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November 29, 2014 – Weekend Market Comment

November 29, 2014 – The Toronto stock market extended its losses Friday as energy stocks continued to sell off in the wake of a collapse in oil prices while miners and copper prices fell heavily on Chinese economic concerns.

The S&P/TSX composite index dropped 177.74 points to 14,744.70 on top of a 116-point slide Thursday after the OPEC oil cartel opted to leave its daily output unchanged at 30 million barrels a day, rejecting intense lobbying by some of its 12 members to cut production to put a floor under prices.

American markets had been closed for U.S. Thanksgiving on Thursday. But on Friday, the January crude contract on the New York Mercantile Exchange plunged $7.54 from Wednesday’s closing price to a five-year low of $66.15 (U.S.) a barrel and sending the TSX energy sector down 2.25 per cent.  The S&P 500 Energy Sector entered bear market territory with a plunge of more than 6 percent, the biggest since August 8, 2011 following the S&P downgrade of the U.S. credit rating. The sector also had its worst week in more than 3 years with a decline of more than 9 percent. Oil prices now are down about 35 per cent from mid-summer highs because of a higher U.S. dollar, lower demand and most particularly, a glut of global supply.

The S&P 500 lost 5.25 points, or 0.25 percent, at 2,067.58, with consumer staples leading gains and energy falling 6.26 percent as the greatest of the three declining sectors. The Nasdaq closed up 4.31 points, or 0.09 percent, at 4,791.63. The Nasdaq closed up 1.7 percent on the week, its first 6-week win streak since February 2013. The index also posted a second month of gains, but only its 7th in 11 months (it was down in April while the others were higher).

The Dow Jones Industrial Average eked out a record close by 0.49 points, ending the month without having lost ground in back-to-back sessions since Oct. 15-16. Friday was the final trading day of November, and the Dow and S&P 500 posted a second straight month of gains and the 8th in 11 months this year. Both indexes barely held onto their 6th straight week of gains, their longest winning streak in a year. Keep in mind the Exxon and Chevron are part of the DOW 30 stocks so it is impressive to see the DOW up.

What I Think
Well you saw this coming, I wrote about this extensively in 2013 in Pop Goes The Commodity Bubble and in The New Momentum. U.S. oil production has nearly doubled in recent years to 9 million barrels a day, and the Paris-based International Energy Agency (IEA) expects U.S. supply to rise by more than 1 million barrels a day next year. And it is this supply increase that is driving down prices. On the week, oil futures declined nearly 14%. In a week, wow! Saudi Arabia and OPEC have essentially thrown in the towel, surrendering to the inevitability of lower prices from exploding U.S. energy production.

Look at this chart of the price of oil last week:

A friend of mine is a engineering related consultant in the Alberta oil sector. Last week he saw his contract end and the prospects of a new one are slim. The new price of oil may be with us for a while and if you are in an oil economy, Texas, North Dakota, Alberta, Iran, Russia or Venezuela, be ready for a new reality. For example, Friday the Russian Ruble traded at 49.965 against the greenback, its weakest level ever. Who recalls in 1986, when the Saudis opened the spigot and sparked a four-month, 67% plunge that left oil just above $10 a barrel. The U.S. oil industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market. Whats bad for oil producers is liberating for the rest of the world. Life will get a little better for net oil consumers, in fact this may be the very catalyst that lifts the world out of the global slow down.

Its not just oil . . . commodities in general are in a tailspin. Look at the action in copper. They used to say Dr. Copper has a PhD in the economy . . . that action Friday does not bode well for the long term economy. That said there has been a poor correlation for the market for copper and the equities market since early 2013.

"The problem is not that there are problems. The problem is expecting otherwise and thinking that having problems is a problem."
~ Theodore Rubin

It All Shows Up in the Charts
Of course we a re still in a Bull Market, but as you can see it is probably short term overbought.
There is a CME4PIF School about this chart.
Hmm new record on the slope indicator . . . .

Strange Goings On . . 
Now here is  graph I have been itching to talk about: Folks you will not see this one very often. The red line shows that the momentum is turning away from equities and toward US treasury bonds... often a sign of impending weakness, yet the green line is the consumer discretionary line and it is going up! So people are buying high beta consumer stocks and US government bonds at the same time. Normally this would not work ... but it is all part of the flood of cash heading to America. In an era when the US energy independence means a return to American global power the world is net long anything USA. In another twist both consumer discretionary (high risk) and consumer staples(safe play) equities are moving up together.

The above graph is so bizarre, I have never seen this pattern before . . . it leaves me feeling a bit like this bird . . .

 Since equities and bonds can't keep ascending, who is right? Well lest look further in our graphs but before we do here is a thought to ponder . . .
When Bond Traders and Equity Traders disagree, stand with the bond traders, they are generally smarter. 

The idea is that bond traders are professionals who are especially sensitive to changes in economic and financial conditions and adept at weighing risk and reward prospects. Professionals also buy and sell stocks, but so do the man of the street and day traders in their dorm rooms.

The saying may, or may not, be true. But when the paths of stocks and high-yield bonds – which have similar risk profiles – diverge, Wall Street pays attention. High-yield bonds, after all, were the canary in the coal mine in 2007. The extra yield, or premium, they carried over 10-year Treasury issues began to fall in June of that year, heralding the global financial crisis.

Back to the charts.  Well first off we have two graphs looking positive. . .

NASDAQ Summation
shows continued upward momentum on technology stocks.

NYSE New High New Low
The big board also has positive momentum.

However . . . It is not all good news.

Primary Sell
Well as you know this is my favorite graph, and it is often early, there is a CME4PIF school on this chart, but the idea is as the graph drops the number of hedges increases. As you can see the smart money on Wall Street is increasing its hedges. Think of it as stock market insurance is selling better and better and better . . . Oh that could be trouble ahead.

S&P500 Stocks Above 50day MA
Well more weak stocks begin to be abandon, looks like about 5% more of the S & P 500 violated the 50day moving average last week.  This process started two weeks ago when this graph had hit insane levels. There is a CME4PIF School on this chart.

Aggressive Defensive Graph
As you can see from the two top parts of the chart, the shift is toward defensive dividend playing larger cap equities. If you look at the third section the green line is the midcap 400 (MVV) and the brown line (DVY) is the high dividend stocks. I use this as a proxy for risk on and defensive.

Green Arrow Graph
Well my proprietary CME4PIF Green Arrow Graph continues to look weaker. There is a CME4PIF School on this graph. The Green Arrows tell you when to put new money and high risk money to work for best short term gains. Obviously, not now.

On Balance Volume
Although not exactly a stampede for the doors, it does look like the pros are not stepping up to the plate as they did last week. You can learn about OBV here. Ignore this for now (too close to call) but if it stays depressed bolt for the doors. Read this as Red line under blacks = equities under attack.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13 up from 12 the day before. Notice the bounce in the CCI graph at the top, often a predictor of coming volatility. You can learn more about the VIX index here.

We also have our new experimental graph the VIX evaluator . . heading a tad sideways.

What Works Now
Well I hate airline stocks but when oil drops they do well. Below is Ryan air JetBlue and Southwest airlines but you could look also at Canadian Westjet and all the others. I am not the only one who hates Airline stocks, Warren Buffett, who has shunned the stocks for 25 years, citing their high fixed costs, strong labor unions and commodity pricing. To him they are just plain "terrible businesses." It got so bad that the only all airline ETF under the symbol FAA was liquidated in March 2013, after it failed to attract big inflows. It had been the only airline ETF left; Direxion closed its airline ETF in 2011 after it attracted only $2 million. Since FAA closed, the NYSE Arca Global Airline Index, which it tracked, is up 61 percent. That's more than double the 28 percent for the S&P 500. And while the news about airplanes recently has been unremittingly favorable, investors tend to take a hard-nosed financial view of the industry's longer-term prospects.

As I mentioned long term treasury bonds look good ... here is TLT, I have been accumulating this:

You want stable and still taking advantage of more money in US consumers pockets... how about Macy's for a little ho ho ho, recommend here a few weeks ago, still looks strong.

I am not thrilled with the prospects of the Canadian market, but if you insist on a pick Dollarama tends to be not correlated with energy prices and has been Steady Freddy so far. Don't bet the farm on this one . . .

Think Global . . .

Don't forget the nations that are not commodity producers, are going to do better now too... Looks like as gas price plummets the world will gobble up a few Mercedes-Benz C63 AMG 4-liter twin-turbo V8 coups.  So buy Germany .. here is  the EWG ETF. Yah Wunderbar!

Be defensive, take profits on your high fliers, move out of commodities and commodity related nations. Tight stops, increase cash. Lighten up on financials. Buy some U.S. treasury bonds and look at the global macro picture.

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.