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December 19, 2015 Weekend Market Comment

December 19, 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. You can read the latest version each week by bookmarking http://cme4pif.blogspot.ca/. For full details read my disclaimer (link at the bottom of this page).

Well I told you last week I took off most of my short positions and that most people should raise some cash. I said  this was going to big a very volatile week and we had a huge run up and down in just a few days. All these massive swings, only to arrive about where we left off last week.




Well lets look at our core charts:





 !
101 Bull Bear
Bear market (red over dark green) and now the short term (light green) is in a deep dive. Don’t be long, raise cash or look at shorts.
 !
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
This is the “good news” the market is clinging too.
 !
107 Industrial Production
Watch this carefully, all recessions have falling industrial production, but data is NEW from the end of Nov. Looks even worse. (see monthly PMI data below)

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

203 OBV
The Market has finally fallen to where the pros are playing.  A little more neutral now. Another buy the dip is possible.

207 VIX
Yowsers, VIX turned around to go higher. Reduce risk when the VIX is over 20.

209 VIX Evaluator
Shows trouble.

211 S&P500 over 50 day
Only 26% stocks are above their 50day MA. I expect this to get worse next week. 

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
Wow should bounce here, instead has gone back for a second helping of trouble ahead.

305 Consumer Bonds vs Equities
Tepid consumer bounce @ Christmas, this is only ok should be stonger. Bonds are in full gonzo panic, fear in market.

307 Bond Direction
Short term buying bonds even with a negative return.

309 Sectors
Nasdaq selling, Consumer, staples and utilities are on. Says: fear but still Christmas.

311 Nations
Looks like international stronger, but really is just USA, now heading south. Abandon all hope: global sell off

313 Major sectors
Glimmer of a bounce in gold that has set new low recently. Rest of world doing better than USA, but only a bit. Signs of fear!

! = Pay attention this chart is important this week.


What I Find Interesting
So lately a few experts on TV point out that the S&P 500 is holding above 2,000 and that historically Dec - April is a great time for stocks and also jobs market is a near perfect 5% unemployed... ergo -- things must be good? Jacob Lew points out in the USA things bought with easy to borrow money, like trucks and houses are still selling -- ergo  -- things must be good? Well the home builder stocks missed the memo, because here is what 8 months of investing in Lennar Homes looks like:

Even Bill Gross thinks it might be a good time to get some bargains in Junk Bonds

To all that I say:




I think this is HORRIBLE time to be in the market,  I am just not sure where to start in my rant of all the warning signs.

The Dow theory says that Transports drop before a big market sell off. 


Interest rates curb growth -- Libor is going ballistic:

Bond Credit spreads widen before a sell off

Market Breadth tanks before a sell off. Here is a chart from my weekly set, be concerned when you see red in the lower part of the chart or when green is below yellow in a dive.


Manufacturing Slows in a recession, in November 2015 PMI ISM manufacturing index broke below 50 -- signaling negative manufacturing growth (shading is prior recessions)





Global Markets Sell-off
Everyone knows the world’s economies are becoming ever more intertwined, but we’re only just starting to understand the ripple effects. Welcome to the new global economy: One guy sneezes, and someone else gets a cold. That’s what we’re seeing in the slowdown now happening in the U.S., in Europe and in emerging market countries all around the world. Barring some kind of radical decoupling, the tight correlation in fates between these economic titans is a phenomenon we had better get used to, and understand, because it’s not going away.

The economy that should scare us the most right now is the Chinese one. The country is slowing down, and that’s precisely because of the halting recovery and weakness in the U.S. and European systems, and the fact that the sputtering has been going on for some time. The U.S. and Europe can wait out our own recoveries. Our advanced economies are resilient. Even in the depths of our crises, the economic suffering, though real, has been muted. But China, despite its rapid modernization, is still, structurally, an emerging market. It’s far more vulnerable to economic shocks. And its political system, already facing turmoil in advance of that country’s leadership changeover later this year, is far more unstable than those in the West. If the developed world stops buying the stuff that China makes, it will force China to turn inward and double-down on state capitalism.

You can measure global trade by the rates charged for space on container ships. The rate is called the Baltic Dry Index. When raw commodities and manufactured goods are no longer shipping, the global economy is dying.



I made up these charts below of weekly results for the worlds stock markets. Green is the shortest term (9week EMA).  If green is on top the market is getting better. Orange is about 1/2 a year 25 weeks EMA. Red is the slowest (52 week EMA), so red on top is trouble. Oddly only Canada has a recent bounce. 

Japan


Asia x-Japan


China

Brazil


Europe

Germany

United Kingdom

Canada - a safe haven bounce or does everyone think the new Prime Minister  Justin Trudeau rides on unicorns and rainbows come out of his butt?


The Loonie

Equities might have bounced up in Canada, but the currency has not. The loonie is now down nearly 17 per cent against the greenback for 2015, the biggest drop since 2008, when it lost 18.6 per cent against the U.S. dollar due to a collapse in commodity prices. You might recall the summer of 2012 where I said to sell all things Canadian including the dollar. Lets see how that worked out.

A reader asked 7 months ago if the Canadian dollar could go lower, at the time I said -- yes, if oil goes lower, so will the Canadian dollar.  Look at the really big picture showing how strong the US dollar can be (scale inverted to the graph above):

U.S. Mid-Cap Small-Cap
At the end of a market cycle mom and pop jump in the market as the rest are leaving. They tend to buy big technology stocks like Apple or also institutions that are hoping things will hold together but are nervous turn to the stable core stocks like P&G or Hormel foods. That means the first stocks to sell off as the market falls apart are smaller firms. In these charts the colored zones show market pull backs. You can see it in a chart that shows two views of the S&P500 -- the S&P500 cap weight vs the equal weight. It tells you to be light on your risky holdings when the ticker RSP under-performs the ticker SPY

Again lighten up when the Mid-Caps 400 under-perform. The pull back has already begun in the Mid-cap stocks:

Value Line is an old school institutional research firm. Since 1961 one of their most prized tools is the Geometric index which has correctly predicted every recession. Looks like trouble:





Consider this . . .

If you think what I do is complex, try a simple experiment.  Click to enlarge this chart below, it is 20 years of the the whole 5000 stocks that trade in the U.S. public markets. Nothing fancy, it is just the big picture, lets use it to zoom out and see the whole market from a long-term perspective. Drink it all in, just stare at it for 10 min. (It is all very Zen -- be one with your chart).  Contemplate how all the little parts interact in the past and what it looks like now. Now tell me what you think happens next.

To me this looks due for a sell off. It could be brief like summer 2011, or nasty like 2008.  Begin with the basics -- in the main window, it just looks like the top is rounding. We also see more red bars, these are signs of negative momentum. The top panel 14 period RSI is below 70 all this year and now looks very flimsy. The ATR panel (2nd from bottom) (bright green line) shows, how big the price swings are. As you can see in the zoom window on the right -- it is really high now. This kind of volatility is what scares investors. ATR goes up  -- investors exit. Last week the volatility was insane, who needs those headaches?
 
What Works Now
People are always asking me how I make money in down markets, well it is called shorting the market. I do it by selling S&P futures short, but you can get similar results by simply buying an ETF to short the U.S. market. These tickers: SH, MYY, DOG all go up, when the market goes down.  Click here for a more complete list.


I also have a very profitable short against Junk Bonds, that I have been talking about here for many weeks now.


Perhaps it is too late -- but short natural gas was the trade of the year Ticker:DGAZ. The trend is your friend and the world is awash in natural gas.

 
What I Think
It is a bear market, so I sell on the bounces. 
 
I am Short S&P500 emini futures, lots of cash and short the mid cap 400. Remember going short is dangerous and if this is a sell off you will also have time to go short later. But no matter who you are this is no time to play the "high flyers" stay away from the recent big winners like Apple, no matter how much you love your iPhone. Take some profits from the seven year bull run. If you are using investment money consider going to cash. If you are young and aggressive consider ticker:MYY the Mid-Cap 400 short and ticker:SBJ the High Yield Short fund.






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.







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CLICK HERE: To see the 100 and 200 series charts



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