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October 24, 2015 – Weekend Market Comment

October 24, 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)
Nasdaq closes at two-month high on tech surge. U.S. equities closed sharply higher Friday after the Chinese central bank cut interest rates and after three tech giants posted better-than-expected earnings.

The Dow Jones industrial average closed up 157.54 points, or 0.9 percent, at 17,646.70, led higher by Microsoft and with Nike leading decliners. The S&P 500 ended 22.64 points higher, or 1.10 percent, at 2,075.15, with information technology leading six sectors higher as utilities led decliners. The technology sector also posted its first four-week winning streak since November. The Nasdaq closed up 111.81 points, or 2.27 percent, at 5,031.86. U.S. Treasury yields traded higher, with the 10-year yield at about 2.08 percent and the two-year yield at 0.63 percent.

What I Think                  

I said I was nearly ready to cover last week and this week I did, taking profits on my shorts. I took the little brown rubber bear off my desk on Monday and returned the black rubber bull in his place.  

Yeah it would have been more profitable to be long earlier, but there were (and still are) some deeply troubling signs. Industrial production is falling both domestically and globally. The small and mid-caps are lagging. Defensive stocks like consumer staples are doing well.  Equal weight index funds are under-performing cap weighted funds.  Also many indicators are already calling this market over bought. Such as the SnP over 50 chart. Add to that the low investor confidence numbers. 

I am not the only nervous investor. Look at how high the short interest is and they still have not covered their positions:

Then there is China  -- still building the mother of all house-of-cards economies. In the first nine months of 2015 profits fell 8.2% across the board, according to state media organization Xinhua. So you know it is worse than that. If the economy was growing so close to the target, there would be no need for stimulus.
The slowdown accelerated in September, according to the report. This week China executed the fifth devaluations of the Yuan. 

Chinese officials on Friday mostly followed a well-worn playbook, putting in effect a number of measures designed to help lower corporate borrowing costs. The central bank cut interest rates for the sixth time in less than a year, and it freed up banks to lend more money for the fourth time since November.

But in the long run I am a trend follower and right now the trend is without question up. You can't let fear rule your investing. Speaking of fear for a laugh see this short video that reminds me of my son. . .

It All Shows Up In The Charts . . .

Section 1: The Big Picture

Big Picture 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. 

This is a bear market, but as the dark green approaches the red it  looks more like a whipsaw. As I have said these happen, and they cost money, but the alternative of buy and hold in a true bear market is worse. Conservative investors please wait until the lines cross.

I present here the lamest possible explanation... The Whipsaw song by Ed Seykota. Mr. Seykota was a great trader, but not much of a song writer.   Listening to the song is optional, but you can skip this torture by just knowing that whipsaws do happen it is part of trend following.

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.

OK well this was our alert that a bear was coming and it is also most of why this week I took off my "Bear hat". Just look at that bounce. 

Industrial Production                   
America is nothing without manufacturing might. 

Now here is the graph that still gives me great pause for concern. Clearly if this does not turn around a recession is coming and if things go off again on the 52-week high low chart (above) I will run like a scared little girl. 

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

Jobs Jobs everyone in America has got a job, but wages are not rising.  

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. 

Two white bricks up, the trend is up. Notice major resistance will come with the third brick up.

Section 2: Short Term Timing

Consider this as fine tuning. As you learned in section one of the CME4PIF 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                   
Learn to use this chart it is in Lesson 2 of the CME4PIF School. There is a link to the school on the bottom of each weekly market comment.

Experts are selling insurance, steady climb, very bullish.

On Balance Volume                   
The big boys are STILL in this market. No running for the exits yet. Super Positive.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.   

Yes the brown CCI reading is overbought, but it was last week too.

VIX Evaluator                   
Don't forget this is an experimental VIX indicator. Looks like clear sailing the trend is away from fear.

S & P 500 Over 50 day                   
Learn to use this chart it is in Lesson 4 of the CME4PIF School. There is a link to the school on the bottom of each weekly market comment.

Well here is your bounce. Most S&P 500 stocks are now above their 50 day moving average. A positive sign. I would bet money this turns down next week, but I said that the last two weeks. 

Green Arrow                   
Learn to use this chart it is in Lesson 3 of the CME4PIF School. There is a link to the school on the bottom of each weekly market comment.

Wait for a green arrow before putting new money to work. From the world of "Could da Would a Shoulda" this was a good green arrow to hit. That said the momentum issues are concerning as mid-caps under perform.

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.

Is very strong and more importantly the summation index is along for the ride. Very Positive.

Aggressive Defensive Chart                   
Here we compare fast moving mid cap firms (ticker MVV) against the old reliable big dividend payers (ticker DVY).

The market is defensive. The Midcap 400 expressed by MVV is flat. This is very odd, normally the mid-cap 400 and the Nasdaq (see above) move together. If you look at the third panel you see mid-caps (lime green) are flat but Dividend stocks (brown) doing well. That is a caution light!

Bond vs Equities                   
Consumer stocks are flat but bonds are really under-performing. It clear equities are the place to be.

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 pulling back to the rising 50 day moving average.

The tech heavy Nasdaq is busting out!

    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. Germany shrugs off "Das Volkswagen ka-putten".
    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. 
Its all about the USA right now.
    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

Narcissist's Rally                  
This week Europe's central banker Mario Draghi's in his press conference unleashed one of the biggest one-day US equity rallies in 2015. On the surface he endorsed more easing in Europe. In fact he really did zero. He merely wag his tongue just like his infamous "whatever it takes" speech in July 2012 and the currency markets leaped. Mission accomplished, his empty words sent  the EURUSD down by 250 pips on the day on nothing but cajoling and hints of both boosting or extending QE as well as hinting at NIRP. Now that Draghi has achieved his FX goal of pushing EURUSD to the ECB's stated Euro forecast ceiling of 1.10. I think it is most likely again he won't do anything in December when the market expects the ECB to lower rates, why should he?

The world is awash in easy money and in debts, rather than concern. At this time the global stock markets cheer every-time more money printing is announced. It is so irrational, in this "up side down time" if corporate earnings are down the market is happy because that means more QE, more debt. 

The biggest, and least appreciated, reasons for the rally on every QE announcement: companies buying huge chunks of their own stock. Every manner of company is caught up in the buying binge, including home-improvement chains, makers of farm equipment and jet engines, airlines, sellers of soft drinks and of hard liquor alike. Not one to miss a hot trend, Apple even authorized as much as $50 billion of buybacks.

It began with the 1990 activist shareholder revolution where CEOs were given bonus incentives in stock options rather than cash. Now bent on shooting the value of those option to the moon, firms are borrowing cheap money (indirectly from the central bankers) to buy up the stock of their own shares. Less shares in the "float" mean more valuable shares.

This is also is solving a problem of how to dispose of off shore cash without getting taxed if it is brought home to a high tax region like the USA. If money is stuck in Ireland, just buy the company shares there. 

After Barclays reported that US companies like Apple, IBM, Exxon-Mobil, and Pfizer spent more than $500 billion in earnings to buy their own stock back from investors in just 12 months—and that the first six months of 2014 saw the highest volume of purchases since the all-too-heady days of 2007—people have been scratching their heads about what all this could signify.
Some say it is greed and some say it is sign of stagnation with nothing else worth doing.  

It is dubbed the Narcissist's rally. Since there is less cash + more debt in the firm the return on assets goes up and with less float share prices go up. Then CEO exercises a few stock options and then buys another mansion in the Hampton and tells everyone what a astute manager he is.

There was an interesting comment in the Harvard Business Review called Profits Without Prosperity that nicely summed up the core problem. University of Mass Professor William Lazonick started that HBR story by saying "Most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity."

There is so much of this share buyback boondoggle going on their is even an ETF to invest in. The PowerShares Buyback Achievers Portfolio (ticker PKW) and it is way outperforming the market, the blue line is PKW the black is the NYSE. 

What Works Now                   
Well lets look at what the market is buying these days. A lot of it is mobile and payments.

Apple: Try and find a 19year old blonde girl with out an iPhone6 in a pink case. Nuff said.

Revenue still growing:

Cognizant: Out source computer programming to India, America has full employment. 

Fiserv:  Kicking IBM out of software for smaller banks and now providing electronic payments on your cell phone.

see the future of geek banking . . .

Global Payments:  These guys process your credit car transactions

Visa: These guys are the trolls that own the bridge all money must pass over.

XTL: Expect strength in telecom coming in to Christmas.

Funny Business                

Market Forecast                   

Market Forecast Timid Bull

Buy the dividend ETF DVY or the value ETF IWD.


I truly hate this market... but the bulls are back in control and for most of us, time to take a chance. 

  • If you are an ultra conservative investor wait and let your financial adviser loose again after the Bull Bear line cross, 
  • If you are over age 45 buy some stable ETFs like DVY
  • If you are under 45 try a few flyers like the stocks I mentioned above in What Works Now. Remember don't put more than 10% of your money in one stock and if you have money left buy a broad based ETF like FV or IWD.

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.