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November 22, 2014 – Weekend Market Comment

November 22, 2014 – U.S. stocks ended the week at highs as markets rallied on overseas central banks' stimulus efforts and an encouraging domestic outlook.

Early on Friday, China's central bank made its first interest rate cut in more than two years and the European Central Bank took action to stimulate the economy. 

In a surprise move after the close of the Shanghai exchange for the week, the People's Bank of China cut its benchmark interest rates on Friday for the first time in more than two years to lower borrowing costs and lift a cooling economy back on track. The one-year benchmark lending rate has been trimmed by 40 basis points to 5.6 percent.

The Dow Jones Industrial Average closed at a record for the 28th time this year but failed to regain the intraday record it set in the morning of a more than 170-point gain, with most blue chips trading higher. The S&P also lost some of its early gains in its 45th record close for the year, with the materials sector continuing to lead sector advancers, up more than 1 percent. The Nasdaq lost most of its morning gains but recovered slightly in the close. 

Crude oil futures for January delivery gained settled up 66 cents at $76.51 a barrel on the New York Mercantile Exchange, with gold futures for December settling up $6.80 at $1,197.70.  The Dow Jones Industrial Average closed up 91.06 points, or 0.51 percent, at 17,810.06, with Caterpillar leading gains and Microsoft the greatest of six blue-chip decliners. The S&P 500 closed up 10.75 points, or 0.52 percent, at 2,063.50, with materials leading gains as all sectors rose. The Nasdaq closed up 11.10 points, or 0.24 percent, at 4,712.97.  Two stocks advanced for every decliner on the New York Stock Exchange, with an exchange volume of 994.8 million and a composite volume of 3.8 billion in the close.

What I Think
OK this is one of those weeks where I was not really sure I was on the right track or at the very least a tad early. It was a nice surprise the market rallied, because we were long. Obviously this was a strong up week and I said last week it was time to be long but lighten up especially high beta speculative positions. Well its true the Dow did hit a fifth record up week, but the small caps and speculative stocks did not. It still might be early for taking the foot off the peddle, but don't forget that without those announcements of monetary stimulus it probably would have been a slight down week for all the indexes. Fundamentals always trump technicals and so it was not a perfect call, but maybe a better call than it first appeared. 

The fact is the reason that Europe and China are doing stimulus measures is not positive. Why are these central banks stimulating now and what are they worried about now that they ignored four years ago? If you want to know then read Bob Davis's excellent story in the Wall Street Journal that everyone should read. 

The signs are everywhere. For starters, China's largest corporate bankruptcy this week - Haixin Iron & Steel Group.

Distressed debt funds are starting to circle in preparation for what they expect to be a bloodbath as Bloomberg reports, bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management, "we've yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one.

Most worryingly though, as KPMG points out, "when you see restructuring advisers getting hired by SOEs... you know it's coming."  Or as one New York trader I know said referring to the KPMG report, but instead quoting President Clinton to Monica "You know its coming".

The Friday close was very interesting because many people wanted to get out of their positions (to limit risk next week). 

Here is a chart I don't generally post ... This is the real time chart in 10 min bars on Thursday and Friday -- it shows what happened to the high beta stocks for the NASDAQ in a slow orderly heading for the exit day on Friday. That red line is VWAP, and market makers don't get their bonus if they don't hit it, they missed Friday no matter how they tried to bring up the order flow. Also classic head fake running up 2PM to 3PM for the RYDEX players. 

Ok well lets go visit our analysis.

Long Term Bull Bear Lines
Well it is nothing but a Bull Market, be sure you are long. No counter trend moves allowed. 

Primary Sell
Well this was the big give away last week, we should have listened and the experts continue to take off insurance and bet for the long side. This says be long -- the market is strong.

NYSE High Low
Again as long as you are playing the big names the party is on.

On Balance Volume
This shows the big money like hedge funds continue to enter the market.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded just above 13. The classic VIX graph confirms that fear is falling and confidence continues. 

VIV Evaluator (Experimental Version)
Well the VIX evaluator is not happy, but might be changing its mind . . . Don't forget we are still learning if this thing works . . .

Green Arrow Graph
My tried and true green arrow graph continues to decay, in the past this has never been a good sign. 

What my Green Arrow Graph is showing you, is part of a deeply troubling move from small caps to big caps. In fact the really small cap stocks have not participated this year at all.  Not to sound paranoid... But normally when small caps will not perform their is some underlying concern. Somewhere that is fear sneaking in to the market. They talk of memes, ideas that get hold slowly.  I don't like it when the big money has one foot out the exit door. Heck look at this evil raccoon,  he is a global macro fund manager that has been playing vix calls, short the NQ and buying QID calls . . . creeps me out.

Aggressive Defensive Graph 
Shows that the smart money was in high beta, but the party looks over. Continues to decay, also not a good sign.

Nasdaq Summation
Index hit new highs, while underlying strength seeps out. I would say it, looks a bit like the second week of January 2014, that was not good. . .

S&P 500 Percent Over 50 Day
Also topping out, as the weaker stocks are getting the punt. This graph says: caution, wake up call time . . . coming very slowly.  

Bond vs Equities
This week the U.S. 10-year Treasury note yield edged lower to 2.31 percent and the U.S. dollar lost its gains against major world currencies to trade flat. No flight to safety yet, but their is little room for continuing. Looks like sideways consolidation for now. The way this works is as the red line falls returns are better in stocks, when it rises the focus is on government bonds.  The grey green graph is consumer discretionary, normally rising in a bull market. 

Party is on, market is strong, be conservative long, low beta. Its late and the really big money has gotten the tarps off a few life boats. Lower risk, protect your capital. Suckers worry about returns, market veterans worry about risk.

A Call Out To London
A special thanks to Paul Wallace and all the other good folks who bought me a pint and shared trading stories last week at the London Traders Network meeting at the New Moon Pub.

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