Skip to main content

October 17, 2015 – Weekend Market Comment

October 17, 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 Friday for a third week of gains as mixed data pushed out expectations for the timing of the first rate hike. The major averages extended gains as the close approached, recovering from an intraday decline, to close up nearly 1 percent or more for the week. The S&P 500 posted its first three-week win streak since May. The Dow Jones industrial average and Nasdaq composite had their first three consecutive weeks of gains since February.

The Dow Jones Industrial Average closed up 74.22 points, or 0.43 percent, at 17,215.97, with General Electric leading advancers and Caterpillar the greatest laggard. The index closed the week up 0.77 percent, with Nike posting the most gains and Wal-Mart the greatest laggard. The S&P 500 closed up 9.25 points, or 0.46 percent, at 2,033.11, with health care leading nine sectors higher and industrials the only decliner. The S&P ended the week up 0.90 percent, within 5 percent of its 52-week high. Utilities was the greatest gainer for the week, while materials and industrials were the only negative sectors for the week. The Nasdaq closed up 16.59 points, or 0.34 percent, at 4,886.69. For the week, the index outperformed the other major averages with a gain of 1.16 percent.

What I Think
We are technically still in a bear market (Bull Bear Lines red over green). But is this Bear just a Ghost? The Bulls have made some impressive gains and I am very close to loosing faith in this bear and going long. Of course if this is a bull trap that is just what the market would want. Again Thursday was particularly impressive, stocks were up all day. But it is a bear market and in a bear market you must expect bearish outcomes. My last bearish hopes ride on a recent spike in utilities and defensive stocks also a further manufacturing slowdown. I also am cautioned by the Aggressive Defensive chart that has turned defensive. In Section Four this week I point out six possible concerns in the market, two based on the calendar and one based on a disagreement with the bond market and two about the economy in general. It is not all roses out there folks.

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. 

Yes I see the end of day number broke the 200 day moving average. It look pretty clear this bull will close the gap and we may soon have dark green over red. But for now this is a bear market.
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.

Hooray! Yup Green is now over yellow, and so if this market does not sell off early next week then I too must be a believer. 

Industrial Production
America is nothing without manufacturing might. 
 OH THIS IS NOT GOOD!  VIOLATION of the 12 period moving average.
I gotta say you seldom see this -- unless there is real DEEP trouble ahead. In fact in the last 150 market comments I have made there has not been a violation. The last time I saw this was 2008. This is a lagging indicator generally it appears when it is already too late and the sell off has begun. Has it?

Non-farm Payroll Employment Index
As a consumer economy America is dependent on strong employment.

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. 

Clear enough 2 white blocks -- market 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, but experts can get caught in Bull traps too.

On Balance Volume
Now this is VERY interesting. The big boys are STILL in this market and doing well. This can only end two ways, ether the bear market is history or some major hedge/mutual funds will be having an awful quarter to end the year. 

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 15. Confidence returns on the street.

VIX Evaluator
Don't forget this is an experimental VIX indicator. Looks like it wants to head straight down again. No fear at all.

S & P 500 Over 50 day
Well here is your bounce. Some 85% of S&P 500 stocks are now above their 50 day moving average. A positive sign. However looks like no where to go but down. I would bet money this turns down next week. But then again I foolishly said that last 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 look at that we have anew 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. Notice the loss of momentum in MACD (the blue histogram).

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.
Nothing but bullishness here. Very Positive.

Aggressive Defensive Chart
Looks toppy. But at this moment defensive equities are leading aggressive equities. A bear warning.


Bond vs Equities
Consumer stocks are flat and bonds are under-performing. Fairly Bullish. However the odd bit is in the lower two panels. Normally these are mirror images, but recently both bonds and equities are going higher. 

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?

In the big pictures bonds still do well and you can't have it both ways, bonds and equities don't rise together for long. 

I said the financials would bounce probably  on good news from Goldman Sachs. Instead Goldman sucked and the financials still went up, especially regional banks. Perhaps a bet on higher interest. Also CitiGroup and Morgan Stanly did have decent numbers. Although I wonder about Morgans management wasting a bundle redoing what already was the tackiest display in New York.   Still this is Bullish.
    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.

Embrace the suck folks - the world is stagnant. 
    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 than the USA. Must be a case of no one left to sell. Gold retreats, probably over done.

    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

Well this bear might be on really thin ice. However, in our ghost of a bear theme, lets look at a six interesting bear arguments that are still standing, despite the recent run up.

Beginning next Wednesday at the close, history sides with the bears.  From the October 21st close to the October 27th close, here are the annualized returns on the following major indices:
  • S&P 500 (since 1950):  -45.19%
  • NASDAQ (since 1971):  -75.79%
  • Russell 2000 (since 1988):  -47.19%

Options Expire
Our recent bullish Thursday was the third Thursday of the month. That means it was last trading day before the Friday Option Expiration day.  In the last eight such dates a peculiar pattern has emerged. A run up to option expiry and then a pull back. Gentle at first and then reversing half way to the next option expiry date. 

Mr Bond Disagrees
There’s a saying on Wall Street that the bond market is smarter than the stock market. The idea is that bond traders are professionals who are especially sensitive to changes in economic and financial conditions and adept at weighing risk and reward prospects. Professionals also buy and sell stocks, but so do the man of the street and day traders in their dorm rooms.

The saying may, or may not, be true. But when the paths of stocks and high-yield bonds – which have similar risk profiles – diverge, Wall Street pays attention. High-yield bonds, after all, were the canary in the coal mine in 2007. The extra yield, or premium, they carried over 10-year Treasury issues began to fall in June of that year, heralding the global financial crisis. 

It is not a perfect indicator and it’s too early to tell if history is repeating, but as stocks (lower panel) continued to rebound in October, high-yield bond prices were eroding vs U.S. treasuries (upper panel). 

High Risk bonds are corporate bonds with less credibility than the big guys, many of these bonds were used to finance fracking and shale drilling. They also were used to buy commercial real estate that is very depressed. America is now dotted with empty class "C" office buildings and decaying strip malls.  A rise in yields increases the likelihood that corporate borrowers, whether they go to the bond market or to banks, will find financing more expensive, investment advisers say, and the rise shows that bond investors see greater risks to corporate and economic prosperity. 

The stock market experienced a sharp decline starting in September. Stocks have rebounded over the last couple of weeks, but high-yield bonds have experienced a more muted recovery. The trading patterns are drawing warnings that losses for both could continue and hinder corporate deal-making and economic growth.

The next bond indicator is in Municipal Bonds. Normally these are not as attractive having lower yield than corporate bonds and  more risk the U.S. treasuries, however right now they are selling well. As expected, they ran up before August -- predicting the fall 2015 equity sell off. Now they are rising again, but that should not be, if stock prices are rising. The reason can only be one thing -- flight to safety.

U.S. Manufacturing Slows
Yes our section one chart on manufacturing fell off this week, but there is more. In September the Dallas Fed's manufacturing report showed its general activity index fell to -15.8 in August, from an already weak -4.6 reading in July. The Atlanta Fed is predicting GDP will grow at an unimpressive rate of 1.3 percent. Furthermore, the August ISM manufacturing index fell to 51.1, from 52.7, its weakest read in over two years. And while gross domestic product in the second quarter came in at a 3.7 percent annual rate, due in large part to a huge inventory build, gross domestic income increased at an annual rate of only 0.6 percent.

Both the Empire report for New York the Philly Fed Manufacturing report for October were negative and came in slightly weaker than expected.  While economists were forecasting the headline reading to come in at a level of -2.0, the actual reading came in at -4.5.  Keep in mind one problem with this indicator is it is often lagging the market. Not to panic yet, but well worth watching. This is significant because if it does not turn around this is often a strong coloration with a recession.

Global Trade Still Weak
It starts with China. Growth in China's industrial production continued to sputter in July, falling to 6%, compared with more than 23% in the heyday of growth a decade ago, and the target of 7% GDP growth this year would be China’s slowest in about a quarter century. 

The stock market in Shanghai is up over 6% this week. China share indexes hit 7-week highs, have biggest weekly gain since June. Sunday night we get China's GDP numbers and of course they will be inflated, but the market is not prepared for a down-side surprise. If it gets one, things will not go well Monday.  

As goes China so goes her trading partners. Exports from South Korea dropped nearly 15 percent  from a year earlier, with shipments to China, the United States and Europe all weaker. U.S. exports of goods and general merchandise are at the lowest level since September of 2011. The latest measurement of $370 billion is down from $408 billion, or -9.46 percent from Q4 2014.

This week CNBC reported that the volume of exports from the Port of Long Beach to China dropped by 10 percent YOY. The Wall Street Journal this week says that Shipments of empty containers out of the U.S. are surging this year. In the past those containers went back full of raw materials, food, recyclable paper and U.S. luxury goods. Trade figures released Tuesday in Beijing underscored China’s faltering demand. China’s imports fell 20.4% year-over-year in September following a 13.8% decline in August.

For a great example of the decay in global trade, and the importance of transports look at the big shipping firms. Particularly the global dry bulk shipping market, here is International Shipholding. Dry bulk shipping was the darling of the market from 2000 to 2007 as China was in full swing, now the sad reverse.

The term Rust Belt gained popularity in the U.S. in the 1980s.  The Rust Belt was a term for the region straddling the upper Northeastern United States, the Great Lakes, and the Midwest States, referring to economic decline, population loss, and urban decay due to the shrinking of its once powerful industrial sector. It was a time of dealing with the new competition from Japan and the loss of a significant market share for the U.S. auto industry. It might be hard now to recall the desperation at that time for the "American Working Man" as blue-collar jobs dried up. You might get a feel for it from the dark emotional music of the time. 

Today more and more we are seeing news out of China of closing factories, low demand and a renewed meaning to Rust Belt, now a term used in Asia. Click here to read it in the Economist. This is a story from the Wall Street Journal about the closure of Pangang Chengdu Steel & Vanadium Co. 

Closed this summer the Pangang Chengdu Steel & Vanadium Co.

Yes China is shutting down some steel mills but there are still plenty of state owned steel mills considered too vital to close. These are propped up by endless loans that don't even get a single payment toward the principal and in some case not even the interest is covered. These so called "zombie companies" keep producing steel with no buyers in sight. One Chinese steel mill can employee 100,000 people and are often the heart of a city's economy. So Chinese state run steel mills are dumping steel at below cost prices all around the globe. 

The latest victim SSI steel in the U.K. and it's 2,200 employees. This is the largest steel plant left in the U.K. and this shut down is after 20 years of government subsides and bailouts that now total some 300,000 pounds sterling, per worker. Oddly the firm is not even owned in the U.K. but is part of a Thai conglomerate. 

The U.S. steel industry is certainly feeling the pinch. Once captain of the world of industry U.S. steel (ticker X) missed expectation each time it reported earnings since last fall.

But of course what hurts China effects all raw material suppliers and this is a global slowdown. As can be seen from this chart, Brazil stock prices are getting crushed and they have been all year.

Dow Transports Turn Down
The most relevant concern is the breakdown in transportation stocks. The Dow Jones Transportation Average (DJTA) not only is trailing the Dow Jones Industrial Average (DJIA) by about 10% this year, but has just fallen to a lower level that represents a negative Dow Theory signal. Recent earnings from transport companies have been disappointing and the transportation index is in retreat again this week. 
For those that follow the DOW Theory, Transports lead the market up and down. Actually the original DOW Theory says Railroad stock do, but over 100 years ago that was all you could track. Today we look at all delivery and transportation stocks as an proxy for Railroads.  

Funny Business
A bit of internet humor (odd 20 years ago this would be meaningless):

Are Americans Crazy?
After watching the antics of Donald Trump the world is wondering why America would even think for a moment this man should be in charge of a the worlds largest nuclear arsenal. Surprisingly the answer might come from the pharmaceutical industry.  Can you guess what drug makes it to the top of the US list for top seller by gross revenue? Viagra? Lipitor? Tetracycline? Oxycodone? Vicodin? Prozac? Nope, its Abilify - Americans consume $7 billion a year of this pill -- nothing else comes close. In case you don't know it is an anti-psychotic. It comes from Japan's second largest pharmaceutical company Otsuka Pharmaceutical Co.  Abilify is known as a second generation anti-psychotic (SGA) or atypical anti-psychotic. Abilify is mostly used as a medication to treat schizophrenia.  Consider that for a moment, it could explain a lot.

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.

Pay particular attention to the global and U.S. slow down in manufacturing. America can not have the worlds highest per capita GDP (right now about $45,000 per person), if all the new jobs are at Starbucks making Carmel Mocachinos or as clerks at Old Navy selling Madagascar made t-shirts. It is nice that more people are working, but high-skill, high-paying, manufacturing is critical to America. 

I said previously I expect volatility until Halloween and I have not changed my mind on that. The market has been behaving a lot better than I expected it would, and there are positive signs that can't be ignored. Breadth indicators continue to show marked improvement, especially the 52 week high low has crossed. The percent of S&P500 stocks above their 50-day average turning up strongly, almost too strong! Because we are in a bear market we should continue to expect negative outcomes more often than positive ones, but currently the bulls have control. Price is entering a zone of resistance and intermediate-term indicators are becoming overbought, conditions that could cause the advance to stall. We should also remember that bear markets can produce some attractive rallies.  A lot of the run up is from a weaker dollar, stable oil prices and a fed that can't raise rates. Clearly the bulls have quite a party going but I do not trust this bump.

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.