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October 22, 2016 – Weekend Market Comment

October 22, 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 http://cme4pif.blogspot.ca/. For full details read my disclaimer (link at the bottom of this page).

Recently, the market has been led predominantly by tech names. Microsoft has been range bound for the last two months, which looks like institutional accumulation by trading in a tight range with no breakout or breakdown.  Microsoft’s share price hit a high on Thursday — up 6 percent to more than $60 a share in after-hours trading — after the company released the financial results of its most recent quarter. The last time Microsoft’s stock was this valuable was not as far back as this picture Microsoft's two baby faced founders, from the the late 70s, but it was back in 1999, when Bill Clinton was still president, Mark Zuckerberg was a high school student and Microsoft was heading toward an antitrust showdown with the Department of Justice. Despite the great news out of Microsoft, overall markets did not explode higher as concerns over valuation and a possible December rate hike cooled speculation.

Lets see what is in the chart this week:





101 Bull Bear
Bull market (dark green over red) and now the short term (light green) is down sharply. Also note the dark green 50 day average has begun to fall off. NOTICE THE SLOPE (second window), this could be part of a long term down trend.  Bull market -- expect bullish outcomes.

103 NYSE High Low Market Forces
Nothing but strength. Bullish.

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
Could be turning up again, if not expect rally to fail.

115 Renko
The current sideways consolidation is obvious.
!
203 OBV
OBV (red line) is ahead of the market. Bullish.

207 VIX
VIX looks like it has maxed out and might retreat from here, mean revision generally rules, until it doesn’t. . Falling VIX is bullish!

209 VIX Evaluator
Sideways to down still. Bullish

211 S&P500 over 50 day
Now 35% stocks are above their 50day MA, good move up from last week when it was 29%. Bullish.
!
213 Green Arrow
Only put new money to work when I draw a green arrow. TRIX says no way we draw a green arrow here.

!
301 NASDAQ Summation
Notice how the NASDAQ was leading, but as this chart shows leading on weak breadth. Trouble is coming for aggressive tech stock if this does not shape up and soon.

303 Aggressive Defensive
Very aggressive, but faultering?

305 Consumer Bonds vs Equities
Bonds weak. Consumer wakes up a bit.

307 Bond Direction
Weakness in bonds indicates overall market caution of coming rate hikes.

309 Sectors
Consumers perk up!

311 Nations
Oh Canada, look at you go with a new interest in gold mines.

313 Major sectors
Canada looks good.

! = Pay attention this chart is important this week.



What I Find Interesting

McMansion Homes
Lately, these homes have been the subject of fresh scorn, thanks to an anonymously authored blog that breaks down the genre’s design flaws in excruciating detail. Posts lambasted builders for erecting garages bigger than the homes they’re attached to, dropping giant houses on tiny lots, plus shoddy construction and a mishmash of contrasting styles. (Gothic Tudor, anyone?)

McMansion Hell is a web site that pokes fun at the trophy houses of the nouveau-rich (think Tony Soprano). Come gawk at vast ugly oversize houses built on the cheep to look grander than they are. Click here for www.mcmansionhell.com

It’s fun reading that nevertheless raised the question: How well have these homes kept their value? Not well, compared with the rest of the U.S. housing market. McMansions cost more to build than your average starter ranch home does, and they will sell for more. But the return on investment has dropped like a stone. The additional cash that buyers should be willing to part with to get a McMansion fell in 85 of the 100 largest U.S. metropolitan areas. For example, four years ago a typical McMansion in Fort Lauderdale was valued at $477,000, a 274 percent premium over all other homes in the area. This year, those McMansions are worth about $611,000, or 190 percent more than the rest the homes on the market.

U.S. Home-Building Drops
By the way as long as we are talking homes, it is very concerning how U.S. home-builders are suffering this fall. A large part of the U.S. economy is based on home sales, so it is a key indicator of economic health.


Scientific Super Discovery
What if the thing that we make too much of (and is killing us) could be turned in to the thing we are always most short of? Scientist at Oak Ridge National Laboratory have discovered an efficient process to turn the greenhouse gas CO2 into ethanol gasoline. Using basic copper and carbon they build structures called nanospikes, and viola you get gasoline. It is not the only process for doing this, but this process works at room temperature and uses low cost materials in a fairly simple process. In short it is economically feasible and scalable.

In my youth I met the Canadian scientists who discovered how to coax oil out of tar sands and recall the same feeling, "this could be huge".   Click here to read more in Popular Mechanics.



Hedge Funds Hit a Wall

Bloomberg this week pointed out how hedge fund returns are falling behind indexes and their clients are noticing. In large part because they have been buying the same tired 5 or 10 stocks, like Google, Facebook and Nike.

The elite, highly compensated men who run money for the world’s wealthy are having a devil of a time finding a way to make decent returns. As an asset class, hedge funds lost 0.4% during the first quarter, according to research firm Eurekahedge.

That might not sound like the end of the world. But it’s an especially poor showing, when you realize that investors who simply bought index funds tracking plain-vanilla benchmarks for stocks, such as the S&P 500, or bonds, such as the Barclays Aggregate US index, fared far better. The S&P 500 and the Barclays Aggregate returned 1.4% and 3%, respectively, for the first three months of the year.

Hedge fund clients have noticed that they’re not making money. As a result, they’ve yanked roughly $15 billion in assets from hedge funds in the first quarter, the worst stint of redemptions since 2009, during the nadir of the Great Recession.


What Works Now

Utilities: Well if your looking for safe and stable look at AES, one of the 200 largest companies in the USA and in the electric power utility business, yawn but safe sane and stable in an unstable market. (Ticker:AES)

Canadian Pipelines: As I said so often, a license to print money Canadian pipelines are safe sane and stable. I don't discuss my holdings much, but here is a hint, my biggest holdings in my retirement account are pipelines.  Look at Enbridge.  (Ticker: ENF.to)


Brazil: If you want to play global and you like come back stories, Brazil is on a come back from a huge sell off. Banco Bradesco is Brazil's third largest bank and probably the most respected. (Ticker:BBD)

Canadian Miners: Well no doubt Canada's gold miners have had a beating and now that gold prices have stabilized in area where profit is possible it might get interesting. The Junior Gold Miners ETF (Ticker:GDXJ) is doing well. Don't bet your retirement on this, but if you really want a long shot rocket, look at Canada's China Gold International. (Ticker:CGG.to)  

FANG: Well of course the Nasdaq has been doing better than the S&P500 so that means the hedge funds are buying up the core five hot stocks, known as FANG (Facebook, Apple, Nike and Google). Well you can't go any public place these days and not see a grown adult pushing "like" on someones selfie, so why fight it, buy Facebook. (Ticker:FB)

High Yield Bonds: Often used as a gauge of risk on mentality the bond market now favours the riskier cousins, called High Yield or Junk bonds.



What I Think
I think this is a bull market and you must be selectively long. We are also now officially past October 20th the scariest part of the cycle is over.

As for my charts, it is encouraging to see a snap back in the OBV line, and chart 103 says thing look stable on the NYSE big board. The VIX shows increasing greed and falling fear.  I still am nagged by the falling TRIX line on the Green Arrow chart. I also don't like chart 301 with a falling NASDAQ breadth indicator.

Overall it is bullish and heading in to a prime season for market gains. November through January is the best three consecutive month period in terms of equity performance during the year. Also February to April general is good. Followed by the famous sell in May.

We're still in a long-term uptrend and that won't change unless the S&P 500 drops below short-term support at 2115.  I expect the consumer and defensiveness to do better in the next week. I think valuations are stretched and a little diversification would not hurt, look at gold, bonds and international.

It is raining outside my den and it has been for days. I am thinking a lot about returning to Belize these days.







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Lets see what is in the charts this week:

CLICK HERE: To see the 100 and 200 series charts



101 Bull Bear Bull market (dark green over red) and now the short term (light green) is up sharply. Also note the dark green 50 day average is in a firm uptrend. NOTICE THE SLOPE (second window), this could be part of a new long term uptrend.Bull market -- expect bullish outcomes…

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