Price analysis indicator has been meandering around is now firmly in neutral territory.  The up moves just haven’t been very big.

VOLUME: Buy.  More volume has been going to the upside..

VIX:  Neutral.  Our VIX indicator is Hold. 

SUMMARY: The overall Navigate the Stock Market analysis is NEUTRAL today, and that makes 13-days with HOLD as our overall outcome.  (See the page How to Use the NTSM System).

The NTMS analysis gave its first SELL signal of this cycle on 22 Feb 2011at S&P 1315.
As a result of that SELL signal, I am still conservatively positioned with only 30% invested in stocks.

Dittos for the week

No significant change in our recommendation.  Volume has been trending higher on down-moves more than up-moves over the past 5-days, and that is usually not good.  On the other hand, volume has been so low that the indicator hasn’t moved much.  Volume is the only indicator currently recommending a Buy so we can’t complain about that. 

The only significant change has been the sentiment indicator.  It has moved up from under 50%-bulls last week to 65%-bulls, a whisker away from a sell recommendation tonight (66%).  When 2 out of every 3-people think it is time to buy, it is really time to sell.

We could still have a Buy signal if we get a big up-move.  That might bring in more bullish sentiment and send us back to Hold or Sell.  In any event, the Navigate the Stock Market System needs more than 1-indicator to agree before we will have a firm recommendation either Buy or Sell.

The bottom line is that the market remains unsettled without any firm direction.

From today’s data, it appears we may have trouble breaking the previous high of 1343 on 18 Feb.  So far, we haven’t broken 1333 in 2-tries.  We may yet retest the 16 March low of 1256.

As always, we’ll have to wait and see. 

The Navigate the Stock Market analysis is HOLD. 

I am still conservatively positioned with only 30% invested in stocks.

Hmmm…still not a Buy yet

I track statistically significant moves in the S&P 500.  Those are moves that exceed 2/3 of all moves over a given period in size and volume. In other words, they are the bigger moves up or down.  We expect to have a statistically significant move every 3-days or so.  For example from 16 Feb until 16 Mar there were 6-statistically significant moves over 20-days. 

Now here is an odd fact.  Since 16 March, there have been no statistically significant days.  That is a 13-day period.  This sort of market action (smaller moves in price and volume) tends to happen at the highs.  Does this portend further down moves ahead?  Perhaps, but I really don’t know.  I think one reason for the lack of volatility is that even the professional traders are confused by this market.   

I have been trying to convince myself to Buy even though the NTSM analysis has not yet called a Buy.  I haven’t been able to do it.  Fundamentally, I think the market is due to head up, but since there seems to be a lot of doubt, I will wait for some clarification.

The Navigate the Stock Market analysis is still HOLD and shows little change from yesterday. 

 I am still conservatively positioned with only 30% invested in stocks.

Time to Buy…a little…maybe

The Navigate the Stock Market analysis is still HOLD and shows little change from yesterday. 

The S&P 500 had a nice rally on the employment news and then faded in the afternoon.  I never like to see a late fade because it shows a lack of conviction. 

 

Today’s volumes improved, but really, light volume is normal AFTER a bottom because a lot of investors don’t believe the bottom is in and tend to stay on the sidelines in the early stages of a rally.  At this point the S&P has stayed above its trend line convincingly and is now 1.5% above the trend line.  Should we wait until it gets to 3% above trend as classical technical analysis would say?  That would be about 1350. I don’t want to wait that long.  I think the down trend has switched to up; but that is in large part a guess because there have been no statistically significant market days since the recent low of 1257 on 16 March.  I use statistics to verify trends. 

There is one very troubling indicator.  Sentiment is getting overly bullish.   Yesterday % Bulls hit 71% for the day and the 5-day average is 59% at the close today.  If that trend continues, we could see a Sell signal in a few weeks.    

As far as the fundamentals, the improving employment figures should keep the rally going unless we get bad earnings reports (or projections from companies) this quarter.   

The NTSM system can be late in calling a Buy after a short small drop (like we just had) so I will probably get back in soon.    

I can’t seem to get really aggressive (e.g., my previous 100% all-in in stocks) or enthusiastic about the market, because I’d like to see a couple more data points to verify this up trend or a Buy signal from NTSM analysis, but that isn’t likely until we have some big moves up. 

I am now 30% invested in stocks.  I going to look at some more data and post later if I decide to Buy on Monday.