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January 10, 2015 – Weekend Market Comment

January 10, 2015 – The U.S. stock market ended a volatile week on a down note Friday, with strategists blaming the slide, in part, on December’s jobs report that revealed a drop in wages.

Slumping oil prices and headlines about a dual hostage crisis in France added to the negative mood.  With explosions and gunfire, security forces Friday ended three days of terror around Paris, killing the two al-Qaida-linked brothers who staged a murderous rampage at a satirical newspaper and an accomplice who seized hostages at a kosher supermarket to try to help the brothers escape.

December’s employment situation report received a mixed investor reaction, as the number of jobs added to the economy was strong, however wage growth ticked down.

ISM numbers are still very strong and all are above 55. Anything above 50 favors economic expansion and these numbers are not even close to being below 50. Motor vehicle sales fell, but remain near the 17 million mark (annualize) and strong overall. The labor market is strong as non-farm payrolls exceeded 200K each of the last eleven months. The housing numbers fell last month, but remain strong overall because starts and permits remain above the 1 million mark.

The main benchmarks finished lower for the week, which has been marked by sharp sell-offs on Monday and Tuesday, then big rallies on Wednesday and Thursday. The Dow Jones Industrial Average moved by triple digits for the fifth session in a row. Friday’s losses put the main indexes back into negative territory for the year.

The S&P 500 SPX, -0.84%  closed 17.33 points, or 0.8%, lower at 2,044.81, and ended the week with a 0.7% loss. Financials and consumer-discretionary stocks led the losses on Friday, while all 10 sectors ended lower. Energy stocks lost 3.6% for the week, as oil prices continued to fall.

The Dow Jones Industrial Average DJIA, -0.95% slid by 170.50 points, or 1%, at 17,737.37 ending the week 3.5% lower. The Nasdaq Composite COMP, -0.68%  finished down 32.12 points, or 0.7%, to 4,704.07, recording a 0.5% loss for the week.

What I Think . . .
We are in a period of consolidation, the market is nearly fully valued and the Fed will need to stop the economic resuscitation resulting in increasing interest rates plus with rapidly dropping oil prices their is a real possibility of a period of deflation. Deflation is when prices rise at a slower pace it can help consumers boost their purchasing power. But when they actually drop, economic activity can screech to a halt. Households hold off making purchases as they anticipate further price declines; companies postpone investment and hiring as they are forced to cut prices. Sliding prices eat into sales and tax receipts, limiting pay raises and profit margins. They add to the debt burdens of companies and governments that would otherwise be eroded by inflation.
Deflation fueled two of the worst economic disasters in modern times — the Great Depression of the 1930s, and the less catastrophic but more recent experience of Japan’s lost decades with almost no economic growth.  Deflation took hold in Japan in the 1990s when banks, wounded by a burst real estate bubble, stopped lending. Wages stagnated and consumers reined in spending.  The International Monetary Fund has studied which economies are vulnerable to deflation, and has raised concern that even a period of ultra-low inflation could do damage. Here is a bit from CNBC on deflation dangers.

On the flip side each week U.S. employment is growing an so is industrial production, current near zero interest borrowing is keeping things popping and there are even warnings that instead we could fuel hyper inflation in 5 years. Here is a bit from Forbes.

Yeah I know, it can't be both! Mixed signals . . . who knows? Well I don't worry about it. It is a bit like driving on a dim lit road, You simply can't see what is way far ahead . . . but really you don't need to know. I just use my charts to tell me what is just up ahead and the future will take care of itself. As the pros say just take what the market gives you. 

There are tools to look at the market at times like this. Lets explore a few. First the simplest is just zoom out. It can be very helpful to look at a long term historical chart. One market pro I heard about threw his charts on the office floor and stood on a chair, while he viewed his charts, talk about the long view perspective. The long term chart here is the DOW since 1900. What I take away from this view is we are in a bull market after the deep sell off off 2008. We have recovered most of the loss and are back on the normal trajectory for the market. 

In other words if you are only returning to the market now . . . you just missed the "sale of the century". For example look at the stock price changes in one of America's  top tier companies, the Prudential Insurance company. In the 2008 sell off the stock had drop from over $100 to about $8 only to gain it all back, Here is the last 13 years.

OK big picture gives you some perspective. It is also why I look at the Long Term Bull Bear Lines chart as the first chart I review. It important to have a tool that gives you big picture perspective. 

The current message of the Bull and Bear lines  is clear  . . . we are in a bull market ... but with decelerating gains (see slope line on bottom). The Bull Bear chart use moving averages. By using moving average cross-over we reduce whipsaw but the cost is we introduce some lag. 

The other way we could do this is to chart a more stable group of equities. In this case I will use an ETF called the iShares Select Dividend ETF ticker symbol DVY. These are very large dividend paying equities and the graph tends to be more stable. Then we will chart it using a Japanese charting technique that reduces noise called a Renko Chart. Now we can clearly see the market direction, Finally we must have an exit strategy, a way to say enough is enough time to sell so we are not long in a major downturn. In this graph I am using a line invented by Chuck LeBeau called a Chandelier Exit. The name comes from the nature of this trailing stop that hangs off the price action like a chandelier. You might enjoy this little story from Chuck click here. So here is the DVY Renko chart, as you can see there were a few false exit signals but they were few and the system kept you on the right side of the market most of the last 10 years. 

There are other charts of this kind I could show you like the Parabolic SAR and point and figure charts. However the message is the same.  The real point is ... its still a bull market baby. 

It All Shows Up In The Charts . . . 

Primary Sell 
The market pros are waffling no clear signal here.

Aggressive Defensive Graph
The Slow Stochastics on the top of the graph has rolled over now black over red, Some minor toe dipping on risk.

Bond vs Equities
Bonds outperform equities (stocks) this week. Safe havens rule this week. 

S&P500 Over 50 Day
The percentage of stocks over the 50 day moving average is on dropping off but perhaps we pause here. This could be like May or Aug, no clear direction yet. 

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 17.55 generally on a retreating slope. Notice the bounce in the CCI graph at the top. You can learn more about the VIX index here.

VIX Evaluator

On Balance Volume is keeping pace with the current market showing that institutional large volume buying is still active. This is one of the more interesting graph, even though it is declining if this was a true panic sell off the red line would be lower. 

Green Arrow Graph
Our Green arrow graph got us long last week, and that was not the best week to be long, this week it looks a little reluctant about that move . . . but it is still on the buy side so the jury is out on this one so far.

Nasdaq Summation
The Nasdaq Summation index shows that is not a good time to be in high tech Nasdaq stocks. Again hesitantly.

NYSE New High Low
Showing strength on the big board.


From the big picture we are in a bull market, the pros are struggling with mixed signals and a full priced market, this leads to a period of consolidation sideways.  Anything could happen... but the path of least resistance right now is up.

Today's market comment is coming to you form the beautiful island of Caye Caulker Belize... my winter home. 

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