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October 10, 2014 – Weekend Market Comment

October 10, 2014 – U.S. stocks fell sharply on Friday, with benchmark indexes falling for a third week in a row. Down 3.1 percent on the week, and up 3.1 percent for the year, the S&P 500 dropped 22.08 points, or 1.2 percent, to 1,906.13, with technology hardest hit and utilities faring best among its 10 major sectors. The Nasdaq declined 102.10 points, or 2.3 percent, to 4,276.24, leaving it off 2.3 percent on the week and up 2.4 percent on the year. For every share rising, nearly four fell on the New York Stock Exchange, where nearly 949 million shares traded. Composite volume cleared 4.5 billion. On the New York Mercantile Exchange, crude futures for November delivery turned higher, up 23 cents, or 0.3 percent, at $86 a barrel and the December gold contract fell $3.60, or 0.3 percent, to $1,221.70 an ounce.

Adding insult to injury after the bell on Thursday was a revenue warning from the CEO at Microchip Technolog. With the Fed going away, and the slowdown in Europe, the market is trying to figure out are these valuations fair, that's what this whole week has been about.

Ah but nothing bad happened to you, because you listened to me for weeks now when I said to raise cash and stay away from high beta investments.

Well here it is all in the charts . . .

Primary Sell:

Pros have left the building folks.... abandon all hope.

Long Term Bull Bear Lines:
NASTY, NASTY NASTY. Move from low beta investments to cash.

NYSE High Low:

NASTY, NASTY NASTY. worst this graph has looked in 5 years. Move from low beta investments to cash.

On Balance Volume:

Not great but there is some institutional bargain shopping or this puppy (red OBV line) would be way below the price. First hint of an impending bounce could be found here.

S&P500 Percent Stocks Above 50 day MA:

NASTY, NASTY NASTY. Move from low beta investments to cash.


The CBOE Volatility Index, a measure of investor uncertainty, rose above 20 for the first time since early February, and spiked 13 percent to 21.24. I will say that a VIX move of more than six points is often the limit, but really I see no hope so far. This is full scale panic as the pros rush for cover. they are running away like scared little girls.

Nasdaq Summation Index:

NASTY, NASTY NASTY. Move from low beta investments to cash.

Look a NASDAQ trader. . .

Aggressive Defensive:

NASTY, NASTY NASTY. worse graph of ths type in 5 years. Move from low beta investments to cash.

Green Arrow Graph:

Slope is falling. This is no time to invest NEW money.

USA Renko Chart:

Hmm that 4th black square was not suppose to happen,  . .  this could get ugly.

Bonds vs Stocks

NASTY, NASTY NASTY. when red climbs you should bail. Move from low beta investments to cash.

However there is a hidden ray of hope . . . notice the blue green line, consumer discretionary stocks are flat and not in the downdraft, that means that institutions are buying bargains in consumer stocks, as predicted last week.

What Works Now
Well their is a an ETF it goes short on the hot names like Netflix called HDGE. But caution that would be a counter trend move in a bull market. Not generally a good idea.

I said last week:
"it is too early to jump back in but this bounce looks real, ... but no betting the farm just yet,  be uber-safe, wait for a green arrow!"
Ah, now you know why I said that. I say never try and catch a falling knife and the buy the dip guys are bleeding this week. That said, the long term bull bear lines are still green over red and as disciplined traders that means we don't ever play the short side in a bull market. I showed you two signs of hope this week, there is some market support out there.  I am in cash and waiting for a bounce. My powder is dry ready to fire.

Make no mistake, this could get a lot worse before it gets better. The conclusion of QE1 and QE2 resulted in a correction for the S&P 500 Index of 17.1% and 21.6%, respectively:

From peak to trough over the period of three to five months; as of Thursday’s close, the large-cap benchmark was down 4.5% from the high over a period of just a few weeks.   If the two previous corrections following the conclusion of a quantitative easing program are a guide as to where the market is going, stocks could realize further significant losses over the months ahead, providing the long-awaited correction and refreshing equity market momentum by shaking loose weak hands.   Regardless of how far the market falls, equity buying opportunities for the period of seasonal strength continue to become increasingly appealing, allowing for greater upside potential from a depressed state.

I pin my hope for recovery on three factors, First, there's no recession in sight. Actually, economic growth is picking up from 2 percent to at least 2.5 percent. The positive Treasury yield curve — the difference between long- and short-term interest rates — is a key signal here. Second, in the TIPS (Treasury inflation-protected securities) market, the so called break-even rates are 2 percent or less. So there's no inflation. Therefore, we're looking at better growth, low inflation, and a Fed that's ending quantitative easing this month.
Finally you could say Europe is weak. But you could have said that at almost any time over the past several decades. And at only 13 percent of the U.S. export market, a soft Europe won't bring down the U.S. — or the world economy.

The bottom line is no one is too excited to be in this market with the fed ending stimulus. Industrial production is high and so is non-farm payroll, so this is probably not an apocalypse. In fact a nice firm bounce next week would be no huge surprise at all.   Until we get buying it is best to be on the side lines and see if the sun will come out.

Speaking of rain, I am off to London to visit my trader friends in the UK, yes Nigel even you. Then to Bordeaux to make sure the vintages this year are going well and down to visit more vineyards in Roja Span. Speaking of wine: click this link to see a cute article on why wine is like trading. By all means drop me a line if you are in the area and want to to talk trading.

You can learn more about my indicators by visiting the CME4PIF school by clicking here.
You always can make any graphic larger, for a better look, by clicking on it.