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September 6, 2015 – Weekend Market Comment

September 6, 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 more than 1 percent lower Friday ahead of a long weekend as uncertainty about the timing of a rate hike and Chinese economic growth continued to weigh. The major averages ended off session lows but still logged losses of about 3 percent or more for the week.

The Dow Jones Industrial Average closed down 272.38 points, or 1.66 percent, at 16,102, with DuPont leading all blue chips lower. Merck was the worst performer for the week, off 6.8 percent. Intel was the only blue chip posting weekly gains, up 0.35 percent. The Dow transports closed down 0.98 percent with Avis Budget leading most constituents lower. The S&P 500 closed down 29.90 points, or 1.53 percent, at 1,921.23, with materials leading all 10 sectors lower. No sectors gained for the week, with utilities falling 5 percent as the worst weekly decliner. The Nasdaq closed down 49.58 points, or 1.05 percent, at 4,683.92. Apple ended lower for a 3.55 percent weekly loss, down 1.01 percent for the year so far.

What I Think
Well I am back, did ya miss me? Well I certainly picked an active market to be away for 2 weeks. You might recall this graphic from July 4th Market Comment:
Well the predicted storm has arrived. But where now? Was that it or is there more to come? Well I don't know, no one knows for certain. That said, our charts will show us where the odds are for next few weeks.

Example experts side by side:

I do know that I have been short for the last few weeks and I made a nice bit of coin even while on vacation. I also draw your attention to the NYSE 52 week High Low Chart and I have no intention to go long in this market until this chart picks up. I don't catch falling knives.

Also there are only about 11 trading days before the FED September announcement. Talk about a bad time to play the markets.

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 is dropping.  So yes green is slightly over red, but you would be a fool if you could not see this does not look healthy. Don't put new money to work until dark green is rising again.

Industrial Production
America is nothing without manufacturing might. Industrial production is still holding up. This tells you that right now the odds favor a pull-back over a outright bear market.

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 this page.

At this time this is still our most important chart, it warned us of the coming trouble and it is still looking very weak. Don't ignore this chart. Yes I see that this could be a bottoming process. But better safe than sorry. 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. Oddly there has been enough of a dead cat bounce to even draw a new white up brick.

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. This is the worst Primary Sell chart in years and I would listen with great care. This could be the start of a long term bear market.

On Balance Volume
Well the OBV line is in line with the market, that shows there are some big guys still in the game. No guarantee but very good news.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 27.5. Hey 3 weeks ago I offered a $20 bet this thing would pass 20... pay up! Seriously though playing the market with the VIX over 20 is just begging to be smacked down. 

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 now it is going NUTS. This is telling you this sell off is real, real dangerous.

S & P 500 Over 50 day
Well folks this is the highway to hell with only 15% of stocks in the S&P500 above their 50 day moving average. Ya sure the revision-to-the-mean guys would be all over this trying to pick a bottom and I agree it could not be much worse, but I will wait to see an uptick.

Green Arrow
Wait for a green arrow before putting new money to work. Recent signals have been of little value until we break out.

Bleack! I told you to ignore that last green arrow . . . I did.

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 summation index is looking like a turn around is in the offing. Bargain hunters are scooping up a little cheep technology. A good sign!

Aggressive Defensive Chart
Risk is off bounce in MVV has stalled.

Bond vs Equities
Bargain hunters are buying consumer stocks, a very good sign. However the bond market is rising fast and that shows 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?

The last couple of days 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. Consumer discretionary leads, a good sign.However utilities are moving sideways and could march up again on market weakness. 
    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. Canada the basket case has a little run as there is hope for oil prices stabilizing. For more see Dennis Gartman yacking on CNBC.
    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

Bear in a "China" Shop.
In China the government says it will not be buying more shares in the open market. For now. This, after spending more than $200 billion to prop up the market since July. So the government is long a lot of shares; their investments are now well under water.

If this is not enough, the government has now begun arresting people on charges of manipulating the market, including, apparently, the head of London's Man Group, one of the largest hedge funds in the world. Man's China chairwoman, Li Yifei, insists it was only "questioning" for about 72 hours. In her words she was helping authorities investigating the recent sharp swings in the country's stock market, noting this did not mean she faced charges or had done anything wrong.

The message: invest or perish. Stay long. Selling is a crime. Welcome to the new open market system. Gee as a hard working middle-class Chinese laborer who toils all day making flip flops (for a couple of dollars a day) I just can't wait to invest my money in a market with no exits. . .

Here is FXP an ETF to SHORT the Chinese market. First suggest here in the summer.

China Dump
Meanwhile I found this chart on the Federal Reserve web page. This is China's non-gold reserves. Basically this shows how much of U.S. government debt (American treasuries) China owns. Yup that peak was about 4 trillion.

You might note they are heading for the exits 1/2 Trillion traded in so far . . . Note the peak holdings was August of 2014. China’s central bank has about a third of its $3.6 trillion of foreign reserves in Treasuries, making the country the largest overseas holder. The war chest sank by a one month record $93.9 billion this August as the People’s Bank of China sold dollars to bolster the yuan.

Now lets see how U.S. Markets have done since the dumping started. Here is the S&P500 the pink section starts August 2014. . .
Is it just me or is that when the market's wind started coming out of the sails about then?

You might wonder why China would do that? If you are a conspiracy theory type you would worry it might be a trade/currency war tactic to destabilize America, and it is true that if they sell enough, America might be in trouble. However the truth is China has no choice but to deleverage. China desperately needs to raise cash right now, because hard currency is leaving China at a record pace. I found this chart on J.P. Morgan's site. It shows $150 Billion dollars each quarter is fleeing China.

If China's selling is only getting started, just what does this mean for future Fed strategy. With $3.5 Trillion of U.S. debt to sell, who would buy it? That is approximately 25% of all the U.S. government's debt. A lot of  the rest of the debt is held by investors who will not sit quietly and watch their treasuries devalue to nothing.  How will the U.S. Government remain solvent if all of it's debt is liquidated and interest rates rise out of control?

I said it before I left on vacation and I will say it again, this market will be volatile and dangerous until the Fed makes a statement next week on a September rate hike and there will be many nasty surprises possible until Halloween. I see no reason for long investment just yet.

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