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January 24, 2015 – Weekend Market Comment

January 24, 2015 – U.S. stocks mainly retraced on Friday, with the S&P 500 halting a four-session winning run, as investors considered economic data, energy costs and a reduced 2014 earnings estimate from United Parcel Service. Near session lows, the Dow Jones Industrial Average declined 141.38 points, or 0.8 percent, to 17,672.60, with Exxon Mobil leading blue-chip losses that extended to 24 of 30 components.

The S&P 500 shed 11.33 points, or 0.6 percent, to 2,051.82, with materials and telecom hardest hit and utilities and technology faring best of its 10 major sectors. The Nasdaq gained 7.48 points, or 0.2 percent, to 4,757.88. For every three stocks rising, nearly four fell on the New York Stock Exchange, where 785 million shares traded. Composite volume cleared 3.6 billion.

What I Think . . .
My guess is after four strong days we're going to be in lockstep with energy prices. This is indicative of the market going forward this year, it's a volatile, extremely nervous market, because it is full priced. What's going to turn it around? Earnings have the potential. Earnings will give us some good bumps, so to speak, but the No.1 thing we need to see for any prolonged stability in the market is for crude oil to trade in a range for two to three weeks.

Saudi Arabia's King Abdullah bin Abdulaziz Al Saud has died at age 90 this week but the royal succession has been in the works for years and should be smooth. Saudi Arabia led OPEC's decision to maintain its production levels on November, triggering a further collapse in oil prices. Oil prices have plunged more than 50 percent since mid-2014, with Brent at $48.52 a barrel at Thursday's close, and Nymex crude trading at $47.62.

One thing that has me concerned is that the market has been favoring very defensive sectors and big cap stocks since last fall. For example two of my staple graphs the higher tech Nasdaq summation index and the NYSE High Low  Graph are at odds with each other, looking at the major firms this is strong bull market ... but only defensive stocks are doing well. 

You also can see that when you look at the leading sector since last fall has been the utility sector, here is the utility ETF XLU.

Investors consider utility stocks to be defensive due to the widely-held belief that these stocks will perform well in the midst of economic downturns. Defensive stocks are also known as non-cyclical stocks. As utilities provide what are considered by most to be basic needs, companies that provide these services will usually continue to record solid earnings even when the economy is performing poorly. Theoretically, defensive stocks provide higher-than-average returns in a declining market. Utility companies return dividends that are likely to offset declines in the company's stock prices.

Still there is hope for this market, many of the major hedge funds use computers that do statistical arbitrage, in other words the computers often buy the weakest part of the market. If we look at the sector graph we can already see that defensive stocks like utilities (red line) are generally at the top of their typical range. Notice the strong bounce in purple for the Nasdaq QQQ index. 

Here is a close up of part of the 6 month Aggressive Defensive Graph. It shows two ETFs one is called DVY (brown line) and tracks the big companies with strong dividends and the other is MVV (green line)a juiced version of the Midcap 400.

In finance, the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset. CAPM “suggests that an investor’s cost of equity capital is determined by beta. In other words the more unstable a stock is, the greater reward the investor deserves. Higher risk (beta) should equal more reward if you are right. In theory a diverse portfolio of less stable stocks should beat the returns of the steady big plodding firms. That is why the NASDAQ should do better than NYSE over all. 

But as you can see that has not been the market in the prior 6 months. In other words the best opportunities right now might be in smaller less table stocks. 

It All Shows Up In The Charts . . . 

Bull Bear Lines
The Bull Bear Lines say this is a bull market and probably in an upward bounce.

Aggressive Defensive Graph
The Slow Stochastics on the top of the graph are in a nice bounce up.

Bond vs Equities
Equities (stocks) were not able to put perform bonds this week. Still jitters out there.

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 happier about that move. 

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. 

Primary Sell 
A bit early to call this but I would say the pros are definitely slowing up on buying protection.

S&P500 Over 50 Day

The percentage of stocks over the 50 day moving average is bouncing up about where it should, very encouraging. As I said last week this is a likely place for an oversold bounce.

The CBOE Volatility Index, a measure of investor uncertainty, fell to 16.66.

What Works Now
Well I hope you followed my prior market comment pick of Southwest airlines. 

Well if the market is returning to risk then anticipate with these index funds:

XIU.TO Canada

EEM Emerging markets
All but forgotten the world is back in play again for anticipated global recovery.

XIV Vix Futures 
As fear subsides this ETF is the one to ride.

Nasdaq Juiced QLD

MVV Midcap 400 2X
Never hold juiced ETFs long term

Stock Picks

Alfred Nobel- was a Swedish chemist, engineer, innovator, and armaments manufacturer. His life was spent building the tools of mass destruction and his famous legacy is the Nobel peace prize. 

I intend to leave after my death a large fund for the promotion of the peace idea, but I am skeptical as to its results.
- Alfred Nobel

Like Mr Nobel now you too can become wealthier from the arms race. This week I am focusing on the world of death and destruction. Weapons has always been a good seller. There are nearly 300 million guns to be found in the USA, one third of them handguns. This represents the highest concentration of private ownership of side arm weapons in the entire world. The rate for murder by gunfire is 100 times that of the United Kingdom. Every year, 17,000 people are killed in America, 70 per cent of them with guns, and nearly 20,000 people commit suicide by shooting themselves to death in the home. The slaughter of children by gunfire in the United States is 25 times the rate of the 20 next largest industrial countries in the world combined.

So here are my picks, you should get richer ... just hope you can sleep well. 

TASR - TASER International
More Zap for your buck look at this baby climb

ATK Alliant Techsystems Inc.
An Aerospace, defense, and sporting goods company. Vista Outdoors (Pending:VSTO) is in the process of being spun out from parent company Alliant Techsystems (NYSE:ATK) as part of ATK's merger with Orbital Sciences (NYSE:ORB). Company is more focused on ammunition and accessory sales. With the majority of the business's profitability stemming from ammunition sales, the continued success from the Company will somewhat mirror the ongoing success of the firearms industry, the health of which can be evidenced in the evisceration of Ruger and Smith & Wesson over the past 12 months.

LMT Lockheed Martin
Lockheed Martin is one of the world's largest defense contractors, and plays an integral role for the U.S. military. Learn more about LMT here.

And other picks . . .

TECHY Tencent Holdings Limited
Well if you want a crazy flier look at this pink sheet listed firm.  Tencent Holdings Limited is a Chinese investment holding company whose subsidiaries provide mass media, entertainment, Internet and mobile phone value-added services. Tencent's many services include social network, web portals, e-commerce, and multiplayer online games. Its offerings include the well-known (in China) instant messenger Tencent QQ and one of the largest web portals in China, Mobile chat service WeChat has helped bolster Tencent's continued expansion into smartphone services. It is the fifth-largest Internet company in the world after Google, Amazon, Alibaba, and Ebay as of October 2014. In 2012, Tencent's revenue outstripped Facebook's by over $2 billion. In September 2013, Tencent's market valuation rose to US$101 billion, nine years after going public.

Internet giant keeps doing deals to fend off e-commerce company Alibaba. It snapped up stakes in Craigslist-like, search engine Sogou and logistics outfit China South City Holdings. In July it won permission from Chinese regulators to open one of the first private-sector banks, in Shenzhen. Its WeChat messaging app reached 438 million monthly active users worldwide in June. Sales ballooned 41% last year and net profit rose 25%.

FISV - Fiserv, Inc. 

Fiserv, Inc. is an American worldwide provider of financial services technology. The company serves more than 16,000 clients worldwide, including banks, thrifts, credit unions, investment management firms, leasing and finance companies, retailers, merchants and government agencies. Fiserv is one of the largest providers of information technology services to the financial services industry and was ranked third by revenue in 2013 by American Banker.Fiserv reported total revenue of $4.55 billion in 2013. Read more here.

Over all the market looks ready to bounce. There is no doubt their are pockets of pessimism and clearly the days of a full blown bull run are behind us as the market completes its recover and returns to more normal growth. 

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