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December 13, 2014 – Weekend Market Comment

December 13, 2014 – Well yes the drop in oil is the big story but a new twist, this week, the International Energy Agency (IEA) cut its forecast for global oil demand for the fifth time in six months. It attributed that lack of demand to weakening global economic conditions. As predicted that caused the price of crude and brent oil to plunge to five year lows on Friday, hurting anything tied to oil production. That includes energy shares and stocks of countries that export energy. Big national losers continue to be Canada, Latin America, and Russia. Added to this week's list of big losers were Britain and Norway, and any number of oil-producing nations in the Mideast and Africa.

The Dow Jones Industrial Average declined 315.51 points, or 1.8 percent, to 17,280.83, down 3.8 percent from the week-ago close, its worst weekly loss since November 2011. International Business Machines led blue-chip losses that extended to all 30 components. Recording its worst weekly hit since May 2012, the S&P 500 shed 32.99 points, or 1.6 percent, to 2,002.34, down 3.5 percent for the week, with materials falling the most among its 10 major industry groups, with all in negative terrain. The Nasdaq declined 54.57 points, or 1.1 percent, to 4,653.60, off 2.7 percent from last Friday's close. For every share rising, nearly four fell on the New York Stock Exchange, where 964 million shares traded. Composite volume neared 4.2 billion.

What I Think
Well it is simple enough, some 20% of the DOW is energy related and since the trading computers keep the indexes synchronized a sell off in the broad market was inevitable. Besides that since you are wisely following my blog you have seen the S&P500 percentage of stocks over the 50-day MA has been decaying for weeks. Last week I highlighted it in red letters, as it said last week . . .don't ignore this weakness.

There has been some interesting chatter about the U.S. being over exposed to  fracking and shale oil drilling loans. It's the outcome of a zero interest rate policy from the Federal Reserve. What's happened from 2009 to 2014 is, the energy industry has outspent its cash flow by $350 billion to go drill all these wells, and create this supply 'miracle,' if you will, in the United States. The fear is that the issue with this has become, what were houses in Florida and Arizona in 2000 to 2006 became oil wells in North Dakota and Texas in 2009 to 2014, and most of that was funded in the high-yield market and by private equity. With the massive price drop in oil both the drillers and the lenders may find there is no way to produce at $60 a barrel resulting in loan defaults and the end of exploration for a few years. 

Oil’s collapse is predicated by one major event: the explosion of the US Dollar carry trade. Worldwide, there is over $9 TRILLION in borrowed US Dollars that has been ploughed into risk assets. Energy projects, particularly Oil Shale in the US, are one of the prime spots for this. Some 15 to 20 percent of the high-yield debt market is exposed to the energy sector, and many of the bonds Wall Street sold the last two years are now under water. Another hot spot is emerging markets. If these risky bets become worthless the results could negate some of the gains of the 2009-2014 rebound.

The implications, if true, are obvious... again we are using low interest, low risk capital for high risk projects, before it was housing, now it is oil drilling, but in any case the dangers are as big.

With growing panic in the oil markets you might be interested in this:

It All Shows Up In The Charts

Primary Sell:

Pros are Getting Nervous! Since you rotated over the last three weeks into large cap defensive stocks and cash you can stroll to the exit now. This movie is over... don't wait for the credits to roll. Ring the cash register!

Long Term Bull Bear Lines:

Still in a long term Bull Market (dark green over red) ... short term sell off due to global weakness. Raise cash be ready to return to the market. .

NYSE New High New Low:

Looks not so good, this was our last positive hold out, now clearly spooked.

On Balance Volume

An Oddity!   Clearly the big market movers were caught off guard as funds continue to buy well in to the sell off as hope is a strategy. I think this is a case of "Too Smart by Half" as fund managers cling to the idea that markets do well in the last quarter and that fundamentally the economy is strong.  The take away here is there are going to be bargains after the sell off.

S&P500 Percent Stocks Above 50 day MA:

This baby saved our bacon! while many other charts last week showed a bounce in buying this graph kept warning us that there was a "disturbance in the force". Well our light-sabers were firmly poised over the sell button last week.

Padwans . . Listen to the S&P over 50 graph, reduce your risk/beta and sell at market, say I


Well insurance for a sell off is selling really well. Those little Pentium chips at the automated hedge funds are running like scared little girls.

VIX Evaluator:

No question now . . .raise cash prepare for bump!

Nasdaq Summation Index:

Looks really good, clearly the bounce has been all about high beta Nasdaq tech stocks.

Aggressive Defensive:

Slow Stochastic is falling. Move from aggressive high beta to more conservative low beta investments.

Green Arrow Graph:

Slope is falling. Move from aggressive high beta to more conservative low beta investments. This is no time to invest NEW money.

Bonds vs Equities:

Clearly a flight to quality as bonds way out perform the US markets.

Hindenburg Omen:
OK this is one of the dumbest indicators out there . . . but because I like to show you how I try to look at a lot of stuff . . .yes this week we triggered the famous Hindenburg Omen. This goes off when the market makes new highs but a large percentage of stocks don't. Considering what is happening in oil, this is really is no surprise. This thing gives many false signals (especially in strong bull markets) but it has also gone off before every major crash so . . .

What Works Now
Cash and for you buy and hold crowd, consider bonds or very stable big companies.

Short Canada
For the last two weeks I have had a short position in Canadian Equities.... it is paying for my vacation. Caution: Counter trend move not for the conservative investor.

I am buying more US Bonds

Short Emerging Market
Caution: Counter trend move not for the conservative investor.

Long Volatility
Caution: Counter trend move not for the conservative investor.

Raise cash, buy bonds, lower beta get ready to buy up the bargains.

This week I am writing to you from Mexico, as I work my way to my down to my winter home in Belize. since you all followed my advice and missed last weeks sell off, I am sure you will agree I have earned today's trip to the beach for a well earned Cerveza . . .

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