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December 28 2013 – Weekend Market Comment

December 28 2013 – U.S. stocks fell slightly Friday, with the Standard & Poor’s 500 Index trimming a weekly gain, after benchmark indexes rallied to all-time highs Thursday amid optimism over the economic recovery. The S&P 500’s retreat Friday halted a four-day rally that was fueled by improving economic data. A Labor Department report showed that jobless claims declined by more than forecast, boosting optimism. While the weekly jobless claims reading dropped this week, the four-week moving average rose from 343,800 up to 348,000 due to the 369k and 380k readings seen over the prior two weeks.  The current four-week moving average is now 43,000 above the post-recession low of 305,000 seen at the end of September.

The big push higher, though, has left the S&P 500 well above its 50-day moving average.  At more than two standard deviations above its 50-day, the S&P is actually the most overbought it has been since mid-May.  Investors celebrate 2013's big gains with more "buy" orders, but the market doesn't stay this extended forever.

Well as I said last week the U.S. markets have entered a parabolic buying frenzy. Talk about hopping on the bandwagon.  In the latest weekly survey of investment adviser sentiment from Investors Intelligence, bears declined by 32% from 23.1% down to 15.7%.  Going back to 1975, there have now been just 16 other periods where bearish sentiment declined by more than 30% in a single week.  To understand what the fuss is about you can begin by looking at U.S. Industrial production figures. As you can see U.S. Industrial production mirrors the U.S. market, the better the economy the better the market.




As you can see the last 10 years the S&P 500 is right in step with the rise in production.


OK so this is all very nice, but I think some of the juiciest parts of the rally might be over. First off U.S. industrial production is often controlled by the Auto industry. Below is a graph of the recent action in Ford, Ford Motor Co. (F)’s prediction of stalled revenue growth and sliding profit in 2014 reflects the high cost of introducing models in the most-crowded new-car field since Alan Mulally joined the automaker. Ford had the biggest drop in more than two years yesterday after predicting a decline in pretax profit, citing fierce competition in a slower-growing U.S. market and the spending needed to preserve strong pricing with its car and truck lineup. The sober outlook underscores the challenges facing the eventual successor to Mulally, who is being considered for the top job at Microsoft Corp. 


Some indicators remain bullish and even look like there is more room to run. The Nasdaq summation index is looking positive. 


And the NYSE still has lots of stocks that could be over there 50 day moving average:


You can even see that the VIX is low but could be alright for a few more days or even weeks. But as you can see when the CCI (top of graph) is in the brown market trouble is not too far off. Remember when the VIX goes up it is a sign of fear and the market (bottom of graph) sells off. 

Also mildly concerning is the On Balance Volume is dropping below the market. On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days. OBV was developed by Joe Granville and introduced in his 1963 book, Granville's New Key to Stock Market Profits. It was one of the first indicators to measure positive and negative volume flow. Chartists can look for divergences between OBV and price to predict price movements or use OBV to confirm price trends. So this drop off may be a sign that we are late in the run up. 


How to Play This Now
Well of course you stay long but you may want to take profits on some of your risky positions and look to open new positions in more stable plays. For example the financial services often do well late in a cycle and also now that interest rates are raising you might look at insurance companies. One leader in the industry to consider is highly advertised Possessive Insurance. 
Just check out this chart:

If you really want conservative look at drug maker Eli Lilly

Also as I mentioned last week the recent run up in the Baltic Dry Ship index points to renewed demand for iron or and commodities in general in China. Look at the recent bounce in the commodity index.

and so we have seen in Canada a renewed interest in mining related stocks. Leading that pack is Teck resources who is also benefiting from the recent bounce in the commodity space. You might like this post from the motley fool.  


So harvest a few partial profits on your high beta plays, (for example these) set your trailing stops a tad tighter, move in to staples and broad ETF assets and remember trees don't grow to the sky.

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Since I am at the Cancun Airport tonight surrounded by airplanes I thought you might like this interesting tidbit courtesy of the Smithsonian Magazine. It shows how far you could travel from New York City in a day.



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As 2014 approaches I would like to remind people that the world is basically a good place, most people have good intentions and that most people are better off (at least economically) now than ever before. The United Nations recently released a heartening update on its ‘millennium goals’ for the developing world, with many of its 2015 targets on the way to being met, or indeed already met. The target to halve the number of people living on less than US$1.25 per day was achieved in 2010; the proportion of undernourished people fell from 23% of the developing world in 1990-92 to under 15% in 2010-2012; more than 2 billion people gained access to improved sources of drinking water. The list goes on but suffice to say that never in history have so many people across the globe lived so comfortably. This reflects the fact that with global GDP set to exceed US$74 trillion this year, never has the world produced this much. Happy New Year . . .





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