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September 19, 2015 - Weekend Market Comment

September 19, 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)
Dow closes off triple digits as Fed uncertainty weighs. U.S. stocks closed sharply lower Friday as investors weighed concerns over the implications of the Federal Reserve's decision to keep short-term interest rates unchanged. Analysts also noted Friday trading would likely see more volatility due to quadruple witching, the expiration of three related classes of options and futures contracts, as well as individual stock futures options. The Dow Jones industrial average and S&P 500 closed down more than 1.5 percent, mildly negative for the week. The Nasdaq composite was off about 1.4 percent on the day and eked out a 0.1 percent gain for the week. The Dow and Russell 2000 closed in correction territory, or more than 10 percent off its 52-week high. The S&P 500 and Nasdaq composite are about 8 percent below their 52-week highs. 
The Dow Jones industrial average closed down 289.95 points, or 1.74 points, at 16,384.79, with Merck leading all blue chips lower. UnitedHealth was the greatest advancer on the week and JPMorgan Chase the greatest laggard. The S&P 500 closed down 32.12 points, or 1.61 percent, at 1,958.08, with energy leading all 10 sectors lower. Utilities was the best performer on the week and materials the greatest decliner. The Nasdaq Composite closed down 66.72 points, or 1.36 percent, at 4,827.23.
What I Think
Last week I said:
"I don't doubt that when the Fed meeting comes they again will not raise rates and the result will be a one day surge follow buy a "sell the news" retreat. But then what? We still have real weakness from China and they continue to dump U.S. treasury bills. Commodities are in the tank and demand everywhere is slowing.  I say it has only been an 8% pull back and the bounce has only been on for a week, so for me the route is to stay liquid just a little bit longer."

Good advice huh? Well the surge was not a day, it was more like an hour and then in came the sell orders.  But the point is you could see it coming, the rally was a bull trap all based on people thinking, hey the fed would not dare raise rates now. After that was over there was nothing left to ponder that was good.  China is going to be in a recession and they only have one customer, the USA. Looks like the USA has bought all the plastic junk it can from Family Dollar and now China has nothing left to offer. Well we have seen this movie before, the US is not buying internationally is followed by the off shore manufacturers not buying raw materials, the commodity nations stop expanding, the sweatshops stop sweating. So the world stops buying from the USA and that tanks the whole thing.
Add to that the run up in financial stocks that NEED a rate hike to be profitable and the sell off is predictable.  I have been saying for a while to avoid financial stocks until the rate hike is real, well now you know why. Below is the chart of a microscopic regional bank in Florida called Zion, but it is also a chart of the crowds sentiment toward the September rate hike. About Valentines day a rate hike in the fall was "in the bag" (click to hear Fischer say it). As the China mess came on the horizon the smell of  contagion slowly gripped the markets. The bear trap started in the third week of August and now, the swan song as the stock goes nowhere in two years. 

With the exception of the OBV chart and the lagging economic indicators I see nothing much good on the charts right now. This is dangerous territory and on the aggressive defensive chart I will show you it has been bad for a while.
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
We have a cross, the red is over green and this is officially a bear market. Now there is a chance that this will just perk right up again or this could be the start of a crash. I would not take any aggressive positions until Green returns atop of red.

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.
Well as I said last week we owe a debt to this little chart for tipping us off to the recent correction. Again I would sit on my cash until green is over yellow. Oh no things just got worse, notice the little arrow that says "This is NOT good." We really could be in bigger trouble than I thought.

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 dat was a hell of a bounce and fast. But in this case I think dat was da end of dis trend . . .

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. Still very dangerous.

On Balance Volume
Now this is VERY interesting. The big boys are STILL in this market. Yeah its heading down but no running for the exits yet. Positive.

The CBOE Volatility index (VIX) considered the best gauge of fear in the market, held above 22.5.  It is very dangerous to play the market when the VIX is this high.

VIX Evaluator
Don't forget this is an experimental VIX indicator. Looks like it wants to head up again. Volatility is here for a while and speaking in the Financial Times El-Erian Agrees. 

S & P 500 Over 50 day
Well here is your bounce. Some 35% of S&P 500 stocks are now above their 50 day moving average. A positive sign. I would bet money this turns down next week. 

Green Arrow
Wait for a green arrow before putting new money to work. Recent signals have been of little value until we break out. Well it was a hell of a dead cat bounce. It even caused a green arrow, but ignore green arrows when bull bear lines look this bad. This bounce has been impressive and I think it is already over.

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 bounces and more importantly the summation index is turning around. Very Positive but there is growing selling in Biotech, I would not be surprised if this chart failed next week.

Aggressive Defensive Chart
The market is dropping. The Midcap 400 expressed by MVV is being sold hard, a very strong signal. Last week I pointed out it already was almost overbought,  headed for a Bull trap well pick your indicator below the whole thing is looking very sad. Look at the green/brown lines in the third section. About July 20 Defensive stocks started to out perform aggressive.
Over the long term you make more money holding value over growth, but that is because they both get nailed in turns downs, but value not as bad as growth. For me I say hold growth and go to cash or bonds in turbulent markets.

As you can see this mess starting in late July and is only getting worse.

Bond vs Equities
Consumer stocks are leading the bounce and bonds are under-performing. Bonds are outperforming equities, a sign of fear.

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?
Bonds have pulled back to the rising 50 day moving average. But now are going higher.

This chart shows that everyone wants a bit of tech (Google effect), but perhaps that was over done. Utilities lead, but so does the tech heavy Nasdaq -- Weird!
    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 the U.S. market is falling these all might be along for the ride, even if this chart shows them rising. When America has a cold the world gets the flu.
    XIU.TO - Canada - Blue dots
    DAX - Germany- Purple
    FXI - China - Green
    EEM - Emerging- Red
    EPHE - Philippians - Brown
Yes I see above the dot line of the Canadian TSX going up strongly, but that does not tell you things are great in Canada, it just is not falling as fast as the USA. When we look at the gold and oil filled TSX by itself, it does not look as good. Down almost 5% in the last 2 months. 

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. 
I am surprised to see emerging markets doing better. Must be a case of no one left to sell.
    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

With or Without You
Following a two-day policy meeting, Fed Chairwoman Janet Yellen said Thursday that policy makers had decided to take “a little bit more time to evaluate the likely impacts” of recent market volatility on the U.S. before acting on interest rates. 
OK the Federal Reserve did not raise interest rates . . . but that does not mean rates did not raise.  Libor, the London inter-bank lending rate, is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest.
Banks don't just lend money to one another whenever they like. There is a system. Every day a group of leading banks submits the interest rates at which they are willing to lend to other finance houses. They suggest rates in 10 currencies covering 15 different lengths of loan, ranging from overnight to 12 months. The most important rate is the three-month dollar Libor. The rates submitted are what the banks estimate they would pay other banks to borrow dollars for three months if they borrowed money on the day the rate is being set. Then an average is calculated.

Market Forecast

Market Forecast Timid Bear

You should be in CASH
So here we are, our indicators in section one say to wait, it is too early to jump back in,  I say it has only been an 8% pull back and the bounce has only been on for a week, so for me the route is to stay liquid just a little bit longer. Yes we see positive looking charts. In particular the NASDAQ summation index looks very strong. OBV is keeping pace that is nice too. But I still think this is a potentially dangerous market until Halloween.

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