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May 23, 2015 – Weekend Market Comment

May 23, 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 lower on Friday, failing to hold highs touched during the session, as investors eyed inflation data and Fed Chair Yellen's speech ahead of the long weekend. The S&P 500 and the Nasdaq failed hold gains in the close. Earlier, both indices extended gains to trade higher, with the Nasdaq briefly above its record close of 5,092.09. The Dow closed near its lows for the day, about 50 points lower, despite Goldman Sachs ending about 1.4 percent higher at a 52-week high to lead blue chips gains. Financials were the week's third-best performing sector in the S&P. The Dow Jones Industrial Average closed down 53.72 points, or 0.29 percent, at 18,232, with Boeing leading laggards and Goldman Sachs and Apple the greatest advancers. The S&P 500 closed down 4.75 points, or 0.22 percent, at 2,126.07, with telecommunications the greatest of nine laggards and information technology the only advancing sector.The Nasdaq closed down 1.43, or 0.03 percent, at 5,089.36.

What I Think

I thought it is constructive that the stock market continues to trade near highs despite mixed economic data. Uncertainty as to when the fed will try a rate hike makes it hard to be too enthusiastic especially with a Fed chair that warns the market is too highThe market has been supported by "ultra-loose" monetary policy around the world and cash from corporate balance sheets being put to work in the form of dividends, buybacks and mergers and acquisitions. In short this folks is financial engineering, not true economic strength. The moves are a clever way to return piles of offshore cash to share holders (read executives and managers with stock options) without corporate tax. 

Many traders noticed the 0.8 percent decline in the Dow transports was weighing on equities. Pressured primarily by airlines, the index lost about 2.3 percent this week, its worst since March 27. Transports are a direct link to the economy... if we're not shipping as many products we're hurting transports... so traders watch the transports, but in this case goods are still shipping, the real issue is airline stocks went too high too fast and are pulling back as the price of oil rises. 

Here is a chart, the black line is the price of oil and the blue is airline stocks.

If goods were not shipping, I would expect major couriers to plunge, but that is not happening. In fact since the end of 2013, FedEx is up 28%, not bad considering (like airlines) fuel is a major cost for this firm too.

It All Shows Up In The Charts . . . 

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

Bull Bear Lines
We continue to consolidate sideways anticipating a break higher or lower, of course who knows but odds are the break will be in the direction of the trend, and when this chart shows a green line above a red the trend is up. 

Primary Sell 
With a slightly falling put call ratio, the "Smart Money" is buying a bit more insurance, but it is still anemic. The lack of conviction is a sign of indescision and a softer summer market.

NYSE New High Low
Looks like we are back on a clear uptrend. Pay attention to this graph, it is a large part of why I say the long term market looks strong. Notice I said long term.

The basic assumption, regarding On Balance Volume analysis, is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the security by a rising OBV. When the public then moves into the security, both the security and the On Balance Volume will surge ahead.

If the security’s price movement precedes OBV movement, a "non-confirmation" has occurred. Non-confirmations can occur at bull market tops (when the security rises without, or before, the OBV) or at bear market bottoms (when the security falls without, or before, the On Balance Volume Technical Indicator).

The OBV is in a rising trend when each new peak is higher than the previous peak and each new trough is higher than the previous trough. Likewise, the On Balance Volume is in a falling trend when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough. When the OBV is moving sideways and is not making successive highs and lows, it is in a doubtful trend.

On Balance Volume is not keeping pace with the current market, and that was true all week! So put your antennas up! This indicator can generally spot trouble far ahead of my other indicators. That said, it also is twitchy sometimes diverging when it should not. Generally what this is telling you is that the big players (smart money) are not most of the money behind this week's action. 

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12 after hitting a year-to-date low of 11.82.

This indicated that traders expect very little volatility in the near-term, and is probably a sign of investor complacency. Other market indicators, like VIX futures spreads and the ISE Index also showed a lack of caution intraday. Notice the CCI indicator on the top of my VIX chart, it goes brown when the CCI dips below -100 and as you can see the market seldom goes up for much longer than a few days to a week or two once the VIX CCI breaks -100.


VIX Evaluator
Don't forget this is an experimental VIX indicator. Dropping as fear subsides.

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 this bull market.  

Aggressive Defensive Chart
The market is up and aggressive is battling defensive as you can see from the slow stochastic on the top, this run up is over done, in December the pull back was sharp, but in February over done lasted a month of bull market continuation.

Bond vs Equities
Equities lately (up to mid this week) clearly did better than bonds. Expect this continue if rates move up, equities will be the only game in town. The consumer remains strong too, I find some comfort there.

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. 

Look we have a NEW GREEN ARROW. Looks like the market is expected to rise for the next while! That said in a consolidation it can be short lived.

Nasdaq Summation
As you can see the NASDAQ has been moving up, but only now is the summation index. Generally we are seeing great things in high tech. Apple had a strong week, and so did Semi-conductors. There was weakness in bio-sciences and healthcare that have been perceived as over bought. 

S&P500 Over 50 Day
Well this is encouraging the market is buying a broader range of equities, a sign that the pros see that we have come to far on the large caps and see value in more good small companies. 

Again the NASDAQ is our star this week. That is good news.
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. 

Unstable China
I loved this piece in Fortune Magazine Showing how a Chinese billionaire lost half his fortune in hours. I have always maintained that the whole Chinese finical system is a scam, and that most of it is based on wild speculation. Stories like this help back that up. 

The Calendar
I have talked about sell in May and go away, but June is actually the worst month for the market over the last 10 years, that's not to say that pulling in your horns in May is not prudent. 

The simplified rule is to invest in the six months November 1st thru April 30th and then switching to safe fixed income products for the rest of the year. If you back test this strategy since 1950 with an initial investment of $10,000 in the DOW, you would have had gains of 6,740%. If you had invested the same $10,000 from May thru October, you would have lost $1,024. This is pretty compelling statistics especially when you also consider that if you had invested in November 1st thru April 30th, there were 48 years with gains and 14 years with losses or a ratio of 3.5 to 1. On the other hand, May 1st thru October 31st had 37 gains to 25 losses. Only three years had double digit losses during November thru April and they all coincided with financial crisis.  If you only used the last 26 years for the study, the results improved to gains of $585,910 versus $498

Semi on the Rise
Semiconductor stocks are down for so far in 2015, this decline in semiconductor stocks is reflective of the long-term decline in personal computers, or PCs, because most semis are tied to them. However this is short sighted, because these chips are also in cell phones like the iPhone 6 and hit products like the GoPro camera also memory chips for tablets and many other non-pc type devices like home appliances, cars, routers, media servers and semi drives. The last week has been strong for semiconductors. You might look at some of the up and comers in chips including these symbols AVGO, QRVO, SWKS and NXPI also the tried-and-true king of memory chips Micron ticker MU. Market is stretched, so don't bet the farm and set your stops tight.

When tech leads the market and smaller firms do well it is the sign of underlying strength in the economy. 

We are in a bull market, therefor you should only be long. Clearly from the VIX chart and OBV chart we are about due for a decrease in acceleration, perhaps even a pull back, so take some profits and check each evening your own OBV chart.  The Green arrow chart and the aggressive defensive chart are telling you the market might be ready to break out but it will not be as strong as what we saw in the fall.  Diverging indicators are a sign of a rift in the market, it often shows a decrease in participation and prices at "perfection" -- that is common as the season switches to the summer low volume trading period. I would proceed long with caution, and be very aware of any spikes in the VIX and softness in the OBV indicator, I have lowed my risk by buying a few good stocks and stable indexes and raised my cash level. 

Wall Street Week Returns

As a teenager some of my early interest in the markets came from my father watching the American PBS show Wall Street Week. The show began January 7, 1972 and was officially titled Wall Street Week with Louis Rukeyser during the 32 years he hosted from 1970 to 2002.

The new "Wall Street Week" features Anthony Scaramucci and Morgan Stanley senior adviser Gary Kaminsky as co-hosts. The new show airs Sunday mornings on Fox affiliates in select markets, and is available for streaming and on-demand viewing Sunday mornings starting at 11 AM ET on

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

Don't squint, All graphics can be enlarged by click on them.