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December 12, 2015 Weekend Market Comment

December 12, 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).

Last week I said we we at a tipping point, we were, we tipped, the crowd goes wild. I am a hero and you dear reader stepped out of the way so you account did not go to zero. Cheers.

Learn how I spotted trouble so you can too. The big clue that the August sell off was not the end of the story was in our charts. The biggest sign we are in more trouble was continued problems in the NYSE High Low chart. Red splotches in the lower window and green stuck below yellow in the top panel is always trouble. Add to that the OBV -- predicting doom as the  smart money was not buying the dips. When the red OBV line fails to keep pace with the market -- be very careful. You can go back the last few weeks and display all the charts that I marked with a red exclamation point. It is not hard to see what had my attention.  

101 Bull Bear
Is about to call this a bear market (red over dark green) and now the short term (light green) is in a deep dive. Don’t be long.
103 NYSE High Low Market Forces
In the right side highlight we see green is below yellow this is the number on reason I am pulling in my horns. Notice the deep drop in to the red zone in the lower panel. This is a sell off and could be a crash.

105 Non-Farm Payroll
November data looks positive.

107 Industrial Production
Watch this carefully, all recessions have falling industrial production, but data is old from Oct.

115 Renko
Two black down bricks the trend is broken and heading down.

203 OBV
The Market has finally fallen to where the pros are playing. This was your big warning. A little more neutral now.
207 VIX
Yowsers, Now looking a bit “toppy” but expect high VIX readings until the Fed pegs a rate.

209 VIX Evaluator
Zoom to the moon.

211 S&P500 over 50 day
Only 28.6% stocks are above their 50day MA. But then again this bad boy looked weak heading in to the sell off. 

213 Green Arrow
Only put new money to work when I draw a green arrow.
Ugly Ugly Ugly stay out of this sinking ship market.

301 NASDAQ Summation
Nasdaq last to crumble, now on express to hell.
303 Aggressive Defensive
This baby was a beacon of truth last week It told you possible head-fake. It was! Now it says get ready the selling continues but perhaps hitting bottom.

305 Consumer Bonds vs Equities
Consumer flat @ Christmas, DANGER should be rising like mad. Bonds sell well as fear is back.

307 Bond Direction
Long term sideways indifference. Short term buying.

309 Sectors
Consumer and Nasdaq selling, defensive and utilities heading up relative to the S&P500 BUT that does not mean they are gaining, in fact they are dropping - just slower. 

311 Nations
Abandon all hope global sell off

313 Major sectors
Glimmer of a bounce in gold that has set new low recently. Bonds perk up. Sign of fear!

! = Pay attention this chart is important this week.

What I Find Interesting
Last week I said I am convinced that the 2008 crash was due to excessive credit and the solution has been so far, more credit. The world is awash in easy money and could catch up to us again in 2016.  Much of that credit bubble is in High Yield bonds.  Look at this from Citibank research, it shows a heatmap of the high-yield bonds. The red are the ones are the ones in trouble.

I am writing a series of articles to explain just what the problem with that is. In the post last week I talked about the junk bond crisis and that was well timed because this week the whole thing started to come off the rails. Even I was surprised by my timing.  I agree with Carl Icahn who says there is more to come. I suggest you read my post again, I clarified a few points that people said were over their heads and added a few graphics, but the message is the same.  Here is the first posting: The 2016 Credit Crisis Part 1: Junk Melt-down. (Don't miss the charts marked Hall of Shame and video of Carl Icahn and BlackRock's CEO.)

Interesting Rates
As the U.S. federal reserve hims and haws about an interest rate increase, the traders are already doing it. Look at LIBOR climb:

Kinder Morgan
Poster child for the stupid things you can do with borrowed Junk Bond money, Kinder Morgan in the last three years is now in debt some $40 billion, about half went to hopeless acquisitions and the the rest unnecessary dividends.

It was those juicy dividends that sucked in a lot of greedy fools. As mom and pop gobbled up shares, the executives were selling big blocks of founder stock and even bragging that their firm dose not have stock options for executives. Even before Kinder Morgan cut its dividend, the stock’s yield was a warning sign. In early September, for example, with Kinder Morgan’s shares trading at around $31, the stock was yielding 6.3%. By mid-November, as the shares continued to fall, the yield shot up to nearly 9%. By the time the dividend was cut, the stock was trading at less than $16 and the yield was a clearly unsustainable 13%. If it is too good to be true . . . it is. When a yield starts to look completely unrealistic, the stock market is telling you that the story might not end well.

Kinder Morgan started out life from the ashes of a similar disaster. Their first transaction was by Richard Kinder and his partner, for $40 million back in the late 1990s -- they acquired Enron Liquids Pipeline. That's twice the public was burned by the same scam. If there is one thing the boys at Enron taught Richard Kinder . . .Wheeeee -- sfun ta spenz da money weez dona gotz!

What Works Now
Well Short anything works, but beware a snap back this week. Yes I know there are 2X and 3X juiced versions of these, but those are even more risky.

Short Junk Bonds (recommended in my posts in late October (what a call))

Short US Midcap 400

Short Canada (how long have I been telling you about this trade)

Short Oil (Oh I wish I had)

Short Emerging Markets (oh I am glad I did)

Short Natural Gas (wow)

Last Week
The S&P 500 declined over 3% in the wake of massive pain in the high yield sector.  Interest rates declined, driving performance for Treasuries that have longer duration, and the dollar declined against other major global currencies on the week despite an impending rate hike from the Fed.  Emerging markets continue to suffer mightily and every U.S. market sector was down. 

The USO oil fund was down 11% in a week. The fast money was short about 240,000 WTI futures contracts this week, that is a new record in the futures market. Natural Gas prices are partying like its 1999. 

The Canadian Peso and the Mexican Peso got a nasty whacking.  If you live in the USA this is going to be a great winter to see Cancun. Alternately this summer party in Whistler style or Quebec City history. It could be worse, these days the South African Rand is not worth the paper it is printed on.

Its All About Yellen or Is It?
This week the Federal Reserve meets and the whole market expects a rate hike. The Fed is painted in to a corner, keeping rates too low too long have just like Japan, distorted the markets and inflated a bubble. But the global economy is falling apart and so is the U.S. market. Nasty.

Friday this coming week will be interesting. The markets could rally if they feel there is clarity from the fed, or they could rally on unexpected rate hike delay, more candy for the baby. They also could (should) blow-up if for no other reason than things are not going well now coupled with new higher interest rates. In the short run it is all about the Fed, and it is going to be volatile. In the long run, it is going to be a case of "it is all about the economy, stupid". I can tell you there is a much big market sell-off coming and the only question is when -- Now or in the spring?

What I Think
Well last week I told you that the  prior week ended with a big surprise because it rallied strong. Fortunately sanity returned this week, and we had the worst sell off since August -- my short positions payed off huge! I took partial profits Friday, probably too soon but no one ever went bust taking a profit. I still am in cash and a few short bets. 

Do you recall this chart from December 5?

Well NOW it looks like this:

I just don't see any happy ending here.

I also introduced you to the High Yield sell signal. It warns to stay out of equities when debts are distressed. This week it still is in trouble, and accelerating.

Please be very careful this week, the Fed sets rates later this week, and the big boys have a huge amount of money net short, one brief rally with a tiny blip-up and we would have one very nasty short squeeze.  It is best if you are playing with nest egg money to go to cash. For small investors I would say raise cash, but I told you that weeks ago. If you love the thrill of the chase you could bet your gambling money on a few short positions. Again, we might get some sunshine to carry us through Christmas, but we are in a global slowdown and sometime from now up until Spring 2016 the markets will see that too.

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

Don't squint, All graphics can be enlarged by click on them.