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October 2, 2015 – Weekend Market Comment

October 2, 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, S&P close up more than 1%, post biggest reversal in 4 years. U.S. stocks closed more than 1 percent higher Friday, recovering from an initial decline of more than 1.5 percent, as investors digested higher oil prices and a weaker-than-expected jobs report. 

The Dow Jones Industrial Average closed up 200.36 points, or 1.23 percent, at 16,472.37, with Chevron leading advancers and Verizon and JPMorgan Chase the only decliners. Intel was the greatest gainer on the week, while Apple was the worst performer for the week. The S&P 500 closed up 27.54 points, or 1.43 percent, at 1,951.36, with energy leading all sectors except financials higher. Energy was the top performer for the week. while telecommunications was the worst. The Nasdaq closed up 80.69 points, or 1.74 percent, at 4,707.78.

What I Think
There was no question about who was in control Friday. Picking up where they left off Thursday, the bulls started charging early but after breaking above overhead resistance, it looked as if it would consolidate until the close. Instead, prices were driven even higher to a much higher finish. 

In section 4, I will show you the paradox of charts, how changing a view can paint a very different picture of this as either a 10% pull-back due to end or a dead cat bounce in a recession -- the start of something worse. I often joke at these points that I am certain the market will either go up or down from here, of course that is meaningless. The real answer, wait and see what the market gives you. For now I would be in cash but if you are a real risk taker you might want to use some of your cash nibble on some stable higher quality firms. But for most, especially those over age 45, there is no point being aggressive, until the Bull Bear lines and the 52 week high low chart looks better.

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 (about now) or this could be the start of a crash. I would not take any aggressive positions until dark green returns atop of red. 

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 is looking nothing but glum. This is a dangerous time and you can see that clearly in this chart. A crash is still possible until this perks up.

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.

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. 

The point of a renko chart is to simplify. Three black boxes down, that is simple enough. It is clear it has been nothing but down for a while now and the recent up bounce did not yet put a hole in that theory.


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 a tad less insurance. Still very dangerous.

On Balance Volume
Now this is VERY interesting. We have been getting strong negative OBV divergences now this week a positive divergence. A lot of volatility -- but at least the big boys are still in the market.  An example is this article on Bloomberg that shows hedge funds have been long and wrong.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 21.  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 is confused but wants to head down again.

S & P 500 Over 50 day
Well here is your bounce. Some 40% of S&P 500 stocks are now above their 50 day moving average. A positive sign.

Green Arrow
Wait for a green arrow before putting new money to work. Recent signals have been of little value until we break out. With the recent upturn in markets it is interesting that we really don't see it yet on the chart.

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 market is rebounding. The Midcap 400 expressed by MVV is being bought, a very strong signal. IF this is the bottom, we certainly see the first signs of optimism here.

Bond vs Equities
Consumer stocks are leading the bounce and bonds are under-performing. Positive sign.

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  now are going higher. Still some trepidation.

Financials tank, the U.S. consumer is still going strong and return of the Nasdaq tech firms. Both are aggressive indicators. 

    XLF - Financial Stocks - Dark Blue dots
    QQQ - Nasdaq - Purple
    XLY - Consumer discretionary - Green
    XLU - Utilities - Red
    DEF - Defensive stocks - Brown

The U.S. consumer has been the big story during this sell off. Look how well consumer discretionary (green XLY) did vs the rest of the stock market (red S&P500). 

True it was an awful third quarter for the market. The S&P 500 was down 7 percent, posting its first two-quarter losing streak since 2011.  Normally in a sell off, these risky high PE stocks are sold FIRST not LAST.  However, there was a powerful theme across many of the best-performing stocks in the September quarter: the U.S. consumer looks all right.

The period of seasonal strength for the Consumer Discretionary Sector ranges from October 17th through to April 12th. Corresponding to the seasonality of the broad market, this sector finds strength from consumers buying/upgrading large ticket items (cars, homes, etc.) during late winter & early spring. Of course, lets not forget the holiday buying season during the fourth quarter. This sector peaks just before the equity markets top out in May.

This is very encouraging, it means the big hedge funds are holding out -- for a Merry Christmas rally.

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.

Despite headlines of emerging market risk, that is what is turning around this week. 

    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 and gold. 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

One of the reasons I stick to a strickt subset of charts in the Market Comment is it is very easy to fool yourself if you keep changing your charts and perspective. Log scale, time scale selecting an indicator and time periods covered can give you a very  different view point of the market.

I was sent both these charts below this week and they had a powerful emotional effect, the green one show since 2009 we had 2 neat 10% pull backs and the market continued. Well back up the truck and buy me some Google and Amazon! But wait, the next one colored mauve, shows three neat symmetric arcs beginning in 1996... Looks like a perfect time for a recession. OMG head for the bunker and go short --- a nasty recession is a coming.

But Wait . . .
First off why do you want a definitive answer? Probably you want to be predictive and right. Well that is not possible right now. All you can do is use the tools here to tell you this is a key point and not to take chances now.

When you look at the returns required to get back to even after a stock market loss, the math of percentages highlights the damage a loss can do to your portfolio. The returns needed to recover from a loss get more disheartening with the fact that the market tends to drop quickly and move up slowly. However, the long-term historical results are on your side as the markets have recovered from virtually all of their bear market corrections.

The tip to remember when calculating return percentages is that the calculation always goes from the starting point to the ending point, with the starting value as the base. For example, an investment is worth $100. If it goes up 10 percent it will be worth $110. A drop of 10 percent puts the investment at $90. The 10 percent is based on the $100 start. After the 10 percent loss, the new starting point would be $90. Since it takes a $10 gain to get back to $100, 10 divided by 90 shows that, in this case, it would take an 11.1 percent gain to recover from the loss.

Look at it this way, in the above chart notice that sell offs are about twice as fast as upward moves. That tells you you have time to catch the uptrend if there is one and you don't have time to avoid a major crash, in other words this is a time for patience.

Funny Business

Well its fall and time for holiday travel plans. Don't forget if you do travel this Christmas, you will need to know the rules of airport security. 

Spin Me Round, Until I Am Paranoid

We live in an age of spin. It is hard not to be cynical when it turns out some well paid environmental lobbyist actually work for oil companies and our movies are full of brand and product placements. Two doctors in lab coats with MD after their names write books that disagree about your diet. They are telling you eating meat and fat are good or bad for you -- as long as you do (or don't ) drink red wine in France. Many dubious scientific studies with questionable science sell us everything from pills to environmental denial. Modern court room trials often bring a team of highly renowned experts to dismiss the other side's renowned experts.   As Mr Putin and Mr. Bush know Political freedom fighters from one side are terrorists from another viewpoint. Then their is the media, what the U.S. networks, especially Fox is feeding us these day, is highly biased reporting boarding on fraud.   On the spin goes. . . 

An interesting inside look at the spin process in this bit of reporting in the Washington Post on showing Hillary Clinton's Secretary of State staff tried to feed questions to CBS's news show 60 minutes. 

On the other hand what if this Clinton revelation was a smear leaked by the republicans? Who were ordered to do it by Free Masons, paid off by Goldman Sachs!  . . .  Well, probably not, because Donald Trump has infiltrated the republicans as a spy for Hillary. You might also enjoy this Propublica expose on Goldman Sachs probably leaked to the media by the Jewish DeBeers diamond conspiracy. Wow!

Market Forecast
Market Forecast Timid Bear

You should be in CASH


We have some signs of a bounce back in the OBV, Aggressive/Defensive and SnP over 50 charts. It is also nice to see consumer discretionary stocks held up really well during this beating. But these are all very short term indicators, they move up on the first whiff of change and they follow dead cat bounces too.

But our PRIMARY tools in section 1 for market timing are not in out favor now. I was surprised to find that the Green arrows chart is flat.  The Bull Bear lines say this is still a bear market and so does the NYSE 52 week High Low chart. 

Yes using laging indicators like these  you will miss part of the eventual recovery but as my post  A Bad Idea Whose Time Has Come says, you might miss a bit, but it is worth it for safety. Read again section 4 (above) on perspective and please keep liquid and patient, your time to make money will come soon if this is the bottom. 

You can learn more about my indicators by visiting the CME4PIF school by clicking here.

You always can make any graphic larger, for a better look, by clicking on it.