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May 2, 2015 – Weekend Market Comment

May 2, 2015 – Welcome to my weekend market comment, an analysis tool I use in my own portfolio decisions, published free to the web every weekend before the New York opening bell. For full details read my disclaimer below.

The Blah Blah Blah 
U.S. stocks closed about 1 percent higher on Friday, recovering from Thursday's sell-off, as investors eyed higher Treasury yields and looked for signs of economic growth. The Dow Jones Industrial Average closed up more than 180 points as the major indices recovered the prior day's losses. The Nasdaq outperformed, boosted by the same biotech and tech sectors that dragged the index down on Thursday. The iShares Nasdaq Biotechnology ETF gained more than 3 percent, just about recovering its losses from the prior day. Apple recouped recent losses to close up 3 percent at $128.95 a share. The Nasdaq closed up 63.97 points, or 1.29 percent, at 5,005.39. the Nasdaq down 1.70 percent. The S&P 500 closed up 22.78 points, or 1.09 percent, at 2,108.29, the S&P 500 down 0.44 percent. The Dow was off 0.31 percent for the week. Friday the Dow Jones Industrial Average closed up 183.54 points, or 1.03 percent, at 18,024.06, with Apple leading blue chips higher, with Chevron the greatest of three laggards. With materials leading nine sectors higher and telecommunications the only sector laggard. 

What I Think
After Thursday's sell off stocks were still negative for the week. Folks we are in a consolidation wedge and being squeezed like a lemon! Consolidation is a sign of indecision and so no clear direction.  Consolidations generally break out strongly, but the obvious question is, up or down?

Well the answer ultimately is based on the odds, and since the Bull Bears chart says this is a bull market, the odds are up. I said odds, not a certainty. That said there is lots to worry about, for example many experts thing this whole bull market is based on fed stimulus, if that stimulus ends, does the market? On the other hand rising rates in bonds will make then unattractive and really what will be left to invest in? There is also a risk to being too cautious. Again, for me, the answer is that the market climbs a wall of worry, so simply when the bull and bear lines are green over red, buy the dips. 

As you read last week, I think that the yield curve factor comes into play and that could restrain stocks as the market prepares for a change in monetary policy the Federal Reserve is getting close to the appropriate time to raise interest rates and all policy meetings, including June's, are on the table for a move. This could be the big turn up in the yield curve that must come sooner or later. 

In a rising rate environment the benefits flow to regional banks and insurance companies. U.S. financial stocks have lagged the S&P500 since the 2009 recovery began in large part due to the yield curve working against them. You can watch a dumbed down version of this on CNBC.   There is still a drag on financials since these turkeys are very exposed to the mess in the U.S. fracking drillers, but by picking certain stocks like insurance firms, you should be able to avoid that.  

It All Shows Up In The Charts . . . 

Section 1: The Big PictureThese charts tell us if we should even be in the market at all.

Bull Bear LinesWell of course the big picture is now and has been for several years now, you can't be wrong if you are long. 

NYSE New High Low
Still in a long term up trend, but notice . . . narrowing.

Primary Sell 
Smart Money was buying insurance, but it is anemic. The danger is that the smart guys keep getting caught on the wrong side of the market, if it goes on too much they lighten up. 

The technique, originally called "continuous volume" by Woods and Vignola, was later named "on-balance volume" by Joseph Granville who popularized the technique in his 1963 book Granville's New Key to Stock Market Profits

On Balance Volume is keeping pace with the current market. A great relief as "smart money" is still with this market.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded around 13. Notice this is about where we might have a double bottom. 

VIX Evaluator
Don't forget this is an experimental VIX indicator. Looks like it might be trying to head up. 

Section 3: Timing and Sectors.
Consider this as fine tuning. As you learned in section one of the CME4PF School most investors don't need to plan the short term, But you can use this section to decide on ratios of risk. For example you can time a strategy of moving from a defensive ETF like DEF and an aggressive ETF like QQQ. or between a ratio of equities and bonds. You could move from broad safe indexes like DIA (the dow 30) and  aggressive equities like Google and Amazon. Remember don't use these  charts to anticipate, and don't do counter trend strategies like shorting the a bull market.  

Aggressive Defensive Chart
For the first time in 2015, the market is heading toward safer assetts outperforming risk risky mid-caps. 

Bond vs Equities
Well equities clearly did better than bonds. Expect this continue if rates move up, equities will be the only game in town.

Green Arrow Chart
The Green Arrow Chart tells us when to put new money to work. You can learn about it in the CME4PIF school

Clearly this is not a great time to enter the market. Pay special attention to the lower portion of this chart, flat performance for mid-caps vs the over all market. Where we are really seeing the market run hard is in mega-tech giants like Amazon but the little firms are being ignored. 

Nasdaq Summation
Yes the NASDAQ hit a new 52 week high recently but notice it did it on a very  weak upward curve. clearly heading for less risk.

S&P500 Over 50 Day
Consolidation is bitch, this thing just wiggles and this week looks anemic as it did two weeks ago. 

The NASDAQ summation chart above shows the NASDAQ is doing poorly but here in the sectors chart it is actually the best house in a bad neighborhood. 

Very inconclusive. 
XLF - Financial Stocks - Dark Blue dots
QQQ - Nasdaq - Purple
XLY - Consumer discretionary - Green
XLU - Utilities - Red
DEF - Defensive stocks - Brown

Section 4: Special Interest
In this section I will introduce some new ideas or interesting things in the market. 

Once again the good folks at the Economist Magazine have pointed out that Canada has the most inflated housing prices in the world. This was also echoed by Jeff Desjardins at the Visual Capitalist, in a well thought our blog article. I droned on about this two years ago and little has changed. The prices continue to rise and there looks to be no limit. I do expect a cooling in the Alberta market due to the price of oil, but it is harder to figure what will happen in Toronto and Vancouver. It is tempting to say well the price can not stay up if the people do not make a wage that can pay a mortgage. Yet that is NOT what happened in London. A haven for investment first by middle eastern oil money and then by money escaping the former USSR, today it is Chinese money hiding in million dollar Kensington one bedroom flats (prices in London are up 28% this year).  

The point that is being missed is the driver of the price climb has been cheep interest rates, a banking system so indestructible that it can not even learn from its own mistakes and Chinese investors hiding ill gotten gains form China in condominiums in Vancouver and Toronto. In Vancouver realtors advertise in Chinese characters in some case no English on the signs at all.  The streets of Vancouver are awash in the offspring communist party leaders hiding in Canada as their parents back home await the inevitable corruption probe that will result in execution by hanging or firing squad. 

Its not just in housing, here is a classic photo of an accident, involving a quarter million dollar car, driven by a twenty something Asian. 

The accident is in front of Vancouver's Louis Vuitton store right across the street from Burberry, Tiffany and Hermes . This french hand bag store sells $1,500 purses and $700 sunglasses (Shown here) aren't they special . . 

The customers of this store all look the similar, vacant faced Chinese ladies who  use senseless material acquisition as a substitute for their meaningless existence.  Mean while, Chinese males in Canada are stock up on super cars and drive them recklessly through the streets. Notoriously, an entire convoy of young men driving 13 Lamborghinis, Ferraris, and other supercars worth more than C$2 million was yanked off Vancouver’s Highway 99 in 2011 for alleged street racing. A majority of the baby-faced Asian drivers were on their N-plates (new driver), said police. Several were reportedly boarding students at Vancouver’s elite St George’s School, which issued a statement which did not deny the claims. Or more recently this incident in 2014. You might feel that I am writing out of envy or prejudice but try this experiment, today it is nearly impossible to drive one hour in Vancouver without being cut off by a shinny new Audi, or other car valued at $80,000+ try it yourself.

But the cars and the purses are on thing, the real spending is on condos, now several thousand and no end of buying in sight. 

A Bubble in Biotech
Well your first sign of trouble is last week many financial pundits were pointing out that healthcare stocks are on fire. Always a sign the party is over. 

The recent run-up in Biotech is cooling, is this a sign of trouble? Bloomberg thinks so. The run-up is obvious when you look at the gold line (Biotech ETF) and the overall S&P500 in dotted blue.

Among the 150 public traded Nasdax biotechs there were just 25 companies that had any profits at all. This latter group included  big cap giants like Gilead, Amgen, Shire, Biogen, Celgene and 20 others, which among them had $30.5 billion of net income and accounted for $780 billion of the total index market cap. At the implied PE multiple of 26X, even these profitable companies were valued at pretty sporty levels. But there’s no denying the bubble mania when it comes to the remaining 125 companies in the index. These companies were valued at $280 billion, but posted aggregate losses of nearly $10 billion in the most recent reporting period.

We are in a bull market, therefor you should only be long. Clearly from the VIX chart and the sector chart we are about due for a decrease in acceleration, perhaps even a pull back, so take some profits. The Green arrow chart and the aggressive defensive chart are telling you to be careful, this is not a time for wild bet on a tiny high beta stock. On the other hand Friday's buying spree and the primary sell and OBV chart says the experts are still buying so it at worst this is a small pull back.

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