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August 8, 2015 – Weekend Market Comment

August 8, 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 slightly lower on Friday as news of an activist stake in American Express offset some of the pressure from oil's decline, following an in-line nonfarm payrolls report. The major averages ended the week about 1.5 percent lower, with the Dow Jones industrial average the worst performer. Stocks halved losses in afternoon trade, with American Express jumping more than 6 percent on news that ValueAct took a $1 billion stake in the firm. In afternoon trade, trade volume in shares of the financial services firm was nearly double its average for the entire day.

The Dow Jones Industrial Average closed down 46.37 points, or 0.27 percent, at 17,373.38, with with Wal-Mart leading decliners and American Express the greatest advancer. The S&P 500 closed down 5.99 points, or 0.29 percent, at 2,077.57, with energy leading seven sectors lower and utilities the greatest advancer. The Nasdaq closed down 12.90 points, or 0.26 percent, at 5,043.54.

What I Think

The guy above with the airplane oxygen mask on is how I feel, why did this thing pop out of the airplane ceiling? For now I am fine -- but this can't be good!  

If you have been reading the last few weeks, I am growing very concerned about both the 50day moving average on the Bull Bear lines and the market breath of the NYSE 52 week high 52 week low chart. Last week I said that if the OBV line gave up I might loose some faith. Well it did and so did I.

I urge you to carefully read the newest CME4PIF School, lesson 5.
The link there is in section 4 and again the school link is always at the bottom of each weekly market comment.   It will help you understand the problem.
I also urge you to take a moment and read this week's section 4 special interest. Seriously it is important.   

We are in a pull back, if it is a whipsaw head fake, then it is just some nerves about a fall fed rate hike and we are gong to bounce soon into a classic summer rally.  If not, it is a true mess and we will have a correction, no not 2008, but 20% is possible. 

What is worse is the market may not be roaring for a while and the reason is deflation. Here is a link to what David Stockman said, one of the all time big bears and boy has this guy been wrong for years (so don't panic). His fear is one many have, as Japan taught us, compounding debt, a hang over from real estate speculation and our aging population (people over 50) are not spending, results in stagflation/deflation. If they are right growth will suck for perhaps up to 15 years as we clear through the baby boomers. This is the same thing Harry Dent has been saying for eons, there is a ton of quotes on the web from him, most last over 1/2 an hour but here is Mr Dent saying it in a couple of minutes.   
So I don't know if this is a pull back or a crash, I never do. But I do know what I have said for weeks now. THIS IS NOT A GOOD TIME TO INVEST NEW MONEY, Only keep your stable investments, no high flyers, no juiced ETFs. 

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.

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.

This week all of section four is devoted to this chart. Please read 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. As you can see we have been in an overall uptrend since the 08 crash, but not at the present. Now we have a two black block, 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 VolumeWell 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 above 14. 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
week 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. Recently I predicted a rise to 60 and a fail. Oh I am sooo smart. :) More about the breadth problem below in section four.

Green Arrow
Wait for a green arrow before putting new money to work. Recent signals have been of little value until we break out. This confirms what I said about the NYSE High Low - wait to put new investments 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 makes new high but early only a lucky few stocks carried it there. 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 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 week more embracing bonds not fleeing, clearly fear of a market sell off is outpacing fear of a rate hike.

This chart shows that everyone wants a bit of tech (Google effect), but perhaps that was over done. 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. Germany in strong rally due to peace with Greece. Even Canada the basket case had a little run.
    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 improving 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

Take my Breadth Away:
If this is not your first time at this rodeo you do learn that markets are not a random walk, despite what professor Malkiel thinks.  Markets are more like the ocean tides and if you adept at timing the tides, you are able to make a bit of a living at this. The tools I use for timing are called technical analysis, through charts we gauge the market. Technical analysis is like a barometer, as the pressure changes the likelihood of changing weather increases, there are no guarantees.

Before a tsunami hits, you get one warning, the tides rush out, people gawk and record, some even walk out to the receding water to look, saying "how odd", then they run like mad as all hell breaks loose. Yes I am that concerned, it could be a tsunami. 

The "How Odd" thing that is happening is an epic narrowing of Breadth. Less and less stocks being bought and few getting all the new capital. To really understand this problem I direct you to the new Lesson 5 in the CME4PIF school.

(at the time of this writing there is a bug in in blogger, you might get sent to some other lesson, make sure you are on 5, keep trying, it works after awhile)

Now the Current Problem:
When I draw the Bull Bear Lines normally I give you less than a year to look at. Here is the zoomed out picture, I have charted 10 years of data. For the hard of thinking I even put some pretty pink boxes over the parts where the 50 day average crossed the 200 day and also the 200 day average stated to point down. 

Guess what I am worried about? Yes there was no need to panic in the fall of 2011, that is called a whipsaw, we might even get one now. However, wouldn't you have rather been on the sidelines, and got back in for that nice run when things were safer?  

Now lets zoom out to 10 years of the NYSE 52 Week High 52 Week Low Chart.

Same story, the chart is in three section, on top I placed pink where the smoothed yellow line was over the green line. In the middle I marked in pink areas where the histogram was unusually dipping red for long periods. On the bottom is the NYSE stock prices I put red lines over the declines. Now, lets zoom in, to the view I use in the Market comment, here is this week's chart:

The NYSE 52 week high 52 week low chart very seldom looks like it does now. In fact, normally we only get a tiny divergence and the market fails as it did in 1987.

It is true we have recently hit 52 week highs in a number of key areas like insurance companies. The treadmill continues on as fewer stocks participate in each successive challenge to beat the S&P 500’s all-time record high. Only a handful of stocks and sectors are delivering up-trends on their own. The 52-week low list swells and the percentage of stocks below their 200-day moving average begins to resemble a highway pile-up at rush hour.

Interestingly, percentage of stocks making 52 week new lows has been rising for awhile now, and when averaged over one month, is now higher than the percentage of stocks making 52 week new highs. Technically, the internals suggest that the bears are in control of the short term trend for the first time since October 2014.

Market watchers have noted that the trading range (difference between the market’s highs and lows) so far in 2015 is among the narrowest ever recorded. The fact that this sort of mass indecision is transpiring just a few percentage points away from record highs is a fascinating development and possibly presages a major turning point in the predominant trend.

This goes back to what I was saying about the current market breadth. Hedge funds and Mutual funds are piling in to the same crowded trades, Netflix, Amazon, Google, Tesla, Visa, Citibank and a bunch of Biotech stocks I can not pronounce.  So any measurements of market breadth are in unusual territory. It is why in the S&P500 we can't get more that 60% of stocks over their 50 day moving average.

Why Breadth Matters: Think of it this way, we are pulling a huge train -- the U.S. economy. To do that normally we use six engines. With the fed stimulating the economy it is a bit like our train is running down hill, it takes very little to pull the train. However, we are shutting down the engines one by one, and the hedge funds are giving their one favorite engine a lot of gas. Finally we only have one engine running. As long as we are on a down slope this looks to work, but with only one engine to pull this train, we will not be able to go up a mountain, like higher interest rates or weakness in China.

The Invisible Retail Demise

There is a clear shift in how the American economy makes money. The shift is to a that each year a greater part of the economy is about selling services and goods to the American consumer, than it is about making things. Manufacturing is lagging, and manufacturing stocks have been trailing the market for some time.  The heart of this is consumer discretionary spending. In the 1960s this was the category for Philco console TVs and GE coffee makers.  Today things have changed, I think of a 17 year old girl at the mall punishing daddy's Platinum Visa card with a cart full of sweatshop made goods from American Eagle or Aeropostal to complement her UGG boots and MAC makeup. On this shopping trip there is also a younger son who wants the latest  $70 PlayStation 4 video game, that he will play for a week.

One very respected wall street technician, Arthur Hill says the health of retail sector is the key reading on health of the U.S. economy. That retailer ETF uses the ticker XRT . It is made up of some 100 publicly traded retailers.

Here are the top 5 holdings and the current PE ratios of the retail ETFs's top 5 holdings:

Co Ticker PE ratio
Netflix Inc. NFLX 275 AMZN No earnings
Nutrisystem Inc. NTRI 35
Priceline Group PCLN 30
Expedia Inc. EXPE 20
Foot Locker FL 20

However, perhaps my idea of American retail sales is outdated. As you will see, it looks like even more malls will shut down and store fronts will mostly be on our iPhone.  The amazing thing is that for a an ETF that is suppose to represent retailers like Wall-Mart and Sears it is not until you get to the sixth retailer on the list until you get to a store you can physically visit. Also the top four holding have very high PE ratios. I think Netflix is an entertainment company, like Disney or perhaps a utility like Comcast, not the top retailer in the USA.

The Super retailer that was one of the only bright spots in the 2008 crash is on its knees - Wal-Mart hits a wall.

As a matter of fact if you look at most of the 100 retailers in the list, many of them, the true brick and mortar stores, are in decline already and are trading below there 50 day moving average. The American consumer is not well as we think... Oh this can't be good.

The Greater Fool Indicator

In the fall of 2007 a hard working truck driving  friend of mine said "I just don't see how anyone can ever loose in the stock market". Another friend of his was advising that his retired mother take out a home mortgage to finance a stock portfolio, and live off the gains. Fortunately he did not get around to that plan for his mother before the 2008 crash.

When I wrote After the Gold Rush where I predicted the end of the gold bubble, I had been contemplating it for a while, but the last straw was sitting in a bar listening to two old guys with a drinking problem, talk about how their broker had them in gold and they were making a killing.  Outside my office in a small low rent building a "WE BUY GOLD SIGN" went up. Also I was often asked (as an "expert") if I owned gold? My taxi driver in Vancouver in a heavy broken accent bragged about his purchase of a few solid gold Maple Leaf coins. Even young people were asking how to get in on the gold boom. That is the sign that the last fools are in a market. I call it the greater fool Indicator. It is logical when you think about it, the smarter players get in at the bottom at a low price, and the last people in are just greedy and following the herd. 

Well suffice to say, last week a cab driver gave me  a stock tip. Recently I have never been asked  so often for  market advice, particularly by people with a small amount to invest, or who are just starting out. Send in the clowns.

Oh, that can't be good.


In the markets right now we are getting some very "odd tides" and I have decided to head for drier land for a little while, perhaps it is nothing, in fact many think this is the little pull back they are waiting for, as for me I am getting a risk adverse. You can follow me and raise cash, or at a minim  sell your high flyers.

I know this is NOT the common advise, everywhere I turn people are piling in, even some experts I respect. Arthur Hill and Erin Hiem both feel this is a pull back in a bull market.
Here is a classic example. Tom Lee of FundStrat is very bullish he bases his optimism on high levels of short interest, a common factor that cause rally when the shorts get squeezed.  That is a lot of smart people who think I am wrong. For me at times like this I think:

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

- Warren Buffet

Stocks closed out the past week with losses, and look set for another week of choppiness, as oil moves closer to its 2015 lows and the commodities crush shows no signs of abating. Retail sales are beginning to fall off.  The Fed remains a key obsession with traders poised to react to each piece of incoming economic news for what it may mean to the Fed's upcoming interest rate decision. Mutual funds and hedge funds are short on new capital. My loyal readers are well aware that China is on the edge of an abyss, the real estate sector is falling apart and the Shanghai stock market is only held back by an insane attempt to prop the market up.

Let the charts guide you. Beware a falling OBV line. Don't pour in new money and chase when the NYSE High Low graph looks this sad.

Tide is out

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.