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June 13, 2015 – Weekend Market Comment

June 13, 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, as continued uncertainty over Greece pressured stocks and investors kept an eye on a calmer bond market ahead of next week's Federal Reserve meeting. The major averages ended the week flat. The S&P 500 ended the week up 0.06 percent for the longest streak of sub-1 percent weekly moves since 1993. The Dow eked out gains of 0.28 percent, while the Nasdaq Composite closed 0.34 percent lower for the week. The Dow transports closed 0.4 percent lower, for its fourth negative week out of the last five.

The Dow Jones Industrial Average closed down 140.53 points, or 0.78 percent, at 17,898.84, with Merck leading all blue chips lower. The S&P 500 closed down 14.75 points, or 0.70 percent, at 2,094.11, with energy leading all 10 sectors lower. The Nasdaq closed down 31 points, or 0.62 percent, at 5,051.10.

What I Think
What is going on is the market is wiggling in little 2.5% ranges, back and forth but mostly that is just noise, overall we are going sideways. Also the wiggles are getting smaller. That is consolidation.

You can look at my 50 day EMA chart I put down in the Bull Bear Lines section, but also here is a snippit of a chart Arthur Hill presented that illustrates the same point. The Market just can't get past those pesky red lines. 

So what is causing the indecision? Well Greece refusing to play ball is a concern but that is a story that still has a few rounds to go. As I said before the issue is a potential end of easy money, as in rate hikes. The red line is the 50day MA of the US treasury Bond

One of the recurring explanations given why the Fed is eager to hike rates is so it has some dry powder ahead of the next recession which, some 6 years after the last one ended is overdue (especially with a negative GDP Q1).  Which, incidentally, is just the topic of the next Economist cover titled simply "Watch out" adding that the world is not ready for the next recession...
This week The Economist said  . . .

It is only a matter of time before the next recession strikes. The rich world is not ready

Read it here 

As one prema-bear put it: "The question of just how much dry powder does a 25 bps increase in the Fed Funds rate provide, especially considering that Europe tried precisely that in the summer of 2011 only to unleash a crippling recession on the continent that required yet another Fed bailout in November 2011."

The rate hike issue is like a locomotive, big noisy and you know it is coming miles away, so it should not be that big of a deal, if we are in for a big sell of it will be something subtler. Generally it will be that speculators painted themselves in to a corner and can't get out.  However there is a subtler side to the bond issue, my personal favorite is this one on CNBC from the world's leading expert on bonds, Mohamed El-Erian, yes it is also about bonds, but it is a bigger problem than the fed. To give you some perspective, the global bond market is about $82 trillion.  The global stock market hovers around $40–$50 trillion.  So, on pure size alone, the bond market is almost twice the size of the stock market. Now in the days of my childhood little old ladies bought a government bond at 10% return, held it until it matured and bought another one. Today granny has given way to big government wealth funds and corporate treasuries. Global pension funds alone are 24 trillion dollars. These guys don't give a rats ass what the bond yield is, just as long as they can buy a bond this week and dump it next week at a big profit because interest rates have dropped. What Mr. El-Erian talks about on CNBC is "liquidity" but what he means by that is, treasury and corporate bond holders are a very conservative bunch and hate losses, as in they simply will not hold bonds in a rising rate environment. Well Mr. El-Erian knows they can't all sell their bonds on the same day, if there are no buyers what will keep up prices . . . so what if they do sell at once? Scarey?

Of course just get me started on China's bubble markets, and to add fuel to the fire here is a bit in Bloomberg. Stock forecasters in search of an early-warning system for the next Chinese bear market are zeroing in on the country’s record $358 billion pile of margin debt. Check out their graph, its not hard to see what is pushing up equity prices.

Well that is all well and good, but don't panic just yet ... there are few things you should keep in mind; first off it has been less than a month since we hit 52 week highs in the major indexes and small caps. Second certain small  technology issues are doing well (example AMBA), not the stuff of big recessions. Finally there is the idea that if bonds are being sold, some of that capital will flow in to stocks . . .So relax?

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
Well of course the big picture is now and has been for several years now, you can't be wrong if you are long. You will note we are turning back up about where we often have in the past, with the 4 day average (light green) making a little dip under the 50 day average (dark green).


But lets ZOOM in on this puppy for a better look at the 50 day EMA (dark blue). I placed above it (for those of you that can't see the obvious)  a slope indicator and as you can see the 50 day slope is now negative. That is not the end of the world, this happens but, it is a cautionary tail. The Goldilocks market is on vacation, from here we maybe in a more traditional market, slugging it out for gains. Or this could be the start of something more. I love the simplicity of this view, it really says it all.

Primary Sell
Smart Money is getting optimistic now, 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 LowThis is the graph that I said two weeks ago was giving me some confidence in a long term bull, now ewww, not so much . . . (yeah I added a zoom panel). We may look back on this as the sign of the long term top.

On Balance Volume our "canary in the coal mine" is looking like it should, it is not important that it is going down, just that the red line is near the current market or above. A very good sign!

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.5. Notice the lowest panel shows the price of SPY in the Elder's Impulse system, yup more blue bars due to a shortage of conviction in direction.

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
Woosh a sudden up turn in risk, or is it a total hate of big defensive stocks in a strong dollar environment?
A bit of both.


Bond vs Equities
Well equities clearly did better than bonds. But really it was bonds imploding, not the equities market that made this work. Expect this continue if rates move up, equities will be the only game in town.


Green Arrow Chart
Our last green arrow was not a great signal and clearly this is not a great time to enter the market. Pay special attention to the lower portion of this chart, small uptick in performance for mid-caps vs the over all market. A good sign.

Nasdaq Summation
Well this is telling you the NASDAQ is holding but with not a lot of gusto. Drones, nuvo-semiconductors and biotech are doing well, traditional firms like Intel and Microsoft are facing the paradigm shift of the death of the PC.

S&P500 Over 50 Day
Could be the point it bounces, it was before..


I told you a few weeks ago the financials were do for a run and here it is folks. That is good news, don't expect it to continue. In fact you look at this set up and really I am expecting a strong move to defensive stocks next . . .  look at this bounce in DEF

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.

Self Driving Vehicles

As a child in the 1960's science was always delivering us something really new. Passenger jets went super sonic, car transmissions shifted by themselves and tiny transistors guided spaceships to the moon. But in the last twenty years not a lot of really new has happened. Electric cars existed time the time of Henry Ford and cellphones and the discover of the gene were from the 1970's. But a true driver-less car is a true disruptive break through. Not just for drivers, but for what it means robots in general can do and be trusted to execute flawlessly.

Trucks too . . 
There was a fascinating write-up this week in the blog about trucks that drive themselves.  I was interested to learn that, in so many sates, the most common job was truck driver. OK a lot of people drive truck,  but I disagree with the author's concussions that very many truckers will loose their jobs. First off this really is no more damaging to jobs than trains are or using earth-movers 100 years ago to replace many pick ax labors. I also think that airplane have autopilots but we still fly important things (passengers) manned and trucks will have drivers overseeing their trips for at least some 20 years out.  Also the article fails to point out many "truck drivers" do local jobs like couriers and garbage truck drivers, so this is not applicable except to long haul driving. (pictured below a Mercedes Benz self driving truck bearing the first Arizona autonomous vehicle license plate)

One area this disruptive technology could make a big change is state revenue. For example on average New Jersey fines generate $30,000 for every mile of road in the sate. What if all those cars were programed to not exceed 5% of the local speed limit?

I have never feared automation. However, I was also surprised how fast this technology is coming. These test truck are on the road now in Arizona and will be everywhere before I am ready for an old folks home.  In fact Google self driving car program has passed 100,000 miles and every accident (all 11) were due to humans running in to their test cars. That is impressive.
Still one note of caution, some technologies take off in a big way, but across so many players, that there is no way to benefit financially. A case in point was the compact disk, they made a zillion of them but over all this was just a new way to build records and cassettes. No one player dominated, not Sony, Panasonic, Akai, RCA or anyone else. Even if you went back in time there is no investment you could make that would zoom ahead based on this technology.

We are in a bull market, therefore you should only be long. A pull-back in a bull market is a buying opportunity.  This week I did buy a few prime issues,

Two in Canada
- BDI - a play on oversold oil and gas
- RNW - a play on renewable energy

- ETJ - Stability with hedging
- HACK - feed the paranoia of the US government

One US Equity
- MBLY - a key firm in the driver-less car, see above.

I bought these with a part of my account I set aside for speculation,  regular readers know that the majority of my accounts are held in super stable, broad based stable ETFS and fixed income.

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.

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.