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May 9, 2015 – Weekend Market Comment

May 9, 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 sharply higher on Friday as investors cheered a jobs report that showed economic growth but not enough, in the eyes of most, to warrant central bank tightening immediately. The Dow Jones Industrial Average closed up 267.05 points, or 1.49 percent, at 18,191.11, with Visa and Boeing leading all blue chips higher. Visa shares jumped more than 4 percent in afternoon trade on a Bloomberg report that the company is in talks to buy its former subsidiary, Visa Europe. The S&P 500 closed up 28.10 points, or 1.35 percent, at 2,116.09, with health care leading all ten sectors higher. The Nasdaq closed up 58.00 points, or 1.17 percent, at 5,003.55.

What I Think
Sure the news talked about how traders loved the job report on Friday, better than expected ... but just by a bit. They also likes a small up tick in average wages and the employment-to-population ratio is 59.3 percent, lower than the pre-recession level of 63 percent and the peak of 65 percent in 2000. 

That said I found it more interesting is that the market had hit the bottom of that wedge I showed you last week and surprise, in came the computer algos buying like mad. Clearly, something bigger is going on. Let's start with the recent spike in bond yields. The 10-Year Treasury Note Yield backing off from its March peak and trading back below its 200-day moving average. That stabilized bond prices, which had fallen sharply over the last month, and rate-sensitive stock groups like REITs and home builders. The spike in bond yields started in Europe, and may have ended there. The German 10-Year Bund Yield suffered a huge downside reversal day on Thursday, which contributed to the peak in Treasury yields. In fact most of Europe was happy to see the outcome of the British elections.  The US stock market turned higher on Thursday after yields peaked. So did some of the weaker rate-sensitive stock groups that pay dividends. The ETF that tracks stable dividend players DJ Dividend iShares (DVY) bounced on Thursday, and even the DOW bounced off its 200 day moving average. 

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. In fact you can create a full trading system on this graph alone, see CME4PIF School lesson One and so far in the last 10 years it would have served you well to be long when green is over red. 

Primary Sell 
Smart Money is not 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. 

NYSE New High Low
Still in a long term up trend, but notice . . . narrowing. In fact at one point last Thursday this was getting very ugly in deed, this is a big part of why you don't want to take big chances when this chart is NOT in a clear trend. 

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 near 13.

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

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
The market surged so of course Fridays surge is going to be more in MVV than DVY but notice how well timed it was with the chart slow stochastics bottoming

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 is clearly out of favor with a big sell off in over priced biotech 

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 finance sector is doing best especially regional banks and credit cards with VISA in the lime light this week. 
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. 

No Mr. Bond, I expect you to die.
Well how long have we been talking about the impending death of bonds? Still they rallied like mad on Friday, still I drew this graph to point out that we may in fact have witnessed a small bounce in an other wise clear trend away from the almighty bond.  Yet, just to muddy the waters, if there is a stock market sell off I expect people to still run back to treasuries, but clearly the market truly is expecting a rate hike . 

What Works Now
Financial Stocks tend to do better late in a market cycle and they have an edge if interest rates go up. Mergers are increasing and so are stock buy back plans this would be a good time to look at buying Goldman and JP Morgan. 

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.

I am spending some of this week's market earnings at the Middle Beach Lodge in Tofino BC. 

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.