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November 16, 2014 – Weekend Market Comment

November 16, 2014 – U.S. stocks were little changed on Friday, with the S&P 500 rising a fraction of a point to notch another record, as investors tracked the price of oil and after October retail sales rose 0.3 percent, just above expectations, along with a November jump in consumer confidence.

Up 0.4 percent from the week-ago close, the Dow Jones Industrial Average dropped 18.05 points, or 0.1 percent, to 17,634.74 on Friday. Also tallying a 0.4 percent weekly gain, the S&P 500 rose a fraction to 2,039.82, lifting it to a record finish, with consumer staples the worst performer and energy the best among its 10 industry groups. The Nasdaq advanced 8.40 points, or 0.2 percent, to 4,688.54, up 1.2 percent from last Friday's finish. All three indexes advanced for a fourth week, with the S&P 500 up just over 10 percent for the year. For every seven shares falling, roughly eight rose on the New York Stock Exchange, where almost 705 million shares traded. Composite volume surpassed 3.2 billion.

The U.S. dollar declined against the currencies of major U.S. trading partners; the yield on the 10-year Treasury note fell 2 basis points to 2.3213 percent. After the prior session's fall to a four-year low, crude-oil futures on Friday gained $1.61 to $75.82 a barrel on the New York Mercantile Exchange. Gold futures rose $24.10 to $1,185.60 an ounce.

If you look back to last week I talked about the markets running too far to fast and to stay long but get smaller and get rid of high beta plays. This week the sidways consolidation continued. Most days the markets were up but often by less than a tenth of a percent.  I bet this patteren contnues this week.

On Thursday, U.S. stocks fluctuated after the S&P 500 and Dow rose to records, with energy companies slammed as the price of oil fell, countering upbeat earnings from the world's largest retailer and data showing jobless claims holding at a 14-year low.

Investors are currently viewing the decline in crude as a read on the global economy rather what it truly is, which is a read on global supply manipultion in the middle east to starve the money supply to islamic radicals and to squeeze out the small US horizontal drillers. The Saudi royal family is forgoing a little revenue now to cut off future problems later.  As I said before, the real trade will be when everybody wakes up and realizes lower oil prices are helping the consumer. Increased consumer confidence, higher levels of employment and lower gasoline prices, this could be a great Christmas season. 

Cute graphic from perma-bear Zero Hedge:

On the flip side we are over 5 years in this bull run, China is much wrose off than the press says, and Europe is weak too. In both cases corruption crack-downs are raining on the party. Since China is not buying or even trying to pretend all is fine, the commodity economy countries, who need demand from China are dead meat. So who does the USA have left to trade with?

You can see the signs of the end of the global coruption party everywhere. Stories of jail time for goverment big shots fill the nightly news in France Greece and Spain. But China is worrse, on a recent investor call for Wynn Resorts, the outspoken CEO Steve Wynn took an unusually cautious stance on his empire in the Chinese gambling mecca of Macau. Wynn called out the recent turmoil in neighboring Hong Kong, smoking restrictions and a crackdown on indulgences by the Chinese government. He didn't venture to predict how soon things might get better. "It's worse in October than it was before October" Wynn said. Particularly worrying is the crackdown on luxury spending and indulgences, which appears to be having a widespread impact on China. Wynn pointed out that the likes of Channel and Cartier are noticing the same trend as his casinos. Even coach which sells goods at a lower price point is reported a big slow down in its quarterly results from China.

I have previously pointed out how the high end liquor gift business is a declining market in China and a wine exporter I know, who trades wine globally, is getting very bad news out of Asia these days. 

Of course it a shows up in the charts. . .

Lets begin by looking at if the market is buying safe big stocks or little tiny stocks. This is important, because small stocks are only appealing when people want to speculate. For fun (whooohoo) we will use two different ways to get at the same picture.

First just the ratio of small cap to the huge companies in the DOW30, notice the rotation since the start of November ...even as the broad market indexes are reaching new highs.

You can also look at the S&P500 equal weight vs the normaly weighted version. Since the normal S&P500 index does not rebalance the bigger compoanies become more and more of the index. Apple and Exxon have a huge effect on the wholeS&P500 index. RSP is the equal weight version, every stock is just one 500th of the index. Read more here.

In both graphs you get a similar message, a decline of interest in speculation starting in March of 2014. A bit of a bounce in mid October, and back to a softening of interest. The point is watch out, it is at turning points in speculation interest that were often predictions of a coming pull back. 

Let begin by looking at some good news, most of the indexes of American optimism, such as the transportation index, industrial production, employment and consumer confidence are hitting 52 week highs. The world predicted in my posting called the New Momentum is all coming ture and the world has little place avalible to invest except in US equities.

The long term bull market is on, green over red is a bull market, but this looks a tad tired, the light green 4 day average is way too far above the dark green. 

The Primary Sell tells us the smart money is still getting long. In fact this is a problem because normaly with a primary Sell like this ...I would be staying very bullish.

The NASDAQ summation index is still bullish but also a tad tired looking:

The OBV line shows us the institutions are still buying.

As far as I can see the brain trust as Goldman Sacks does not see a problem, the pros are still in the game. Historically this is also a great time to be in the market in the final two months of the year. 

However . . .

The Aggressive Defensive graph continues to ask us to use this as a chance to "Pull in our horns"


The Green Arrow graph says to stay long, but the market is now less strong.

My tradtional VIX chart show no fear yet and that the pros are still long. Although a tad less firm in conviction/direction. Notice how the bottoming moves are less deep, perhaps VIX at 13 is the new bottom and will not see 11 again for a while. Logical considering the increase in volatility, also a recent over 20 spike and a S&P only up 11% in 2014.

I am also experimenting with a new look at the VIX called the VIX evaluator. In this case I am looking at short term VIX future vs medium term. The idea is that this might give a faster reaction based on a deep look at what the fast money is doing. 

According to the VIX evaluator... the fear will return to the market in the coming weeks. Well that interesting but this graph is still in testing, not sure how predictive it is. 

Continue to stay defensive, long but warry. Set your stops closer, take profits on your high flyers.  Long term trend is up, short term trend is overbought expect at best a sideways consolidation or at worst a pull back. 

Coming to you from the beaches of Las Palmas Spain, where I am at the 250 boat strong ARC sailing regata from here to St. Lucia. Next week off to London to speak at a traders workshop and home to Canada, I better get in some red wine and sunshine.  

You can learn more about my indicators by visiting the CME4PIF school by clicking here.