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January 2, 2016 – Weekend Market Comment

January 2, 2016 – 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  For full details read my disclaimer (link at the bottom of this page).

I warned at the start of 2015 to expect a year of volatility and 2015 did not disappoint. After all those wild swings sometimes over 2% in a day, we end the year up 1.6% on the S&P 500. In other words in 2015 we went nowhere. Worse we actually are considerably in the hole except for 8 stocks, known as FANG and NOSH this refers to FANG (Facebook Amazon Netflix Google) and NOSH (Nike O'Reilly Automotive Starbucks and Home Depot). It is so bad that the very broad index, the Russel 2000, lost around 6%.

I have seen the future and it is not good.  There will be no eighth year in this rally. For 2016 I expect a bear market with a correction of not less than 20% during the year. It could be now or anytime until Halloween.  I will explain that further on in the section "What I find Interesting". 

101 Bull Bear
Bear market (red over dark green) and now the short term (light green) is heading back down, as I said before in a bear market sell the up-bounces.

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. Perhaps there is recovery on the way, but it could disappear in a hurry. 

105 Non Farm Payroll
Lots of jobs! But beware this is lagging indicator. The smart money is gone before this turns down.
107 Industrial Production
Not good. Watch this carefully, all recessions have falling industrial production, but data is from the end of Nov.

115 Renko
A new up white brick, but I think it was a bull trap.
203 OBV
Notice the pros were exiting fast than the crowd. Red line fails to keep up - watch out.

207 VIX
VIX shows uncertainty creeps back in. The fear gauge is now over 18.

209 VIX Evaluator
Mehh, sideways.

211 S&P500 over 50 day
Now over 50% stocks are above their 50day MA. 

213 Green Arrow
Only put new money to work when I draw a green arrow.
A Green arrow, but I still am bearish. Don’t invest now.

301 NASDAQ Summation
Nasdaq looking flaccid.

303 Aggressive Defensive
Heading still aggressive mode but looking like it might roll over.

305 Consumer Bonds vs Equities
Disturbing, the consumer is lagging. Bonds are in an uptick.

307 Bond Direction
Flat but deflating.

309 Sectors
Defensive staple stocks are the only real strength – not a good sign.

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

313 Major sectors
I got nothing here!

! = Pay attention this chart is important this week.

What I Find Interesting
As I said above 2016 is going to be rough. I have one ray of "hope", is that the U.S. government has repealed FIRPA a law taxing foreign real estate investment. Now dirty money from offshore can cause exploding real estate prices in key U.S. cities like San Francisco and L.A. if you don't think that is possible, I invite your to read the house for sale ads in Vancouver. Vancouver got so bad that a game web page was created called Crack Shack or Mansion. To play the game you guess if it is a $1million+ home in Vancouver or abandon home in a U.S. ghetto. 

Watch this video from San Jose California called Million Dollar Shack, for a feeling of the desperation this can cause:

However that ray of hope is pretty slim chance against all the problems I see going in to 2016.  Here is the list:

Junk Bond Meltdown: Junk Bonds have injected $2.5 trillion of capital used to harvest commodities, from Coal to Oil and mining for everything from Gold to Zinc. They also were used to prop up dying retailers, shore up bankrupt banks and other fool's errands. The bill is due now and the money is not there. Read About here in my blog: The 2016 Credit Crisis Part 1: Junk Melt-down.  

Currency Wars: The world is awash in easy money much of that went to prop up governments and corporations around the world. As the U.S. dollar rises in power it is making countries who borrowed in U.S. dollars unable to pay the loans. Further the few nations that do have currencies tied to the U.S. dollar are finding themselves unable to compete as their products become to expensive for the rest of the world to buy. This happened before and it was the start of the 1997 Asian Contagion. This time there are new victims in South America, Africa and Europe as well as Asia. You could argue this has always been true, but never this big and currencies have never been this unstable. 

The Global Slowdown: Most of the worlds consumption comes from a few "greedy" nations in the Europe, Japan and of course America. The rest of the world is living "hand to mouth". Out side of America people seldom understands why you would buy lunch rather than make it, drive a car two blocks to the store, run an air conditioner for an empty house and treat yourself with two exotic vacations a year. However, in the high consumption nations the population bulge is reaching a predicable age of under-consumption as homes are down sized and a humble sandwich is a large lunch for a population passing 60. Boomers see there children leave the nest, while they trade laptops and neckties for golf clubs. Former hippies are learning to live on pensions 60% of their prior wages. In the process they are sending a lot of old junk to the dump and buying fewer things. They also are trading experiences for stuff.  Even the youth in the developed world do more with less, as the average age to get a drivers license or move out of the parents home is on the rise. We are also flooded with cheep goods and too many competitors. Chinese products are so low cost we don't need to spend as much. A pair of pliers is a dollar, and so is coffee mug, Check out $1.49 Christmas lights. Also we are inundated with choices and brands, just sit down for a moment and think of all the names of firms you know that make a mid-size family car. Plus in this on-line world we get the best retail price and in-depth reviews before we do pick our new anything.  Read the Tyranny of Choice in the Economist. In short the consumer is consuming less. Manufacturing is falling in the United States, China, Germany and Japan.  Always a precursor to an economic slow down.

The Phony Market Boom: I am sure many of you went to see the new Hollywood Movie, "The Big Short" and so you already know in 2008 the U.S. government approved some $1 trillion dollars in emergency funding to shore up the U.S. banks. If this money had flowed in to small and mid-size traditional banks the U.S. we might have seen a real rebound in the economy. Unfortunately by giving the money to investment banks the money did not really stimulate investment growth. Some banks bought bonds in the carry trade. Some of the money was use by CEOs with stock options to line their pockets. The CEOs went on a binge of share by backs. Some 1,900 companies in the U.S. repurchased some of their shares since 2010. This caused a seven year rally in equity prices despite declining profits. By decreasing the number of shares outstanding, they also increase earnings per share, even when total net income is flat. From the outside this looked like investors were buying stocks, but in fact the companies were buying their own stock. Fun fact: in the last 7 years corporate America spent more than twice what it spent on R & D to fund share buy backs. The 2009 - 2016 rally was taken as a sign that everything must be alright. 

How China Fooled The World: China's planned economy becomes a nightmare - $14 trillion in liquidity has been conjured out of thin air by the world's central banks, and the tens of trillions of credit money created (and misallocated) by China - a country which was the world's growth dynamo for the past three decades and which is now rapidly slowing down - the entire world is floating on an ocean of excess money, which for one more year has succeeded in masking just how ugly the truth beneath the calm surface is. China's biggest banks are now public companies and look solvent but billions is hiding off balance sheet in shell companies in an accounting system that makes Enron look like rank amateurs.  What is more, the ruling party fears more than anything loosing face and social unrest that could bring down the whole system. The result is clumsy market reforms and thousands of skeletons in the closet.  

What Works Now
Short Canada:

Short Emerging Markets:

Short Mid-cap 400:

What I Think

Well last week I told you I was short this market and you must have thought I had lost it as the market rallied on Monday, by the end of the week we were below where we started.  

A week like the one we just had is great for traders and high frequency trading computers but for long-term investors like mutual funds and the common person it makes people take money off the table. You will recall this graph of the long term market and I said be concerned if volatility (ATR) stays up for too long. Look at the pink band marked High Volatility. 

I look at this graph and I still see a rounding top pattern and the TRIX is going no place but down. So I am still short the Midcap 400

Also there is an interesting pattern emerging on the Toronto Exchange. Yes I showed this graph a few months ago, but it still is working. One reader wrote me asking if this was the bottom for Canadian stocks, my answer, only if oil, gold and coal become valuable again. In other words ... not a chance.

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.