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March 7, 2015 – Weekend Market Comment

March 7, 2015 – U.S. stocks closed down more than 1 percent on Friday as investors weighed a jobs report that indicated an interest rate hike could come sooner rather than later.

The Dow Jones industrial average closed below 18,000 for the first time since February 19. The index had its worst day in a over a month, briefly falling more than 300 points, down more than 1.5 percent. The report sent turbulence into bond markets, with the U.S. 10-year Treasury note yield rising to 2.25 percent and the 2-year surging to 0.73 percent on increased anticipation of an interest rate hike.

February's nonfarm jobs report showed a gain of 295,000, above expectations of 240,000 in February, down from 257,000 in January. The unemployment rate fell to 5.5 percent, while hourly wages ticked up 0.1 percent, below consensus and off the surprise 0.5 percent gain in January. The report sent turbulence into bond markets, with the U.S. 10-year Treasury note yield rising to 2.25 percent and the 2-year surging to 0.73 percent on increased anticipation of an interest rate hike.

The Dow Jones industrial average closed down 278.94 points, or 1.54 percent, at 17,856.78, with Johnson & Johnson leading all blue chips lower. The S&P 500 closed down 29.78 points, or 1.42 percent, at 2,071.26, with utilities down 3 percent to lead all 10 sectors lower. The Nasdaq traded down 55.4 points, or 1.11 percent, at 4,927.37. Five stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 903 million and a composite volume of 3.8 billion in the close.

What I Think
Well like I said last week we are overvalued and a little pull back is in order. The market is fearful of the Fed changing its line but clearly it also knows the market is over valued. The Wall Street Journal Friday mentioned that the P/E of the market is about 18 and the long run average is about 15. 

Ok last week I showed you how the bull and Bear Lines were toppy. This chart showed the start of a correction, one reader asked me about my negative tone last week and was this the start of a big sell off, should he go short? NO NO NO back to CME4PIF school for you . .  click here to learn how to read the Bull and Bear Lines. You NEVER short the market when the dark green line is above the red line. That is called a counter trend move, and we don't do those. Look back over the last four years and you will see that would often have you on the wrong side of the market. What I was trying to show is that the light green line is going to make a bit of a dip here and that will be a another buying opportunity. Remember the Bull Bear Lines are our big picture overview of the market and so long as dark green is over red it is a BULL MARKET. It is very hard to understand my system of market timing if you have not full grasped lesson one. Every big sell off starts as a pull back. In both cases (dip or crash) I will see the same negative divergences here ... but it is the Bull Bear Lines that show when to give up optimism and put on your bear suit. 

It All Shows Up In The Charts . . . 

Bull Bear Lines
The predicted pull back is right on time. Probably will run out of steam just beyond the 50 day EMA( dark green line).

Primary Sell 
Clearly the market pros are running to buy some insurance. 

Aggressive Defensive Graph
The Slow Stochastics on the top of the graph has hit a new peak and heading over the hump.. now red over black, Clearly aggressive equities are already over done and the pace is increasingly moving towards safety.

Bond vs Equities
Ah the dance of the markets... bonds hit bottom of normal range and bounce as smart money takes some profits in stocks and looks for safer harbours. But bonds are not bouncing as they should... looks like the bond game might be over as fear of fed rate hike takes place...scratch my TLT idea from last week.  Risk off has begun but no flight to bonds.

S&P500 Over 50 Day
The percentage of stocks over the 50 day moving average has peaked as predicted and the slide down begins.

Green Arrow Graph
Our Green arrow graph is stalling... not a good time to put new money to work. 

Nasdaq Summation
The Nasdaq Summation index is also now caught up in the sell off... Risk Off!

NYSE New High Low
Still showing strength on the big board. Yes some hesitation here too. This is still a long term bull market.

The new leader is financial stocks, that is kind of odd it should be utilities, but they don't do well in rising rate environment. 
The strong jobs report is causing interest rates to rise and that drives trreasury bonds down. Stocks that are interest rate sensitive reacted this week with banks and stock brokers doing well and utilities (off an average of 3%) and gold the traditional safe havens taking a beating. As I said last week, it also is clear that this is about the max of the normal range... anything COULD happen, but it probably is time for the higher risk stocks to get tired. Expect pull backs in consumer discretionary and high tech.
XLF - Financial Stocks - Dark Blue
QQQ - Nasdaq - Purple
XLY - Consumer discretionary - Green
XLU - Utilities - Red
DEF - Defensive stocks - Brown

On Balance Volume is not keeping pace with the current market at all. This is showing that institutional large volume buying is going to the sidelines. It looks like the "smart money" was late to the party this time and is not hanging around. I have great respect for the early warning signals that come from OBV , yes it is not perfect, but it often warns very early. It certainly was our first tip off to this pull back. So it is this chart that has me the most concerned this week. In fact if this does not pull up soon ... it could get scary.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 15.

VIX Evaluator
Don't forget this is an experimental VIX indicator... last week week I said it looks like it is saying... my look how close I am to the edge of my range.....Well THIS week it bounced... hmmm. 

OK well it is like this.... We are in a bull market and but this is a pull back. Last week I was "gently pulling my horns in" I am long safety, I have raised some cash and I await a buy opportunity. I have bought a ETF called VXX to hedge my risk and NO you should not bet the farm of VXX it is only to protect other positions. 

Remember CASH is a position too!

Ahh the good old days of day trading. . . .

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