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November 05, 2016 – Weekend Market Comment

November 05, 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).

The S&P 500 on Friday logged its first nine-day losing streak in almost 36 years, but some analysts view declines of eight days or longer as buying opportunities that are usually followed by gains over the next six or 12 months. The benchmark index SPX, -0.17%  declined 3.42 points, or 0.2%, to 2,085.23 on Friday. The streak is the longest since Dec. 1, 1980, when the index dropped 9.4%, according to FactSet.

If you are a regular reader you know I have been on the defensive for some time now (more about that below). The only index that was holding up was the tech heavy Nasdaq and as I pointed out the breadth indicator in chart 301 Nasdaq Summation, has been warning of trouble for a while. Well this week it all came down.  Outside of option expiration days, the NASDAQ's volume the past two days is the highest consecutive day volume level since the post-Brexit results in late June.  In the last week the so-called FANG stocks (FB, AMZN, NFLX, GOOGL) have stumbled. As earnings and outlooks disappointed, shareholders have awoken to the new normal low growth world and wiped over $100 billion in market capitalization

There also are two further signs that suggest to me the selling hasn't ended and, in fact, could just be beginning.  The first is the loss of price support on the NASDAQ to accompany the heavy volume. The other are our two major breadth charts.

Lets see what is in the charts 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
I said this was our last hope... hope is gone. This is trouble. Yellow over green leave the scene. VERY BEARISH

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
Market is breaking down 4 black bricks! BEARISH!

203 OBV
OBV (red line) is with the market. But clear down trend. Not wonderful.
207 VIX
VIX fear is way up. Rising VIX is bearish!
209 VIX Evaluator
Turned back up for the first time in ages. BEARISH!

211 S&P500 over 50 day
Now 27% stocks are above their 50day MA, down from last week when it was 33%. Neutral.

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. Notice how this was a great early warning.  VERY Bearish!

301 NASDAQ Summation
Notice how the NASDAQ was leading, but as this chart shows now falling apart on weak breadth. Trouble was coming for aggressive tech stock and looks like it is here.
303 Aggressive Defensive
Very defensive, but as an optimist you might say the worst might be over? Very Bearish!

305 Consumer Bonds vs Equities
Bonds rebound. Consumer SUCKS a bit. Bearish

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

309 Sectors
Defensives rise! Tech falls off, we saw this coming!

311 Nations
Oh Canada, look at you go with a new interest in gold mines. Third world sucks, good bye Philippians!

313 Major sectors
Gold the only star!

! = Pay attention this chart is important this week.

What I Find Interesting

New Jobs Suck
The divide between the have and have nots inside the American labour force gets wider. There is an unprecedented divergence between the total number of high-paying manufacturing jobs, and minimum-wage food service and drinking places jobs, also known as waiters and bartenders. 

In October, according to the U.S. BLS, while the number of people employed by "food services and drinking places" rose by another 10,000, the US workforce lost another 9,000 manufacturing workers. Since 2014, the US had added 547,000 waiters and bartenders, and has lost 36,000 manufacturing workers.

The working poor are real, a few earn more than minimum wage. According to the U.S. Census bureau, 7.2 percent of American workers live below the poverty line. In other words, they far outnumber the ranks of minimum wage earners. Remember, even McDonald's cashiers earn closer to $7.72 an hour on average, according to Glassdoor.

No, not every low-pay worker is a kid assembling Big Macs between classes. According to the Bureau of Labor Statistics, the median fast food worker (technically referred to as a combined food preparation and serving worker) is about 29. A full 40 percent of minimum wage-earners, meanwhile, are in their prime working years of 25 to 54. Sure, some are married moms working part-time so they can see more of their kids. But plenty aren't.

For a strong economy America needs consumers with deep pockets. These service jobs are not like the skilled jobs of 30 years ago. The up-shot is that statistically there are many jobs, but not many at union scale, however you might get a spiffy paper hat. 

YouTube Rules
According to a fun to read graphic laden report from Ericsson Consumerlab. Consumers aged 16-34 spend almost 2.5 hours more each week watching streamed on-demand UGC (User Generated Content -- YouTube etc), compared to 35-69 year olds. At the same time, they spend almost four hours less than the older population when it comes to watching live and linear broadcast content. Of course we ALL still spend way to much watching everything on TV.

So what are those Millennials watching on User Generated Content? Perhaps it is some soul searching: 

What Works Now

What I Think

The financial press says the weakness in the markets is due to the close U.S. Election between what looks like two bad choices. However, I think that deep down the election is a sideshow, fears of Europe and Chinese banking stability are a concern. U.S. interest rate hikes are a concern and overall market valuation are a concern. It is generally feared that stock buybacks are slowing. Many see this as the only real fuel the market had.  After 3 years of poor performance,  there is a move away from hedge funds simply buying the same 5 FANG stocks. When you give up on super growth, what really matters is solid balance sheets, steady dividends and profit. Bottom line -- the street is short on all of these.

I do agree with Jeffery Gundlach about 2 weeks ago -- "Investors should be defensive".

If you are a regular reader (it is important to be regular) you saw this coming a long way back, lets look at my quotes from the October postings:

October 29, 2016: In What I Think section I said: But for now, when Risk On  (Ticker:MVV) and Risk Off (DVY) and faith in the US government (Ticker:TLT) all are in a down trend. When the consumer is not powerful (Ticker:XLY) and no one wants a home (Ticker:ITB), I would not go sticking my neck out!! 
From the What Works Now section my advice was very clear -- CASH.  
October 22, 2016: I think valuations are stretched and a little diversification would not hurt, look at gold, bonds and international. (Speaking about 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. 
October 15, 2016:
That said, the market is "priced for perfection" and needs to pull back to attract buyers. Breadth is the core issue.  Click here to check out Bloomberg's warning. Keep a close eye on my second chart: 103 the NYSE 52 High Low, if this breadth indicator goes negative (yellow over green), expect trouble.

So there you have it, 9 days of market pull back that you had 3 weeks notice about. 

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