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June 14, 2014 – Weekend Market Comment

June 14, 2014 – Escalating violence in Iraq drove crude oil prices to nine-month highs on Friday while damping the appetite for risk, even as bullish news from the U.S. tech sector lifted shares on Wall Street and helped buoy stocks in global equity markets. Brent crude edged above $113 a barrel, up more than $4 this week, on concerns that an insurgency in Iraq could trigger civil war and eventually crimp oil exports. Iraq's most senior Shi'ite cleric urged his followers to take up arms to defend themselves against advancing Sunni militants, escalating a conflict that threatens civil war and a possible break-up of the country.

In short the markets were worried that the price of oil would act as a brake on the current rally. When consumers buy gas at higher prices they don't buy other stuff. Frankly if this news came two weeks ago the market would have shrugged it off. The real story is that this rally has been running since April 11th and running hard. Everyone can see the market is doing well, that means that even mom and pop are pouring money in to the market. Thus the market is overheated and we need to take a pause here. Lets face it once the dumb money is in, what’s left on the buy side? I have moved from high-risk stocks like Tripadvisor and L3 Communications leaving my stable full of cash and my lager positions in stodgy Canadian banks and pipelines that continue to march higher as the pros move towards safety along with me. Don’t get me wrong this is a bull market, that needs a rest, there is no need to panic.

Of course it is all in the charts. Lets look at the shift from Risk on the Risk Off. Here is our tool, a comparison of risky mid cap stock vs safe but boring dividend stocks. The Stochastic oscillator on the top of this graph tells you what to do -- when red is on top you bulls should pull in your horns!

You can also see from the blue histogram in the Green Arrow Graph that there easily could be another small  correction here. 

The New York Stock Exchange 50 day overbought line just ran up to the magic 80 line and is now retreating. In 2013 it probably would have gone to 90% but in this full valued Mehhh market market it is no surprise it could not pass 80%.

You also might like to look at it from the percentage of S&P 500 stocks above the 50 day average, this is often more obvious because of the flight to safety (the NYSE) in a risk off period. 

Our most damming indicator is the primary sell that passed in to near record territory, clearly over optimistic and rolling over a tad. By the way we have a new CME4PIF School all about the Primary Sell Indicator

The VIX is still way to optimistic but clearly it too is pulling back as traders find they can use cheep VIX options to cover some risk. The truth is that VIX is Wall Street's equivalent of a Rorschach test. What people think VIX means says more about those people than anything VIX might be telegraphing.

Investors actually are responding to the low VIX by calmly amassing positions that would increase in value if VIX surges higher, which could occur if the stock market falls from its lofty heights. This bearish trading contradicts recent articles and analysis contending VIX's low reading means investors are blithely ignoring risks. The hedging action shows the only thing VIX really means is that options prices are inexpensive. Puts and calls on many stocks are trading at the lowest levels on record. This fact has attracted far less attention than the more easily understood fact that VIX traded at its lowest level on Friday since the credit crisis.

Hence, many investors are buying inexpensive options to hedge historically high-priced stocks. Hedging action is heavy in bearish puts on the S&P 500 index and SPDR S&P 500 Trust (ticker: SPY ), the exchange-traded fund that tracks the big-cap benchmark.

But I said this is a short term pull back not a major sell off to confirm that lets look at two of our big picture tools Non-farm payroll and Industrial Production, these are lagging indicators but I never get too nervous if these are still positive

So there you have it, it looks like the bull is still here, BUT this is no time to be buying equities. 

OK Its a beautiful sunny day and I would love to talk about stocks with you all day but my convertible is begging me to take it for a spin. Happy Thoughts...

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