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July 4, 2015 – Weekend Market Comment

July 4, 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 (courtesy of CNBC)  U.S. stocks closed little changed on Thursday, the last day of trade for the week, as investors eyed a soft jobs report and were on edge ahead of Greece's Sunday referendum. The major averages had their worst trading day of the year on Monday and failed to recover those losses, ending the shortened week lower by about one percent or more. The Dow remained in negative territory for the year after falling into the red on Monday.

The Dow Jones Industrial Average closed down 27.83 points, or 0.16 percent, at 17,730, with Intel leading gains and DuPont the greatest laggard. The S&P 500 closed down 1.16 points, or 0.06 percent, at 2,076.27, with utilities leading four sectors higher and materials the greatest decliner. Utilities was the only sector to post gains for the week. The Nasdaq closed down 3.91 points, or 0.08 percent, at 5,009.21.

What I Think
Greece Votes NO. Global market are selling off, Futures are dropping as I write this, including the S&P500 off over 2%, the German DAX is off 6% and global oil prices are dropping now well under $60 per barrel. It should be mess on Wall Street Monday.

The overall direction is looking pretty clear, the leftist leadership of Greece is publicly saying they are holding back to get a better deal and they know they are putting the European leaders in a position where they must refuse Greece. If the ECB does not send cash there will be riots in the streets of Athens, if they do give in, Italy and Spain will be putting their had out too.

In the long run, the worst case does not look so bad. Prime Minister Alexis Tsipras gets he wants, dignity from a return to the drachma and a socialist utopia with vast prosperity flowing from his loving government (sorta like Cuba). The European Union gets stronger, minus it's second most backward cousin (yes Czech Republic I am talking to you), and a bit of a reality check for southern Spain and Southern Italy. Plus, sipping ouzo by the pool in hotels in beautiful Naxos will be a super bargain in drachmas and Germany can ship a lot more VW Beatles with a Euro at parity.  So What?

Yes the news is about Greece, but perhaps that is a distraction. If you were paying attention last week you also saw a pull back in US industrial production, a very strong US dollar, a big sell off in China, an impending end to quantitative easing (ie a rate hike coming), a global war on oil prices, a lack luster jobs report. To top it off this week's pull back officially wiped all of 2015 gains off the DOW.  

Last week I said we should expect a buying opportunity after this sell off, but I am not so sure we are done, in fact next week I expect a  snap-back rally for the shorter term, but the long term Models lead me to believe it will be very short-lived. The indicators and price action still leave me with the opinion that this snap-back rally (if it happens at all) will finish soon and set up a bearish decline.

You might have notice I have moved some charts around and add some now charts. I always did use these charts but I am letting you see them too. 

I have expanded section 1 on the big picture to show more about the economy and renamed some sections. Section 2 is the new home to some indicators. Section 3 now gives more clues as to where to put your money to work. 

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 and so far that is what is happening. A month of sideways is now four weeks old.

Industrial Production
America is nothing without manufacturing might. This recent dip is not a good thing.

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. 

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.

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, wait to bounce. 

On Balance Volume
Very encouraging, the big volume players are still in the market.

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" and is ready for a snap back upward from here.

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. A troublesome sign.

Aggressive Defensive Chart
It still looks defensive but yes 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? See Liquidity Crisis.

This chart mirrors what the Aggressive Defensive Chart says. Last week we worried that the new trend is safer stocks like the defensive ETF and utilities. This does not look good.
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.
XIU.TO - Canada
DAX - Germany- Purple
XLY - Consumer discretionary - 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. 

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
In this section I will introduce some new ideas or interesting things in the market.

I would like to expand on what I said last week because it is the most important thing to understand.

The Greek crisis might be filling the headlines but there is much more. 

A liquidity crisis in Bonds
A melt down in Chinese equities.
A recession in Canada due to collapsing oil prices
A strong U.S. dollar kills exports and hurts emerging markets 
Falling U.S. Industrial Production (see my chart in section 1 above)
Weak oil demand shows true state of economy

In fact I am so concerned about the China sell off I wrote the first CME4PIF thoughts article in a year. Click here to read The Crash In China.

The No vote this weekend in Greece will kick off a global equity sell off, the only real question is how big will it be. But in fact Greece is a tiny nation of little consequence in the big picture. Jim Rogers said it best.  Greece is much less of a systemic risk, as Europe has strengthened its safeguards and institutions.  The real bad news is that it will compound the sell off in Asia, as Chinese investors panic to protect their savings. This will lead to money piling in to US dollars and cutting the forecasts for larger U.S. global companies. As the DOW falls, so will the other highly correlated markets as the computers hedge the spread. This could get messy. 

The indicators and price action still leave me with the opinion that this snap-back rally will either not happen or will finish soon and set up a bearish decline. The Bull bears still say this is a bull market, so either I will buy a dip or watch a trip, but for now I am on the sidelines.


I try not to sound too alarmist, but what the heck, I leave you with this thought . . .

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.