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January 3, 2015 – Weekend Market Comment

January 3, 2015 – Trading was light on Friday in the wake of the New Year’s Day holiday, as many investors stay on vacation until Monday. Composite volumes for the New York Stock Exchange and Nasdaq are at roughly half of their 30-day average.

U.S. stocks were on track for losses in 2015’s first day of trading, hurt by disappointing economic news and pushing the S&P 500 down nearly 2% for this holiday-shortened week. The main indexes gave up all of Friday’s early morning gains following weaker-than-expected readings for construction spending and the Institute for Supply Management’s manufacturing index. The S&P 500 SPX, -0.26% was last down 6 points, or 0.3%, to 2,053 after being up as much as 0.7% in the first half-hour of trading. The benchmark is on a pace for its third straight down day. Consumer plays led the index’s losses. The Dow Jones Industrial Average DJIA, -0.18% slid 33 points, or 0.2%, to 17,790, having erased a morning gain of nearly 129 points. It’s down for the fourth session in a row and eyeing a 1.5% weekly drop. The Nasdaq Composite COMP, -0.36% shed 22 points, or 0.5%, to 4,714. The tech-heavy index is off 1.9% for the week.

What I Think
Well lets start by looking at Thursday with a big red candle:

That price drop on Thursday could just simply be some funds adjusting for year end but the continuation on Friday did not look very positive. As I mentioned the bounce up from December 17 was very strong and it is clear that we are in a period of very high volatility. The bounce up on December 17 was due to what used to be called the "Bernanke Put", even though Ben is gone, the idea is that as long as there is fed support and quantitative easing there would be an up trending market, on Dec 17 Federal Reserve Chairwoman Janet Yellen soothed bulls in her December news conference, pledging the central bank would take a slow but steady approach to raising rates. The following sell off on Thursday appears to be due to speculation the in 2015 rates would rise and some disappointment manufacturing numbers. This shows it’s still a difficult balancing act. If the Fed gets spooked and moves too soon, too fast it could derail the recovery and then force the Fed to do an about-face . At the other extreme, the Fed could prove too patient, potentially setting up a scenario in which policy makers have to hike rates aggressively to catch up with resurgent inflation.

Many pros on the street have been talking about The January effect, a general increase in stock prices during the month of January. This rally is generally attributed to an increase in buying, which follows the drop in price that typically happens in December when investors, seeking to create tax losses to offset capital gains, prompt a sell-off. The January effect is said to affect small caps more than mid or large caps. This historical trend, however, has been less pronounced in recent years because the markets have adjusted for it. Another reason the January effect is now considered less important is that more people are using tax-sheltered retirement plans and therefore have no reason to sell at the end of the year for a tax loss.

It All Shows Up In The Charts . . . 

Bull Bear Lines

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

Primary Sell 
Clearly the market pros are anticipating more risk.

Aggressive Defensive Graph
The Slow Stochastics on the top of the graph has rolled over now red over black, Clearly defensive equities are the current safe haven.

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 as the fast money exits equities for safe bets.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 18 generally on a upward slope. Notice the bounce in the CCI graph at the top, often a predictor of rising volatility. You can learn more about the VIX index here.

And Now the Better News?
As volatility increases you are going to find more indicators starting to disagree. These indicators shows some hope that this sell off is a short over reaction to end of year forces. However in many ways it would be better if everything just agreed because conflicting information means mixed signals and harder decisions. 

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 is good time to be in high tech Nasdaq stocks. Again hesitantly.

NYSE New High Low
Showing strength on the big board.

Last week we talked of how trend followers would jump all over last week's signals and revision to the mean crowed would say it already peaked. We the up trend is broken and the two parties are just about to swap opinions if this week is more of the same. Clearly this is not time to be a hero, I am still long but primarily in in large dividend plays which weather these environments better. 

For example in this graph I show the last month of market performance (percentage change) with the S&P 500 in blue on the bottom, On top is the iShares Select Dividend ETF (symbol DVY) in brown vs the PowerShares NASDAQ- 100 Index Tracking ETF (QQQ) in pink. DVY is a proxy for safe haven stable conservative investing and QQQ represents the riskier tech heavy Nasdaq. The Nasdaq is dominated by stocks like Apple and Amazon while DVY is aimed at big stable companies like Lockheed Martin, McDonald's and Kimberly-Clark. 

Obviously in the last three trading days no one is doing well, but even before that is clearly conservative stocks that are outperforming the gee wizz stocks. In short the market expects more people are going to be blowing their nose with Kimberly-Clark than blowing their mind with Apple.  

You might also note that despite the three day pull back the NASDAQ sold off in percentage terms as much as the stable pays, in other words an optimist might find underlying strength in smaller caps based on that. 

I still feel the bounce was too far to fast, and feel the risk on environment is here and the economy is strong, As long as the Bull Bear lines are dark green over red, it is time to be long or to buy the dip. I expect about 3 days of retrace and then a buying opportunity at support.

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