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May 30, 2015 – Weekend Market Comment

May 30, 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 
The Dow Jones industrial average ended about 115 points lower after falling more than 150 points during the session. The blue chip index posted a 0.95 percent gain for May. The S&P 500 ended up 1.05 percent for the month, and the Nasdaq outperformed with a 2.6 percent monthly gain. U.S. stocks closed lower on Friday, the last day of trade for the month, as investors digested economic data and remained cautious on continued concerns about Greece. The Dow Jones Industrial Average closed down 115.44 points, or 0.64 percent, at 18,010.68, with General Electric leading laggards and Merck the greatest advancer.

Gains in U.S. Treasurys on Friday pushed the 10-year yield to its lowest level in four weeks, but wasn’t enough to claw the market out of a monthly loss.

Benchmark 10-year notes gained 10/32 in price to yield 2.097%, the lowest closing level since April 30.

The S&P 500 closed down 13.40 points, or 0.63 percent, at 2,107.39, with industrials leading all 10 sectors lower. The Nasdaq closed down 27.95 points, or 0.55 percent, at 5,070.03.

What I Think  
You know the old saying, when you are playing poker
you should look around the table and decide who the sucker is, if you can't figure  out who that is... it is you. Below you will see the weakness in the OBV I pointed out last week continues. I also said if there was trouble expect one last up turn in the 20 year treasury, just when it was falling apart. Well folks the treasury is rising as rates fall again. 

I am convinced that the smart money is stepping back from the table. At a market top there are fewer and fewer buyers and they are generally the less experienced players. When they stop buying, there is no one left to hold up the market, so the market has a correction. 

Last week I said there were a number of negative signs cropping up and that I have moved quietly  out of speculative plays and raised some cash. If you did that you were pretty happy this week. Signs of weakness are everywhere. European markets were down pretty sharply at the end of this week, and China also had a retreat. Meanwhile the on the NYSE the decline in the transports is a divergence we can't ignore. Add to that my new favorite concern the US industrials are falling. For a typical example look at Ford. Despite being the world's most profitable automobile manufacturer. Ford also has braging rights with the Ford F150, the top selling U.S. vehicle, now even more popular with falling gas prices. Still the share price of Ford struggles. The party ended in March and for that matter, hasn't really been much fun since the first half of last year.

I also pointed out a few weeks ago this long term picture of industrial production. Let not forget this graph because falling industrial production is always a part of each major market sell off.

The DOW composite is now touching it's 200 day moving average, there are a lot of programs designed to sell the market it the DOW breaks the 200 day moving average. On the other hand, when this happened last fall it was a great opportunity. Notice the slope leading up to the fall 2014 situation was a pause in a dramatic uptrend, this time it looks a case of "apathy after going nowhere" for way too long. 

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
When this chart shows a green line above a red the trend is up, in short this is a bull market. Never short a bull market. 

Primary Sell 
With a slightly rising put call ratio, the "Smart Money" is buying a bit less insurance, but it is still anemic. Don't panic yet. The lack of conviction is a sign of indecision 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.

On Balance Volume is not keeping pace with the current market, and that was true for 2 weeks! As I said last week, 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. Honestly this trend is deeply troubling, and why I am raising more cash, this chart says to expect "A Swoon in June".  

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

They say big sell offs come from complacency and forgetting the last crash, it often takes about 8 years to forget, as that complacency slips in, people don't run for protection as easily. As pointed out in Bloomberg, the VIX these days just does not pop on bad news like it used too. Yup that is complacency.  

Here is a very interesting long term chart. This is the VIX instead of absolute value, it is in change in percentage... as you can see sell offs follow 4 years of low volatility in the VIX. Oh my... this does not look good at all. 

That said, I do want to remind everyone, though, that timing complacency is extraordinarily difficult. We'll top on complacency, but you'd get so many false signals before then that it's not really worth trying to game it and this is STILL A BULL MARKET.

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
Defensive issues are clearly leading as people exit the more speculative midcap 400. Yet another vote for an impending mild correction. 

Bond vs Equities
With an upcoming Fed interest rate hike anticipated, U.S. bonds should be dropping but this week they are rising, showing a real flight to safety. The same flight to saftey I predicted would precede any market pull back.  At least the consumer remains strong , I find some comfort there. 

Here is the big picture look at U.S. bonds (ticker TLT), the red line is a 50 day moving average ... as clearly the big trend is investors are shunning bonds in anticipation of a rate hike. However, look at the short term green line as bonds still are being used as a safe haven this week. It is kind of disturbing when people are still buying bonds in the face of an upcoming rate hike. 

Green Arrow Chart
Last week we had a new green arrow, but I said it could be short lived and yeah it looks half hearted already.

Nasdaq Summation
Nasdaq is the only bright spot left in the market but the summation index says  ... forget about it, anticipate a pull back. 

S&P500 Over 50 Day
Well this is just putzing around, as would be expected in a sideways market.

Again the NASDAQ is our star this week. That is good news, don't expect it to continue.
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
Still more trouble from China's coal miners tank in a big way read about here in the Wall Street Journal.

We want fairness. There is no fairness if you do not let us cheat.
I am shocked and appalled, Snort giggle, here is a must read: the Daily Telegraph on exam cheating in China

"A Perfect Storm"
Not that in America there is not a some denial going on. A new report by The University of Notre Dame, commissioned by the law firm Labaton Sucharow, which represents whistleblowers, has some alarming numbers to add to this well-trodden narrative. The report surveyed more than 1,200 people in the financial-services industry to look at whether increased regulations, along with calls for a cultural change, have had any demonstrable effects. The conclusion? Wall Street feels it is still corrupt and incompetent. Who knew?

This week's example, Dick Fuld said that he did not speculate his firm Lehman brothers in to bankruptcy. Yup it was just fine, it was those former Goldman Sachs officials in the government, that  used this as a chance to destroy his firm. Dick whines about how Lehman, was caught in a once in a hundred year "financial perfect storm" that no one could have seen coming. 

Really?  let's face it folks, how could a humble banker, who made only $500 million during his time as CEO, be expected to know it might be bad business to give mortgages to people with no income?

What Works Now
I hope you took some profits in those hot semi conductor firms I put you into a few weeks ago. Here is AVGO, SWKS and NXPI

Short Emerging Markets, I continue to hold EUM the short emerging markets fund. With China growing slower and industrial production dying in the USA it can not be much of a party in the third world either. Not that everyone agrees with me, such as this from the economist,  as people still cling to hope. 

We are in a bull market, therefore you should only be long. A pull-back in a bull market is a buying opportunity.  Clearly from the Nasdaq summation and the 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. Yes there is still some hope in the NYSE High Low chart and the primary sell chart is far from full panic, even the VIX is not reacting upward yet. 

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 lowered my risk by buying a few good stocks and stable indexes and raised my cash level. 

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.