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July 18, 2015 – Weekend Market Comment

July 18, 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 (link at the bottom of this page).

The Blah Blah Blah (courtesy of CNBC)
U.S. stocks closed mixed on Friday, but posted solid gains for the week, as strong earnings boosted the Nasdaq to another record high. "Today Google is certainly in the spotlight because it's having one of it's best days in the history of Wall Street," said Daniel Deming, managing director at KKM Financial. "It's amazing you're seeing this market being able to recoup once (bad news) is taken away. ... I think this has been a classic study in how the psychology of the market really has a big impact." 

The Nasdaq Composite jumped nearly 1 percent to a new closing and intraday high as Google Class A stock briefly surged more than 16.5 percent to above $700 a share. The combined rally in both Class C and Class A shares—with a trade volume about 7 times normal—for a one-day increase of $65 billion at the close was the biggest one-day gain in history, according to S&P Dow Jones Indices.

The Dow Jones Industrial Average closed down 33.80 points, or 0.19 percent, at 18,086.45, with Intel leading decliners and IBM the greatest advancer. The S&P 500 closed up 2.35 points, or 0.11 percent, at 2,126.64, with energy leading nine sectors lower and information technology the only advancer. The Nasdaq closed up 46.96 points, or 0.91 percent, at 5,210.14.

What I Think
Well Google did very well at $672 a share, considering "Mr. Market" was only asking about $125 a share in October 2008. Of course no one wanted to buy it then and now some experts call it a bargain.    

We are stuck in a problematic situation.  Since the year 2000 the average small-cap stock in the Russell 2000 Index is up 151% while the average blue chip in the Dow Jones Industrial Average has gained only 57%. As a result, small-cap stocks now seem absurdly overpriced. According to investment research firm MSCI, the average small-cap stock’s price-earnings ratio is 29. The historical average P/E for stocks is about 15.

Normally we would fix that  buy buying large caps, in a classic arbitrage play. However, Wall Street is boycotting large caps, because the U.S. dollar is too strong and America's biggest companies make money on world wide sales.

Add to that the Chinese stock market if in a very fragile state. An we are all waiting to see it the the band-aid fix they put on last week will hold.  

As I said last week, the problem in China is that they are dealing with a moral hazard, the government has in effect said they will hedge the market to protect participants from all down side risk while encouraging rampant speculation. Of course one day the intervention must stop. For naive investors in China it is a bit like the story of a turkey that is fed 1,000 days in a row. The feedings reinforce the turkey’s sense of security and well-being, until one day before Thanksgiving an unexpected and uninvited "bad event" occurs. All of the turkey’s experience and feedback is positive until fortune takes a turn for the worse.

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. Notice we hit the 50day average and stopped.

Industrial Production
America is nothing without manufacturing might. This recent dip is not a good thing. Looks a little better this week, at least it is not falling.

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.

Poof an uptrend bloc appears!

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
Looks like the Bots/Alogs and the traders are happy to get back in. After all China and Greece are fine . . .

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

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, broke below 12, some time in the mid 11 is generally the bottom (of fear) and the top of the recent market advance.

From late March through mid-June, equity markets were fast asleep, and volatility was non-existent.  The VIX volatility index (also known as the “Fear Gauge”) had dipped down into the 12s, and it was a snooze-fest on trading floors.  At the end of June, though, Greek debt problems popped up in the headlines again, and then China’s stock market decided to collapse.  For a couple of weeks there, the bears came out of hiding, and volatility spiked.  As shown in the chart below, the VIX index rallied up to 20 in a very short period of time. But in even less time than it took to get up to 20, the VIX has moved back down, and as of today it’s at a new 2015 low!  Talk about a quick turnaround!

VIX Evaluator
Don't forget this is an experimental VIX indicator. Interesting, it not only predicted the China/Greece mess, now it has calmed down . . .

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. Will we stall out at the 62 as before?

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.

Well we is all loving the NASDAQ ever since Google kicked butt!   

Aggressive Defensive Chart
Very interesting, big cap defensive type equities are out doing the midcap 400. Is the truth about small cap becoming obvious? Or is this the end of the bounce. 

Bond vs Equities
Ah the consumer is selling off and bonds are being bought . . . humm nervous, weaker market?

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 shows that everyone wants a bit of tech (Google effect), but perhaps that was over done. Bet you that brown DEF line starts upward this week.
    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 now ending relief rally in Germany! Canada you still suck!
    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

FV - Autoilot

The First Trust Dorsey Wright Focus 5 ETF (ticker FV) is a very interesting ETF, what it does is buy 5 of this week's best performing ETFs from the First Dorcy's family of ETFs. In other words it a sector rotating ETF, giving you kind of mutual fund picking but with less "management" lowering fees and mistakes.

The Good News:
There are many advantages to this ETF, first off it is very broadly diversified so you could put a bigger part of your portfolio in here, and not be taking large risks. It also is very stable, it has a very consistent standard of deviation, about half of the normal S&P500 ETF so you will see a nice steady rise in value. Also to date it is kicking the S&P500 for return. Check the chart FV is in blue and the S&P500 is in red:

The Bad News:

Well first off the fees, at nearly 1% it is a very expensive ETF. Also I think it also pays ETF fees on a hidden level from the 5 ETFs it buys (double whammy).
First Dorcy is a smaller ETF firm so they are going to offer a lot less ETF for the top 5 to pick from, than say if the same product came from iShares or Powershares. Also revision to the mean tells you there will be times when this find putts you into the five most endangered ETFs during a big market reversal.

The Granny Fund:

Sometimes people ask me how to play the markets without a lot of research and needing to pay close attention, I call these Granny Funds, since they could be a way that even your grandmother could play the markets.

This First Dorcy 5 ETF might be a great choice for investors who want the hands off results of a professional adviser without the huge fees. If you were to combine this with the Bull Bear Lines you just might have a great way to invest a modest portfolio with great returns and few decisions. If you were a bit more of a research oriented investor you could use this and some bonds as part of a Naive Graham System.

GOLD looses Luster
Well you all know I have been predicting the death of gold since the summer of 2012, then at $1700 an oz and if it were not for Chinese hiding gold bars under their mattresses it would have been worse. Check out Barrick, or the juiced short gold miner ETF DUST:
Of course the source of the problem, china. Read This:
Gold plummeted from $US1132 an ounce to $US1092 in the space of minutes today after 5 tonnes of bullion was unloaded on the Chinese market.

What Works Now
My buys this week were all ETF's. in Canada ZBK, in the USA FV, ETB, PBJ, and PBS. I still hold Mobileye. 

We are in an uptrend, as part of a recent bounce. It is still a bull market so: no going short against the American market. After all we just hit a 52 week high in the NASDAQ and it is a BULL MARKET. This has been third-longest period in post-war history without a correction. That alone should make you nervous. We are in a summer consolidation so I do not expect a big break out, and with the VIX in the 11 zone, you might buy some protection. I have no idea when the big pop in China's markets will be, but if it happened this summer that would be no surprise. 

I said last week, this bounce was going to be dangerous, and my opinion has not changed. My stops are tight and I have little faith in this over-bought market. One hiccup in the OBV chart or the NYSE New High New Low chart  and I am greatly reducing my exposure to risk.

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.