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July 11, 2015 – Weekend Market Comment

July 11, 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 at the bottom of this page. 

The Blah Blah Blah (courtesy of CNBC)
U.S. stocks closed more than 1 percent higher on Friday, recovering from a sharp selloff earlier in the week, as hopes for resolution in Greece and stabilization in China boosted sentiment. The Dow Jones industrial average closed about 210 points higher after gaining nearly 250 points in afternoon trade. The blue chip index eked out a 0.17 percent gain for the week but remains about a third of a percent lower for the year so far. The S&P 500 recovered gains for the year but failed to hold higher for the week, ending flat for the five-day session. The Dow transports gained nearly 1 percent for the week, closing up nearly 1.9 percent on Friday as airlines surged. The index posted its first weekly gain in five. The Nasdaq Composite gained 1.5 percent as biotechs rallied and Apple closed up 2.67 percent, reversing a 2 percent plunge Thursday that took the stock close to its 200-day moving average.

The Dow Jones Industrial Average closed up 211.79 points, or 1.21 percent, at 17,760.41, with Apple and United Health leading all blue chips higher. The S&P 500 closed up 25.31 points, or 1.23 percent, at 2,076.62, with financials leading all 10 sectors higher. The Nasdaq closed up 75.3 points, or 1.53 percent, at 4,997.70.

What I Think
I said there would be a bounce and I said please don't jump on it . . . here is why.

Greece's prime minister blinked and pretty much caved in to the demands of German and Finland, begging for more credit. Now the creditors have demanded Greece put in place prior promised reforms before they will send more money. An extra dose of humiliation to a country trying to find it's pride. “This Eurogroup list of demands is madness,” Nobel laureate Paul Krugman wrote on his New York times blog. “It’s a grotesque betrayal of everything the European project was supposed to stand for.”

Both sides know the debt is unsustainable, so really this is just childish revenge. Well golly willikers that just fixed everything in Europe. Nope, I can not see any future tension or problems here. Kinda like that nice repair job on the that BMW picture above.

Back in China we saw the latest move by the government aimed at stabilizing stock prices following a devastating market rout the past month.

All the sham companies on the stock market (some 1,500) voluntarily stop trading so the banks would continue to lend them money and their stock price would not fall. In the crisis of 2008 Americans were careful to bail out all banks, even those that did not need it, so no one could mark some banks as insolvent. But in China these bogus firms have just put their hand up, by stopping trading, it is easy to see that 60% of China's public firms are effectively insolvent.

Mid-week will still had another day of selling on Wednesday. This was greeted by yet more emergency measures from the billionaires in the people congress in Beijing, with the government announcing that controlling shareholders and executives who own more than 5% of stocks will not be allowed to sell for six months. So much for market forces playing a “decisive” role in China’s economy.  Then the bigger state controlled firms were ordered to buy back their own stock. Then for good measure Thursday they took the controls off margin lending so that the very stupid could get deeper in debt and buy more worthless stock.  Effectively giving an exit for the big guys before the really big implosion.

Here is a chart of the leverage in China vs the Tokyo and U.S. markets, look at the scale on the left of each graph! Don't forget this does not include Chinese shadow banking money, that probably makes this twice as bad.

Now China's securities regulator instructed brokerages on Sunday to review trades and enforce rules that require the use of real names and national identification numbers. The latest warning by the China Securities Regulatory Commission (CSRC) is meant to clamp down on a trick whereby a single investor controls multiple accounts -- often registered under other people's identification numbers -- to bid the price of a stock up or down. In other words they are starting to follow the dirty money and in China that can end in a corruption trail followed by an execution. The knee jerk reaction was predictable, (read it here) a huge flood of real estate investment money heading to Sydney, San Francisco, London and Vancouver.

The big question is what impact is Beijing’s heavy handed approach to controlling a market going to have on systemic risk in the world’s second largest economy? Prodding institutions to step in and buy to bail out over-leveraged retail investors may have sounded like a good idea at the time to try and keep the criticism among China’s new speculator class to a dull roar, but it introduces a whole new range of possible bad outcomes.

The effect is now in China you have a perfect stock market, on the way up you win and if it falls the government has declared it will order the market to protect you. In effect a super "put" in the market. Great fiscal policy kinda of an ultra Bernanke. But in the U.S uncle Ben used the power of the federal government balance sheet, in China they are just naively screwing over their own major companies and big shareholders. Add to that tracking the guys with the big money and you can see why I can't see a big appetite for Chinese equities going forward. Again . . . Nope, I can not see any future tension or problems here.

Back in America the view is.... So now that everything is fixed, mid-week there was bounce in the European, Chinese and U.S. markets (I said was coming) and all is rosy again.  Speculators are something like these dogs, throw a day or two of recovery at them and they chase the stick.  Oh go get it  . . . you stupid algo & trader mutts.

    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. I said before that you can expect a repeat of Jan 2015 but my fear now is this will be more like October 2015 . . . But you can't predict the market you can only go with the trend. Right now there is a bounce up in an over all 50-day-moving-average mild sell-off.

Industrial Production
America is nothing without manufacturing might. This recent dip is not a good thing. No long term happy out come if this does not get fixed.

Non-farm Payroll Employment Index
As a consumer economy America is dependent on strong employment.

NYSE New Highs - New Lows
This is a deceptively simple indicator we simple count the number of NYSE stock hitting new highs and subtract the number hitting new lows. Think of this as the vital sign measurement for the health of the market.

My big concern is the yellow average line has begun to point down in a big arc, something we have not seen for a while. I am not putting a lot of cash in equities until at least the green is above the yellow.

Market Renko
Renko charts are not based on time (note the funny date scale) and only draw a new brick if the market moves in to a new territory. They really can simplify the whole question of direction. As you can see we have been in an overall uptrend since the 08 crash.

This week another black down trend box on the chart.  Overall not good.

Section 2: Short Term Timing
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 a bull market.

Primary Sell
Now the big guys are buying insurance, talk about late to the party. Well clearly we might be at the limits but who knows, notice no bounce on Thursday or Friday. Overall not good until it gets better.

On Balance Volume
Very encouraging, the big volume players are still in the market, and some sign of enthusiasm as OBV exceeds the price.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded higher near 17. Yes I see it too, the VIX is over bought and should head downward. It does look like the market has topped out for "fear". But no guarantees.

VIX Evaluator
Don't forget this is an experimental VIX indicator. Well it turned a corner, so.... what does that mean? A new over all direction for the VIX? I have no idea.

S & P 500 Over 50 day
As you can see this market is stuck in a range. No one is willing to play the "edges" and so the market stalls. Yes I see there could be a snap-back here.

Green Arrow
Wait for a green Arrow before putting new money to work. Recent signals have been of little value until we break out.

Section 3 Allocations and Sectors 
OK Now you know  the market direction, where should you put your money?

Nasdaq Summation
This chart tells us if technology is a good bet now, general the NASDAQ leads the other indexes. The summation index can often spot weakness-strength before the price reflects it.
If you look at the S&P 500 over 50 day chart you see that we are buying only a few favorite equities and ignoring the the ugly sisters. In late June that was Semiconductors and biotech ... stars of the Nasdaq, as you can see that is loosing steam. Look this week as the NASDAQ price went up and the summation index did not. A troublesome sign.

Aggressive Defensive Chart
It still looks like we MIGHT be at an upturn like January 20, or this could stall longer as in May, my bet is more like May.

Bond vs Equities
Well equities 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. Nice to see a bet on the consumer, the fall back trade.

Bond Direction
The direction of the bond market at this time is critical. The Bond Bull began in 1981, we have has a 33 year bull market in U.S. Bonds. When it unwinds it will have major implications.  This fall, as the US federal reserves tries to take off the economic training wheels, interest rates are near zero and so have no place to go but up, then again many feel the economy cant take the shock. The 50 day average line (red) is clearly in a downtrend. The US treasury market is is twice the size of the stock markets. As investors flee bonds who will buy them from fleeing investors?

This chart mirrors what the Aggressive Defensive Chart says. Looks like this last bounce was heavy in to utilities, that tells me that investors want safety and perhaps they don't see a fed rate hike this year.
    XLF - Financial Stocks - Dark Blue dots
    QQQ - Nasdaq - Purple
    XLY - Consumer discretionary - Green
    XLU - Utilities - Red
    DEF - Defensive stocks - Brown

It is a global Market are there better place to put your money? Remember this chart is compared to the S&P 500 U.S. market. If it is falling these all might be along for the ride, even if this chart shows them rising. Look at the relief rally in Germany!
    XIU.TO - Canada - Blue
    DAX - Germany- Purple
    FXI - China - Green
    EEM - Emerging- Red
    EPHE - Philippians - Brown

Major Market Sectors
This is our newest chart, it shows the over all U.S. Market, from the equal weighted S & P 500. Below it are broad sectors you might want to look at. Well this says, Canada sucks (who knew) and some relief China might be back (hrumph) in other words this week you learned nothing form this chart.

    Canada Dividend Stocks vs S&P 500 in Canadian $ - Red
    Emerging Markets vs  EW S&P 500 - Pink
    US Bonds vs EW S&P500 - Blue
    Commodities vs EW S&P500 - Brown
    Gold vs EW S&P500 - Gold

Section 4: Special Interest

Trading with the Odds   
I was going to write about the importance in trading of playing the odds, but the more I wrote the more I realized this was more of a major trading lesson, so I finished it in the CME4PIF School under Lesson 9: Playing the Odds.Please give it a read if you want to understand the core of my trading philosophy.

What Works Now
On June 13, I profiles the self driving truck, and I hope you followed me in on Mobileye (ticker MBLY) the Israel based company behind self driving vehicles.  Don't forget the last few days most stocks are way down in a correction,

To learn more about Mobileye watch this kids video (seriously it is cool):

Short China
On June 27 I talked about an opportunity to short the Chinese stock market via an ETF called FXP. I hope you followed me in on my best trade in 2015, to a gain almost 40% on your investment in a couple of weeks. 
I bought at the (green arrow) and raised my trailing stop to only 5% on July 7 as the Chinese government started to impose trading rules, I was stopped out at the market open June 9 (red arrow).

I don't think the rout is over in China, as the long term up-trend is broken and the government rules will be a clumsy disaster. Lets zoom out and you can see what I am talking about. Of course I am ready to buy more FXP at the next sell off.

Well if you are paying attention I said there would be a bounce after a sell off, but I am pretty sure we are not done yet, China and Greece are not fixed yet, the U.S. dollar is still too strong and industrial production is dropping. As I said before:


So what I am thinking this week is . . .

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

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