BULL OR BEAR – Predictions Abound

I have probably written before that I can’t remember there being such a dichotomy of market opinions. Here’s a warning rather than a specific crash prediction from Sy Harding.

SY HARDING PREDICTS ANOTHER LEG DOWN
Sy Harding is a fellow engineer so at least we have that in common. He also believes that this bear market is not over so there’s another point in common. He recently wrote:

“The secular bear market that began in 2000 continues to track similarly to the secular bear markets of 1900-21, and 1966-82...As in the 1970's, it is taking unusual stimulus measures, record budget deficits and debt loads, to recover from the disastrous decade...And though each step has resulted in slow recovery, it will take at least one more setback for the economy and market (probably caused by austerity measures to tackle the debt problem), before the secular bear ends.” – Sy Harding, StreetSmartPost, Asset Management Research Corp.
http://www.streetsmartpost.com/

Chart from
http://www.streetsmartpost.com/

As I often note: The likelihood is very high that there will be another significant decline in this bear market, we just don’t know when. Based on past history, we can see that during secular bear markets the markets remain “range bound” bouncing roughly between prior highs and lows. The prior high was around 1560, only about 7% below Tuesday’s close. I have read several crash-predictions for 2013 or 2014 and I suspect those opinions come from history rather than current market conditions.

On a related note, the CNBC fear-mongers can’t stop talking about a Bond bubble and the coming crash in bond prices. If equity prices go thru another round of contraction, as I suspect they will, bonds will again be a safe haven. A good time to sell bonds will be at the bottom of the next downturn.

MARKET RECAP
Wednesday the S&P 500 was UP about 0.3% to 1461 (rounded). VIX was UP 1.4% to 13.81.

NTSM
No change from yesterday: The numbers in the NTSM analysis are BUY Wednesday because the Sentiment reading has improved to neutral, leaving positive numbers for Price, Volume and VIX; but, as I’ve suggested before, I will not get back in the stock market until the market breaks its prior high. “The trend is your friend” and so far, the market has not shown me that the trend can get above the old highs of 1466.

With the added positive number in the NTSM system, I’ve seen 3 BUY ratings and 3-HOLD ratings in the past 6-trading days. Markey internals are looking up. Late day buying seems to indicate the pros are buying. The only remaining test is; can we break thru the 1466 ceiling? II suspect we may do it.

I’ll buy back in the market when we have two successive closes at or above 1467. I think the market will have a tough time getting past the 1550 level and then there is a potential Debt ceiling issue ahead so even getting in comes with some risk.

MY INVESTED POSITION
Based on the SELL signal, 7 November 2012, I moved out of the stock market at 1377 on the S&P 500. Because of the negativity I have noted from Hussman and others, I am currently invested in a range of near 15% invested in stocks.

Is Alcoa the Bell-weather Stock?

Alcoa is the first DOW stock to report earnings, and as such, many look to it to gauge market earnings for the quarter. Jim Cramer recently wrote that "Alcoa means everything". Here are some excerpts from Marek Fuchs suggesting that may not be the case.

WHY CRAMER IS WRONG ABOUT ALCOA’S EARNINGS…(Yahoo Finance)
"Manufacturing amounts to only 15% of the national economy, with the sectors Alcoa peddles to a fraction of that…Alcoa earnings estimates have been cut 25% in recent months, down to a consensus of 6 cents a share from about 8 cents in October...Earnings beats of recently trimmed numbers don’t mean as much or have as lasting an impact. By the same token, misses of freshly cut estimates imply that business is degrading at a quick pace or management has no bead on what is going on. Or both…In the final estimation, Alcoa’s earnings aren't entirely meaningless. But they're just one piece of a complex economic and earnings puzzle." – Marek Fuchs. For the full story visit…
http://finance.yahoo.com/blogs/the-exchange/why-cramer-wrong-alcoa-earnings-investors-know-230105528.html

Who’s right – Cramer of Fuchs? The market may tell us tomorrow depending on the Alcoa earnings report.

ALCOA
Alcoa reported revenue about 5% ahead of expectation. Earnings met expectations at 6-cents per share. Guidance was good. Wall Street liked the result and Alcoa’s share-price rose 2% in after-hours trading.

Overall, the market earnings expectations are low. Dan Greenhaus, chief global strategist at BTIG, wrote in a research note Tuesday; "Excluding financial stocks, however, earnings are only expected to rise 0.5%..." For more on the subject see CNN/Money at…
http://money.cnn.com/2013/01/08/investing/alcoa-earnings/index.html

Here’s a comment making a point very similar to my post yesterday regarding the VIX.

WHY VIX’S RECENT PLUNGE MAY BE BAD FOR STOCKS (CNBC)
"After a historic decline, market volatility really has no place else to go but up.
In the near-term that's probably bad news for stock prices, which have rallied in 2013 but likely are in for a rough ride over the next several weeks.
…The VIX, as it is known, is a popular measure used to gauge market fear by measuring futures activity on the Standard & Poor's 500. A low reading is generally associated both with investor complacency and rising stock prices."
Full story at
http://www.cnbc.com/id/100359775

MARKET RECAP
Tuesday the S&P 500 was down about 0.3% to 1457 (rounded). VIX fell about 1.2% to 13.62.

NTSM
The numbers in the NTSM analysis are BUY Tuesday because the Sentiment reading has improved to neutral, leaving positive numbers for Price, Volume and VIX; but, as I’ve suggested before, I will not get back in the stock market until the market breaks its prior high. "The trend is your friend" and so far, the market has not shown me that the trend can get above the old highs of 1466. Of course, if the S&P 500 can pull back into a legitimate correction, I might have a good buying opportunity.

MY INVESTED POSITION
Based on the SELL signal, 7 November 2012, I moved out of the stock market at 1377 on the S&P 500. Because of the negativity I have noted from Hussman and others, I am currently invested in a range of near 15% invested in stocks

Earnings Season Starts Tuesday!

MARKET THOUGHTS
The NTSM decision model is purely mathematical; however, a review of all of the data presented (including output charts for NTMS indicators; market internals; overall NYSE volume, etc., each plotted vs. the S&P 500) can be helpful at times. 

For example, when I look at the VIX indicator for Monday, it is positive in its relation to the overall NTMS model (VIX has been falling fast and that is good); however, the plot of the values of VIX vs. the S&P 500 "suggests" that a TOP in the market is near.  The market has generally topped when VIX dropped to around 14 or 15, slightly higher than its current level. 
 
NewHi/NewLo data also shows that while this market internal has been improving recently, over a longer-term, it has plateaued for the past three weeks at a level associated with recent market highs.
 
This sort of data is a reason why I am reluctant to get back in the market.  On the other hand, I am also well aware that the reason for having a mathematical decision-model, with its decision-making rules, is to avoid paralysis of fear or greed.  More importantly, my favorite trading advice is, ”trade what you see, not what you think.”  At this point, I want to see a breakout of the trend, above its prior high.  Here are a couple of rules for determining a trend line break”

-      The Two-Day Rule states that price must close through the trend line for two successive days.

 -      The 3%-Rule states that price must close 3% through the level of the penetration to be considered a break.

I’ll get back in the market when the rules are satisfied.  In other words, I want to see two successive closes at or above 1467 or a close of 1510.  I must admit, I haven’t completely decided whether I want to see both rules satisfied or just one of the rules. It may be a moot point; I think the market may give us a clearer view as earnings season gets under way.

Earnings season starts with Alcoa after Tuesday’s close.  Alcoa is the first DOW stock to report and its earnings are often scrutinized for hints regarding expected earnings from other countries.

MARKET RECAP

Monday the S&P 500 was down about 0.3% to 1462 (rounded).  VIX also fell about 0.3% to 13.79.   

NTSM

The NTSM analysis was HOLD Monday held in check only by the Sentiment indicator.  Price, Volume, and VIX are all positive.

MY INVESTED POSITION

Based on the SELL signal, 7 November 2012, I moved out of the stock market at 1377 on the S&P 500.  Because of the negativity I have noted from Hussman and others, I am currently invested in a range of near 15% invested in stocks.   

Unemployment Graphics

UNEMPLOYMENT (Monthly Job Creation)

Chart and full story from CNN/Money at
http://money.cnn.com/2013/01/04/news/economy/december-jobs-report/index.html

Chart and extensive discussion from dShort Advisor Perspectives at…

http://advisorperspectives.com/dshort/charts/indicators/unemployment-monthly.html?unemployment-labor-force-participation-rate.gif

Unemployment Basically Unchanged; ISM Slightly UP

UNEMPLOYEMENT (from CNN/Money)
“Overall, the labor market's performance in 2012 was pretty lackluster and hiring was not strong enough to get the nation out of its economic rut, economists said.
The economy added 155,000 jobs in December, bringing the total number of jobs created in 2012 to 1.84 million, the Labor Department said Friday. The unemployment rate held steady at 7.8%...Economists surveyed by Briefing.com expected the report to show that 150,000 jobs were created last month and the unemployment rate remained unchanged.”

(I had some nice graphics to insert but Blogger.com isn’t accepting a Picture from my computer.  Hopefully this will get fixed.)  

Chart and full story from CNN/Money at
http://money.cnn.com/2013/01/04/news/economy/december-jobs-report/index.html

Both the unemployment rate and the Labor Force Participation rate (those employed or un-employed, but looking for work) were unchanged.  (The labor force participation rate accounts for those who have given up looking for work, while the unemployment rate only looks at employment vs. the population of employment age.  The unemployment rate will drop if people quit looking for work – all other things being equal.)  As Doug short points out, the Labor Force Participation rate is at a level last seen in 1979.

See the Chart and extensive discussion from dShort Advisor Perspectives at…

http://advisorperspectives.com/dshort/charts/indicators/unemployment-monthly.html?unemployment-labor-force-participation-rate.gif

ISM MANUFACTURING SURVEY UP (FROM CNN/Money)

“The Institute of Supply Management's monthly reading on the U.S. manufacturing sector came in at 50.7 in December, moving the index off its 2012 low of 49.5 in November. The index is compiled from a survey of manufacturing supply managers, and any number above 50 indicates the sector is growing.
The December expansion marked only the third time the sector grew in the last seven months.”  Full story at…
http://money.cnn.com/2013/01/02/news/economy/ism-manufacturing/index.html

POLITICS AS USUAL

The NY/NJ politicos screamed about how the House didn’t act on the Sandy relief bill designed to help Hurricane Sandy recovery.  As Paul Harvey might have said, “Here’s the rest of the story.”  The WSJ noted that more than 25% of the $60-billion appropriations bill consists of funds for “social service grants” that have nothing to do with Sandy.  There’s even $150-million for Alaska fisheries.  The House will pass a smaller Flood Insurance appropriation soon. We’ll see if the rest passes the House in its present form.  Apparently, the pledges to avoid “Congressional adds” to the President’s budget (earmarks) are being ignored by the Senate.

It is time to RAIN on the politicians – Remove All Incumbents Now.

MARKET RECAP

Friday the S&P 500 was UP about 0.5% to 1467 (rounded).  VIX fell 5% to 13.83.

There are no more worries – Even Hans Solos agrees; “Everything's under control. Situation: normal…everything's perfectly fine now. We're fine. We're all fine here now…” 

NTSM

The NTSM was HOLD again Friday.

Friday’s close above 1466 means that the S&P 500 has now closed above its prior high.  While I have reservations about the extreme sentiment readings, I can’t let the market get too far ahead.  If the S&P 500 closes a bit higher I’ll start buying back in.  Sometimes the trend is your friend, even if I don’t trust him right now.

MY INVESTED POSITION

Based on the SELL signal, 7 November 2012, I moved out of the stock market at 1377 on the S&P 500.  Because of the negativity I have noted from Hussman and others, I am currently invested in a range of near 15% invested in stocks.   

FED Rethinking Bond Buying

FEDERAL RESERVE RETHINKING BOND BUYING (from CNN/Money)
“U.S. stocks closed lower Thursday, after investors fretted that the Federal Reserve might end its intervention in the markets sooner than expected…The minutes from the Fed's December meeting showed some members were weighing whether the central bank should wrap up its bond buying program before the end of this year.

"People thought bond buying would go through 2013 at least," said Douglas DiPietro, managing director at Evercore. "Now it looks like some members of the committee are getting more cautionary about that."  Full story at…

http://money.cnn.com/2013/01/03/investing/stocks-markets/index.html?iid=mkt_SF_news

 

UNEMPLOYEMENT (from ENews Park Forest)

“In the week ending December 29, the advance figure for seasonally adjusted initial claims was 372,000, an increase of 10,000 from the previous week's revised figure of 362,000. The 4-week moving average was 360,000, an increase of 250 from the previous week's revised average of 359,750….The total number of people claiming benefits in all programs for the week ending December 15 was 5,402,987, a decrease of 68,727 from the previous week. There were 7,223,309 persons claiming benefits in all programs in the comparable week in 2011.”  Full story at...
http://www.enewspf.com/latest-news/latest-national/39419-unemployment-insurance-weekly-claims-report-for-week-ending-december-29-2012.html

The “total persons claiming benefits” is a 25% drop from year ago values, so year-over-year, we’re headed in the right direction.  The rise this week is worth watching.  We’ll find out more when Friday’s jobs report comes out.  The ADP employment numbers were pretty good today so it will be interesting to see the Government’s take.

RECESSION FEARS

My comparison of the Morgan Stanley Cyclical Index vs. the S&P 500 shows investors are buying the cyclical stocks at a pace that means investors currently think there is NO chance of recession. 

REVISED NTSM THINKING

This year has been a challenge for the NTSM system and I under-performed the market somewhat. (I’ll post the numbers later.)  This has caused me to look hard at the bottoms in the S&P 500 on 15 Nov (1353) and 1 June (1278).  Neither were classical bottoms in the sense that market internals improved enough to justify calling a bottom at the lower-low.  Volume didn’t take off either, so most investors didn’t pile in to make it obvious that the bottom had been missed.  In each case though, there was steady buying.  A review of market action following the 2012 bottoms indicated that it should be possible to review market internals at the higher-low (the first pull-back after a bottom) and call a higher-low buy point.  This should improve the NTSM performance going forward when bottoms are marginal. These typically occur on small declines (less than 15%) as was the case in 2012.

As for the fiscal cliff, that was simply a crap shoot and I don’t like the idea of playing craps with my retirement funds.  Thanks, clowns in Washington. It is time to RAIN on the Politicians – Remove All Incumbents Now.  That might be the only way to make them work for the people instead of themselves.

MARKET RECAP

Thursday the S&P 500 was down about 0.2% to 1459 (rounded).  VIX was down 0.75% to 14.57. 
                                                  
VIX fell 37% over the previous three days.  You have to go back to May of 2010 to find a drop in the VIX of 37% or more.

NTSM – Overall is HOLD

The NTSM analysis switched to HOLD Thursday after the BUY Wednesday as VIX fell again; it’s now below 15.  I saw a note on a trader board that traders should short if it falls below 14.  I pay more attention to the direction of VIX than its value.  Back before the last crash the VIX was all the way down below 10.  Indicators follow:

Sentiment: Negative

Price: Positive (Up moves have been larger than down)
Volume: Neutral (Selling today pushed this indicator down from yesterday’s buy)
VIX: Positive (Huge drops in VIX triggered buy rating

I haven’t gone back in yet.  As I said yesterday, I will be patient and wait for further confirmation of the buy signal on Wednesday.  That could happen anytime though.  I’ll try to post any changes to the Blog. 

At best, my guess is that the S&P 500 might make it another 5 to 10% higher, but it needs to pull back to clear the air before it can get much higher than that.

If I was in the market, I’d probably stay in; as it is, I am comfortable out...at least for a while longer. The high bullish sentiment still has me spooked.

MY INVESTED POSITION

Based on the SELL signal, 7 November 2012, I moved out of the stock market at 1377 on the S&P 500.  Because of the negativity I have noted from Hussman and others, I am currently invested in a range of near 15% invested in stocks.   

Dewey Wins!

Wednesday’s Wall Street Journal’s front page headline was “House Balks at Cliff Deal”.  Ooops!  They settled the cliff-deal when the House voted in favor of it.  Dewey didn’t win either.

THE CLIFF RESOLUTION (CNBC)

“...critical issues, including reduction of the deficit, remain unresolved. Meanwhile, the economy doesn't have much growth to give. Mark Vitner, senior economist at Wells Fargo, predicts it will expand just 1.5 percent in 2013, down from a lackluster 2.2 percent in 2012...Ben Schwartz, chief market strategist for Lightspeed Financial, said unemployment was still likely to edge up and retail sales growth was likely to be weaker than last year...‘Regardless of a deal getting done, people on Wall Street are not going to run around giving high fives,’ Schwartz said. ‘The federal government is obviously dysfunctional, to say the least.’”
http://www.cnbc.com/id/100348219

This was a do very little, tax-deal that kicked the can down the road and simply delayed resolution of sequestration and spending cuts until 1 March.  Holy, debt-ceiling Batman…what a mess.  We’ll go thru this whole thing again, and believe it or not, all parties seem even angrier than before the vote.

REMINDER – MARKET HISTORY (Hussman)

“Among cyclical bull markets in secular bear periods, the current advance – at about 45 months in length – is second in length only to the 2002-2007 bull market advance …On average, these advances have been followed by market declines of about 39%…Cyclical bear markets in secular bear periods have typically wiped out not just half of the preceding bull market gain – which is average – but close to 80% of the preceding bull market gain. It’s not clear what portion will be surrendered in the present cycle, or necessarily when, but I have every expectation of observing the normal range of full-cycle opportunities as we move forward from here.”  – John Hussman, PhD, Weekley Market Commentary, Brief Holiday Update
http://www.hussmanfunds.com/

MORE MARKET HISTORY (dShort Advisors)

“...today's P/E10 relates to the past, our chart includes horizontal bands to divide the monthly valuations into quintiles — five groups, each with 20% of the total. Ratios in the top 20% suggest a highly overvalued market, the bottom 20% a highly undervalued market... By this historic measure, the market is expensive, with the ratio approximately 29% above its average (arithmetic mean) of 16.5 (16.46 to two decimal places). Last month it was 27% above.

...(The) latest P/E10 ratio is approximately at the 82nd percentile of the 1583 data points in this series.

“A more cautionary observation is that when the P/E10 has fallen from the top to the second quintile, it has eventually declined to the first quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 540. Of course, a happier alternative would be for corporate earnings to continue their strong and prolonged surge. If the 2009 trough was not a P/E10 bottom, when might we see it occur? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now in its 12th year.”  Full story,  dShort Advisors at…

http://advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php

MORE SCARY OBSERVATIONS

The P/E10 is now only 13% below its value at the START of the 1966-1982 secular-bear market.  We can easily see from the charts that in the past, secular bear markets have frequently ended after 3-major declines.  (We’ve had two so far.)  As Doug Short noted, bear markets usually end when the P/E10 is in single digits – at least S&P 540!  OMG!

We must admit that a debt crisis (triggered in Japan, Europe, or the US) leading to recession could send us there.

MARKET RECAP

Wednesday the S&P 500 was up over 2.5% to 1462 (rounded).  VIX was DOWN an astonishing 18.5% to 14.68.  The astonishing part is that the VIX was down over 20% Monday.

NTSM – NOW BUY (but wait, there’s more)

The NTSM analysis switched to BUY Wednesday as VIX crashed back below 15 and Volume and Price jumped on Wednesday’s big move up.

This creates a bit of a conundrum.  Price, Volume, and VIX are all positive.  Sentiment is still a screaming negative.  Sentiment was still 67%-Bulls over a 5-day moving average (that's a negative for the market) as of Monday the 31^st.

This sort of disagreement (extreme-negative sentiment, and bullish Volume and VIX) occurred in April 2011 about 2-weeks before the top; Sentiment was correct then.  That’s the only similar example I could find going back to 2009.

I will be patient and wait for further confirmation of the buy signal.  The cliff has made a mess of the NTSM numbers and created a lot of confusion – just ask the Wall Street Journal.

Chart wise, the S&P 500 is close to its prior high of 1466 and just may drift down from here if it can’t get higher.  My earlier prediction was that we would see a relief rally and then some selling.  We’ll see.

MY INVESTED POSITION

Based on the SELL signal, 7 November 2012, I moved out of the stock market at 1377 on the S&P 500.  Because of the negativity I have noted from Hussman and others, I am currently invested in a range of near 15% invested in stocks.   

While I don’t like missing the rally over the past couple of trading sessions, there was no way it could be predicted, so I am OK with better safe than sorry.  I posted some scary stuff above about Market History; remember, we can't know the timing of the next crash, if there is one, so it's best not to be too scared to be in the market, i.e., if the numbers look good I'll get back in.