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January 17, 2015 – Weekend Market Comment

January 17, 2015 – U.S. stocks jumped Friday to close higher for a first session in six, while tallying a third weekly drop, as energy led gains with U.S. crude rising and as investors considered a mixed bag of economic reports. Down 1.3 percent from the week-ago close, the Dow Jones Industrial Average rose 190.86 points, or 1.1 percent, to 17,511.57, with Home Depot and Exxon Mobil leading blue-chip gains that extended to 27 of 30 components. The S&P 500 added 26.75 points, or 1.3 percent, to 2,019.42, with energy leading gains that extended to all 10 of its major industry groups, and leaving it with a weekly fall of 1.2 percent.

The consumer-price index declined 0.4 percent in December, with he cost of living falling by the most in half a dozen years following a 0.3 percent fall the month before, the Labor Department reported. A third report had factory production slowing in December, up 0.3 percent versus a 1.3 percent increase in output in November.

What I Think . . .
The market is reacting to economic data that is more good than bad, to energy being up 3 and 4 percent, and before a long weekend, when investors don't tend to be bearish. The negative reports that stuck out were the industrial production numbers, which dovetails well with the very poor retail-sales number, and may point to additional weakness in the U.S. economy. But stock climb a wall of worry, and lets not forget this is still a bull market. This is our seventh pull back of about 5% in the last 2 years. 

Here is an interesting graph it shows how the major market sectors oscillate. As you can see the defensive areas like utilities (red) and defensive stocks (brown) have done really well, as the market has been anticipating weakness. 

The big losers are the financial stocks as a double whammy of weaker housing market and a looming disaster in junk bonds funding the shale oil boom is coming to light. Let plot a chart of  corporate bonds showing how junk bonds do vs high quality top ranked corporate bonds.

Only when the tide goes out do you discover who's been swimming naked.
     - Warren Buffett 

Bond investors who helped finance America’s shale boom are facing potential losses of $11.6 billion as oil prices plummet by the most since the credit crisis.The $90 billion of debt issued by junk-rated energy producers in the past three years has fallen almost 13 percent since crude oil peaked in June. Well it looks like a lot of junk bond have been sold by Wall Street based on projections of ever increasing oil prices. . . .and the tide is out,

Still from a mean reversion stand point it is clear that many of the "risk on" type equities are oversold and I would expect a relief rally is very possible in the next week. 

I am also very encouraged by strength in the German market. Despite two Greek banks teetering on default the German DAX is near all time highs with impressive buying on Friday.

It All Shows Up In The Charts . . . 

Primary Sell 
The pros are definitely buying protection but this could be the bottom of it.

Aggressive Defensive Graph
The Slow Stochastics on the top of the graph remains firmly down but looking at what happened in the Dec 10th retreat this clearly could be the bottom of the sell off.

Bond vs Equities
Equities (stocks) outperform this week. Another sign of potential bottom. This week gentlemen do not prefer bonds. 

Bull Bear Lines
We are clearly in a Bull Market even pull backs are short and the pull back is typical. The current pull back appears to be out of steam already. Volatility is increasing. 

Green Arrow Graph
Our Green arrow graph got us long a few weeks ago, and that was not the best week to be long, this week it looks a little reluctant about that move. 

Nasdaq Summation
The Nasdaq Summation index shows that is is bad time to be in high tech Nasdaq stocks. Again if we are following the last pull back this could be the turn.

NYSE New High Low
Showing strength on the big board. Quality still rules.

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. 

S&P500 Over 50 Day
The percentage of stocks over the 50 day moving average is on dropping off as the fast money exits equities for safe bets. Still this is a likly place for an oversold bounce.

The CBOE Volatility Index, a measure of investor uncertainty, fell 6.4 percent to 20.95.

How to Play This

Well first off nothing in the charts says buy... but the possibility of a strong bounce next week is uber obvious. Yeah but we don't catch falling knives so how can we participate and lower our risk? This might be a great time to use a stop. Yup, a lot of people use stops for downside risk protection, and that often results in bailing just as a bottom is in, however stops can also be used to generate a computer buy order as a rapid bounce is in full swing. Its called Buy on Stop. Everything that makes the stop-loss order so useful also holds true for its mirror image, the buy-stop order, which ironically most investors never consider using at all. A buy-stop order is entered for a security you don't own at a price above the current market. Once your specified price is breached, the shares are purchased. What makes buy stop orders effective is that they are triggered by the market's only important indicator, price.

Lets look at the last bounce, Here is the action on Dec 17:

In hidesite if we had a buy order in place that was a buy on stop order set on Dec 16 to buy on stop any violation of the Dec 12 high, we would have bought on Dec 18th in the morning. The high Dec 12 for the SPY was 202.70 so our order would have been, 
VALUE 202.70
Any value form 202.70 to 204.70 would get us in. 
In other words we are ready to buy if the market takes off and still on the side lines if it fails. 

For example the current 3ATR value of SPY is $203.68 so we might set this buy order this weekend
VALUE 203.68

Or if we wanted to take on more risk we could look at the juiced version on the midcap 400. The high on Jan 12 was 72.79, if we pass that we might assume the bull is on. and if it does not go there we risked nothing. 

VALUE 72.79

Long equity investing means looking for a fundamental revaluation of an asset. Whether it's gold going from being frowned on to gorged upon or Latin American stocks transitioning from being avoided to embraced, the idea isn't to grab a quick scalp, but to participate in a longer-lasting trend. To that end, I look to put buy stops where a market would begin to break out to higher, The buy-stop order works because it purposefully puts us in the market exactly when that transformation in the midst of occurring: when what we had imagined beings to actually become real. Buy on stop can be a real edge that gets you in the market with computer quickly buying for you ... even when you are busy elsewhere.

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