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August 15, 2015 – Weekend Market Comment

August 15, 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 higher on Friday amid news regarding Greece and after the release of three more economic data sets while investors' focus shifted back to the Federal Reserve. U.S. equities hit session highs less than an hour ahead of the close as news about the euro zone confirmed it agreed to launch a new bailout program for Greece. Before then, the three major indexes traded in a range similar to that of Thursday.
(Oh Joy . . . Greece has more unpayable debt)

The Dow Jones Industrial Average closed up 69.09 points higher, or 0.4 percent at 17,477.4, led by DuPont and ExxonMobil being the greatest laggard. The S&P 500 closed up 8.16 points, or 0.39 percent, to 2,091.55, with utilities leading nine sectors higher and energy lagging. The Nasdaq closed up 14.68 points, or 0.29 percent, at 5,048.24 as biotechnology stocks fell 0.64 percent and Apple ended 0.74 percent higher.

What I Think

If you read my doom and gloom worries last week you were probably surprised the market exploded higher on Monday, but you did not have to wait long as the markets began leaking air for the next three day.

S&P 500 Index is the quintessential bellwether domestic equity index. The S&P 500 appears to be in a topping pattern, has tested it’s 200-day moving average twice recently, and is now in a crucial period where it is testing the 200-day moving average for a third time.

This is a very cautionary sign, especially since no upside breakouts have occurred after each test of the 200-day moving average. A break of the S&P 500 below its 200-day moving average would be technically negative.

Another source of concern is that the S&P 500’s 50-day moving average is nearing its 200-day moving average. A cross of the S&P 500’s 50-day moving average down through its 200-day moving average will generate a “death cross” signal, a very negative technical pattern, indicating the potential onset of a bear market.

But even closer to the death cross is the DOW 30. At first glance this is NOT surprising since 2 of the 30 are Exxon and Chevron. But as you will read further on in Section 4 Special Interest, this does really not explain the problem at all.

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. But clearly the light green short term average is in a nose dive. The dark green 50 day ema has rolled over. Even the 200 day red line looks ready to bend down.  So yes green is over red, but it might not be true for much longer. Don't put new money to work until this corrects.

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. For a better understanding of this chart, see Section Four... about the Auto industry.

Non-farm Payroll Employment Index
As a consumer economy America is dependent on strong employment. This chart alone is the brightest spot on this weeks charts! It is the only reason I am not stuffing U.S. dollars under the mattress.

NYSE New 52 Week Highs - New 52 Week Lows
Learn to use this chart it is in Lesson 5 of the CME4PIF School there is a link on the bottom of each weekly market comment.

Section one of the Market Comment asks the question: should you be in the market? Right now it does not look like it. 

Don't ignore this chart. My big concern is the yellow average line is pointing down in a big arc, something we have not seen for a while. I am not putting any new cash in long 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.

Now we have a two black blocks, still a clear downtrend.

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
Experts are buying insurance, by the bucket full.

On Balance Volume
Well the OBV line is breaking lower than the market and it continues. Not Good.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded lower near 13.  If you are betting man, I will bet you $20 we see a +20 spike in the VIX in the next month. Any takers?

VIX Evaluator
Don't forget this is an experimental VIX indicator. Interesting, it not only predicted the China/Greece mess, then it has calmed down. Might move up next month is my guess.

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. Still unable to nudge above 60%. NOT GOOD

Green Arrow
We have a Green Arrow, and I hate to contradict one of my indicators, but I still am not putting new money to work.

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.

Nasdaq pulls back. See below about Apple.  Wow look at this summation index -- risk off, head for safety:

Aggressive Defensive Chart
Risk is off defensive sector regains lead.

Bond vs Equities
The consumer is giving ground and bonds are doing well as fear leaps in.

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 US treasury market is is twice the size of the stock markets. As investors flee bonds who will buy them from fleeing investors?

This week more embracing bonds not fleeing, clearly fear of a market sell off is outpacing fear of a rate hike.

This is very very defensive. Utilities and financials lead, both are not a good sign.
    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. 

This week: Splat the global picture is nothing but down.
    XIU.TO - Canada - Blue dots
    DAX - Germany- Purple
    FXI - China - Green
    EEM - Emerging- Red
    EPHE - Philippians - Brown

Major Market Sectors
This 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 holding  and U.S. t-bills are in a run for the flight to safety.

    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

Auto Destruct
Today automakers are making sales by lowering credit standards, right now a monkey with a cup of peanuts can get a Jeep. .... that cannot last. Car buyers are borrowing more money than ever to finance the purchase of new and used vehicles. Borrowing terms are growing longer and credit standards more relaxed. Delinquency rates are rising. More and more capital is being raised on securities markets to lend to borrowers with subprime credit. Is an automotive credit bubble forming, similar in nature to that which plunged the U.S. housing market into turmoil and the nation into recession?

Outstanding automotive loan balances in the U.S. rose to $870 billion in the third quarter, almost a third higher than the total of two years earlier. The percentage of loans thirty days declared delinquent has risen, as has the percentage of loans overdue.

Most credit scores operate within the range of 301 to 850. Within that range, there are different categories, from bad to excellent.
  •     Excellent Credit: 781 – 850
  •     Good Credit: 661-780
  •     Fair Credit: 601-660
  •     Poor Credit: 501-600
  •     Bad Credit: below 500

In the third quarter, in the worst days of the global financial crisis, the average credit score for a new-car loan was 736; five years later the average had dropped to 713, as lenders relaxed their loan standards to include more buyers with credit problems. Over the most recent five years the average loan score for used-car buyers fell to 650 from 661.

The average duration of a new-car loan rose to a record 66 months and a record 62 months for used cars, as lenders wrote more five-year, six-year and seven-year loans so that buyers could afford the monthly payments on vehicles that have grown more costly.

Also another problem, particularly for GM is China's economic slow down has crushed forecasts for the automakers. GM sold about 3.54 million vehicles in China last year, more than a third of its global sales volumes, and the company plans to raise its vehicle sales volumes in China by 40% by 2018. However despite lowered prices on 40 models by between 10,000 yuan ($1,613) and 53,900 yuan ($8,694) on its three main brands sold in China—Buick, Chevrolet and Cadillac. GM lowered the price of its Cadillac ATS luxury sedan 6.7% to 418,800 yuan, and pared the price of a Chevrolet Cruze with a 1.5-liter engine 8.3% to 109,900 yuan. But the discounts are not working.  Inventories are already at record highs.

GM Cars unsold and unloved in China's Shenyang, Lianing province

For all U.S. automakers July saw a larger than normal jump in production. But despite easy credit and lower prices sales are not keeping pace.  What comes next is predictable ...layoffs.

Oh and for fun let see how far a car-salesman today will go to sell one . . .

A Weak Consumer.
Last week I was showing there is real trouble for Brick and Mortar retailers. Have a look at these three consumer stocks, Target, Urban Outfitters and in luxury, Tiffany

Bio Hazard
Strong patent protection and new wealth flowing from Obama-care boosted Biotech speculation to the roof, but the reality of PE ratios and a dose of common sense has returned. So yet another darling of the street for months hits a wall -- as Biotech stocks sell off across the board. 

The last time we had a wholesale abandonment of the biotech arena the results were indeed ugly.  Initiating in early March of last year and lasting six to eight weeks the sector was hit by a big wave of selling that swept over the entire biotech area. The big names were down over 30% but small cap biotechs were often down over 60%. 

OUCH - This is why I stay away from speculative stocks when the NYSE 52 Week High Low cart is this ugly.

Rotten Apple
OK, some pockets of weakness, that happens from time to time. However if you have been reading my postings, the real action in the market has been flavoring a few such as Netflix and Amazon. Now one of the forever favorite few has just dramatically fallen from favor - Apple.

In fact the fall from grace reflects real issues and may even point to a long term high cresting this summer. Apple has to much cash to sink, but since Steve Jobs dies there has been few bright spots. It is so important and profound, that  I have written a CME4PIF Thought, called Headwinds at Apple, on the important subject. Click here to read.

The Slow Down is NOT Just Energy
What do General Motors, JPMorgan Chase, Microsoft, IBM, Proctor & Gamble, Citigroup, Johnson & Johnson, Coca-Cola, Oracle, and Caterpillar all have in common?

1) They are among a long list of S&P 500 companies with negative year-over-year revenue growth.

2) They are not in the Energy sector.

With 80% of companies already reported, S&P 500 sales are on pace to decline (year-over-year) by 3.1%, the second consecutive quarter of negative growth.

With the U.S. stock market still higher over the past year, many have dismissed the decline in company sales. “It’s just energy” has been the most common refrain -- as around the world energy companies have been hit hard by the sharp decline in Crude prices. In looking at the actual data, though, we find that it is hardly “just energy” that is showing top line weakness.

Of the companies that have reported thus far, 48% have shown negative year-over-year revenue growth. Of these, 142 companies are outside of the Energy sector. Below is a small sampling of that group.

So think about it, recently I said, only a few darling stocks like Bitotechs, Apple and Banks were holding up the market. But the darlings are not so darling now . . . So what is left?

We just had six years of amazing gains with no real pull back for the last 3 years. Remember: Bulls Make Money, Bears Make Money, Pigs get slaughtered.  

China admits things are slowing down and they even lowered interest rates and devalued their currency. Not a sign of confidence in their own markets. But on a bigger picture, it tells you Europe and America are not buying what they are building.

Major DOW30 firms are loosing money due to the strong U.S. dollar and the DOW is very near the famous death cross. In fact the only ray of hope doing well is U.S. housing and perhaps rising employment. Employment is lagging indicator. Really, how long can employment rise when we see this week high paying manufacturing and energy sector jobs are in peril. Even McJobs are in danger, last week I showed the brick and mortar retailers  are in pain and even fast food is not selling well. If you think how diverse that list of major companies is that are under performing and you consider what the NYSE 51 Week High Low Chart is warning you of, it is hard to be optimistic about the next three months. 

In case you missed it -- here it is again:

Read my last 3 blogs, when the breadth is this bad, it is no time to be in equities. I am mostly in Cash. I am going on vacation. You might keep an eye on the NYSE 52 High 52 Low chart, there is a real time link in Lesson 5 of the CME4PIF school.

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."
- Arthur Schopenhauer

Cashing In
OK so if you have been following my advice, you like me are up to your butt in profits this past few weeks. My China short (last month) alone was about a 40% return, bwahaha.  So I am taking pity on Europe, trading a few American greenbacks for Euros. 

I am chartering a yacht for a week in Croatia. Then heading west a bit in Spain and Portugal, dining at a few Michelin-Star restaurants and shopping.

So you will not be getting a Market Comment until Sept 12. In place of that, I leave you with this link to watch Zoey analyze the market.  I figure it is about as informative as my Market Comment.

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

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