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May 06, 2017 – Weekend Market Comment

May 6, 2017 – 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 book marking For full details read my disclaimer (link at the bottom of this page).

One of the problems facing the current stock market is that some sectors have been rising, while others have suffered large losses. Since the start of the year, for example, technology has gained nearly 14% versus a 6.7% gain for the S&P 500. Energy stocks, however, have plunged -10% this year. Industrial metal miners have lost -6% as have telecom stocks. Obviously there's a tug of war going on within the market as a whole. The question is which side is winning. 

Here is what our charts say:

101 Bull Bear
Bull market (dark green over red)  the dark green 50 day average is in a rising uptrend.  NOTICE THE SLOPE (second window), we might be starting another new slope upward.  Bull market -- expect bullish outcomes.
103 NYSE High Low Market Forces
Breadth lines are firmly up!!!

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
Flat but strong industrial production.  That is good news.

115 Renko
Broken resistance, new leg up?

203 OBV
OBV (red line) is catching up to the market. Phew!

207 VIX
Fear craters... hmmm wow that is confidence.

209 VIX Evaluator
All good again.

211 S&P500 over 50 day
Now about 62% of stocks are above their 50 day MA, from last week when it was 58%.

213 Green Arrow
Only put new money to work when I draw a green arrow. Notice loss of TRIX momentum. 

301 NASDAQ Summation
Nasdaq breadth is returning. Pay attention -- could be volatile.
303 Aggressive Defensive
Flat - Caution

305 Consumer Bonds vs Equities
Bonds fail. Consumer strong. BULLISH!

307 Bond Direction
Bonds still trending up, just not recently.

309 Sectors
Defensives upturn, banking lag. BULLISH!

311 Nations
Germany rebound! Philippines leads! Canada bounces on bottom of range.

313 Major sectors
Commodities fall, especially Iron Ore, global slow down on the horizon?

! = Pay attention this chart is important this week.

What I Find Interesting
Sell in May -- No Way!

From May to October seasonal factors might exert negative pressure on the market. A study by Andrade, Chhaochharia and Fuerst (2012) found that the summer/fall seasonal pattern is still very much alive. In the 1998–2012 sample on average November–April they found that returns are larger than May–October returns in all 37 global markets they studied. On average, the difference is equal to about 10 percentage points. The magnitude of the difference is the same in other studies too. Further back-testing by Mebane Faber found the effect as early as 1950.

Despite the science "Sell in May, and go away" is not a hard and fast rule, it is a tendency. The best example of how the rule doesn't always work is all but one of the last few years -- the market actually closed higher, not lower. What is true, is that in the fall and summer can be some of the worst draw downs, historically many crashes happened in Sept or October, including the big  three: 1929, 1987 and 2007-2008

The sweetest time of investing (Halloween to spring) is past for another year and could work against the market rally. I would just make note of it as a background issue, because we have no way of knowing how much it will influence price movement. So be aware of the market, but don't go away yet.

Canada Housing Bubble
Well I have been afraid of the Canadian housing market since 2008 and year after year I am proven wrong, as money flees China to Canadian real estate, as I wrote in the China Problem.  However, the Alberta economy has been in a tail spin, for two years now due to a crash in the price of oil, now 1/3 the peek price. This has meant 120,000 top paying jobs have vanished. According to CBC news home prices are dropping even still in Alberta. Vancouver home prices took a good hit when an election promise taxed foreign buyers. Global News reports the drop was over 8% in the first quarter of 2017. Now the last hope Toronto has started to see a pull back in home prices (Read more in Bloomberg.) and excess inventory is starting to build. 

Let me show you the problem, here is what a $220,000USD home looks like today in Nevada:

Next here is a $1.3 million cdn dollar home in a bad area of Vancouver:

Ahh you see we have a problem here. Jeff Desjardins who calls his posts the Visual Capitalist, points out that Canada is the most overpriced realty market in the world. Also that most of the only good news in the fall of 2016 really was from Vancouver alone.

As in the USA in 2007 trouble became obvious when smaller lenders began to fail. Canada's Home Capital is all over the news (read more in Bloomberg) as it raised billions in five days of bailouts due to Ottawa putting pressure on major Canadian banks to save the financial system. According to Macleans Magazine, the whole industry is full of false mortgage applications, lair loans and big leverage, it all sounds eerily like 2007, but I have been saying that since 2008.

What Works Now
Stock Index Data

MSCI (Ticker:MSCI)
MSCI Inc. (formerly Morgan Stanley Capital International), is a US-based provider of equity, fixed income, and hedge fund stock market indexes, and equity portfolio analysis tools. It publishes the MSCI BRIC, MSCI World and MSCI EAFE Indexes.

What I Think

I think we are in a cyclical bull market (since February 2016) within a near record long, secular bull market (since early-2009), and neither show signs of abating. 

I take a weight of the evidence approach to broad market analysis. This means I do not rely on one indicator to shape my broad market stance. Instead, I use several indicators to weight the evidence. These include the 17 charts listed above. The first two charts are the big picture, chart 101 the bull Bear Lines and chart 103 NYSE High Low Market Forces. There is no magic predictive power to these two charts, the market could begin to unwind tomorrow --  but it does draw a line in the sand, when to get pessimistic. Overall these 17 charts say the weight of this evidence has been bullish since March 2015 and remains bullish right now. At this point, I am simply monitoring the indicators for signals that will prove this bullish stance otherwise. As a trend follower, I will wait for the market to signal and try to refrain from jumping the gun.  

Right now I see a strong bull market with a breather coming, still good just not as crazy.

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

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