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October 10, 2015 – Weekend Market Comment

October 10, 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)
Stocks close higher ahead of earnings; S&P posts best week of 2015. U.S. stocks closed higher Friday, wrapping up a solid week of gains, as investors digested indications from the Fed on the timing of a rate hike ahead of earnings season. Stocks rallied Thursday, with the S&P 500 and Dow Jones industrial average closing above the psychologically key levels of 2,000 and 17,000, respectively, for the first time since August. The three major averages remained within 10 percent of their 52-week highs, or out of correction territory. The Russell 2000 closed above its 50-day moving average but remained in correction mode, off a touch more than 10 percent from its 52-week high.

The Dow Jones Industrial Average closed up 33.74 points, or 0.20 percent, at 17,084.49, with UnitedHealth leading advancers and Intel the greatest laggard. DuPont was the greatest gainer on the week, while Nike was the only decliner for the week. The S&P 500 closed up 1.46 points, or 0.07 percent, at 2,014.89, with information technology leading five sectors higher and energy the greatest laggard. All sectors gained for the week, with energy the best performer. The Nasdaq closed up 19.68 points, or 0.41 percent, at 4,830.47.

What I Think
Well I think I said it perfectly in my post A Bad Idea Whose Time Has Come. In that Post I said we would get a rally and to avoid it. Taking about staying cash Specifically I said "There is an 80% chance that in a few weeks this will be the wrong move." Well that is what happened. The average stock is up more than 6% since equities hit their recent lows on September 29th.  But this rally has been much different than prior ones we’ve seen over the last year or so.  That’s because this time markets have been led higher by the most unloved, beaten-down names, while prior market darlings have lagged.

However, you must decide if you are serious about protecting your money or if you just want to ride every turn around. Never chase the market the pros say and for good reason, violent upturns can quickly be violent downturns.

There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.” — Mark Twain

Believe me to miss this run was painful. Each day this week the market roared ahead, Thursday was particularly painful. That said, I am reminded that volatility is way up. October is often an up month, but when it is not, oh boy is it not. I still recall October 1987 and as Bloomberg pointed out LTCM mess in 1990 or even a recent volatile October 2011. Even the crash of 1929 was in the fall.

One particularly dangerous area is earning due out this week. After a multi-month period of previously strong dollars, most earnings are expected to be luke-warm especially at media giant Netflix. But one bright spot is financials. On Wednesday we’ll hear from Bank of America (BAC) and Wells Fargo (WFC) in the morning. Thursday morning we get reports from Citigroup (C), Goldman Sachs (GS). Rolling Stone framed Goldman as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." Well that sounds profitable, and despite record recent litigation expenses, this week I think they will not disappoint.

The Bull Bear Lines are Red over Green, this is still a bear market and when the bears are on the street, it is best to avoid temptation.  Also generally markets are in Mean Reversion cycles. For a tail of caution, you might look at some charts below, particularly the S&P500 over 50 day and the VIX both very oversold. In the Sectors graph I expect a rotation out of consumer in to Financial equities and that is often the sign of more trouble ahead. Gold and Materials look strong as they did back in 2007 before the trouble.  That said, this has been an impressive bounce and if you are under age 45 you might have used this run as a chance to pick up some bargains. You will find some ideas in section 4 What Works Now. 

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
Learn to use this chart it is in Lesson 1 of the CME4PIF School there is a link on the bottom of each weekly market comment. 

Looks like the light green line has recovered most of this sell off. That was quite a bounce!

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 It sure looks like it wants to cross. Lets see what next week gives us. 

Industrial Production
America is nothing without manufacturing might. Still net positive but we are really skirting close to that average line.
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.

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. 

Well as you can see two white blocks up!

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 selling their insurance. The Pros do not sees much trouble ahead.

On Balance Volume
Now this is VERY interesting. The big boys are STILL in this market. VERY Positive.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 17. It is very dangerous to play the market when the VIX is above 20, and it is not so if your really brave this could be your entry point. That said, look at the CCI (top of chart) well in to oversold (brown) territory.

VIX Evaluator
Don't forget this is an experimental VIX indicator. Looks like it wants to head up again. Volatility subsides a bit.

S & P 500 Over 50 day
Well here is your bounce. Some 75% of S&P 500 stocks are now above their 50 day moving average. A positive sign. However that is very bullish considering that many are expecting a weak earning season.  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. No Green Arrow yet, this bounce has been impressive but look at the blue histogram is it 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.

Aggressive Defensive Chart
The Midcap 400 is on fire this last week But as you look at the first two indicators both look overbought and only a few days from a turn.

Bond vs Equities
Consumer stocks are leading the bounce and bonds are under-performing. 
But again we near the limits.

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 recently have under-performed but the 50 day EMA is still up, and if there is an October rush to safety expect it to be in U.S. treasuries.

Financials tank as teh cynical give up on a future rate rise, but it looks very over done.
    XLF - Financial Stocks - Dark Blue dots
    QQQ - Nasdaq - Purple
    XLY - Consumer discretionary - Green
    XLU - Utilities - Red
    DEF - Defensive stocks - Brown

If you wanted to play the possibility of a bounce in financials -- look at Prudential.

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. 

Well in the it can't get worse field recently the experts have been talking the trouble in emerging markets, well there is your contrarian buy signal.
    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. 
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

What Works Now
Whatever was out of favor is back in fashion. Materials have been doing well so here is long forgotten Teck Resources.

The U.S. dollar is falling, perhaps you can finally let your inner gold bug loose.

The whole materials sector ETF ticker: IYM

Emerging Markets are perking up

The price of Oil sucks but refiners are making a bundle as the price at the pump is slow to drop. Here are Canadian refiner Parkland and U.S. giant Chevron.

Funny Business
Perhaps the greatest insight in to the markets today, this just in from London.

Market Forecast
Market Forecast Timid Bear

You should be in CASH

There are bull market rules and bear market rules and effectively, bear market rules tell us to expect bearish outcomes in a bear market. The recent short-term rally is unexpected and dramatic and has certainly given me pause as price has managed to close above the 50-EMA on the $SPX for a few days now. 

I said previously I expect volatility until Halloween and I have not changed my mind on that. Breadth indicators continue to show marked improvement, especially the 52 week high low looks nearly ready to cross. The percent of S&P500 stocks above their 50-day average turning up strongly, almost too strong! A lot of the run up is from a weaker dollar, stronger oil prices and a fed that can't raise rates. Clearly the bulls have quite a party going and I might break my discipline and buy some of the above (what works now) plays this week but I do not trust this bump. I recall in 2007 riding a fall bump, I actually made a lot being long Nasdaq futures in the green area. But the party ended -- In October.

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