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August 26, 2017 – Weekend Market Comment

August 26, 2017 – U.S. stocks closed mostly higher Friday on new hopes for tax reform, with the Dow Jones industrial average notching its first weekly gain in the last three weeks.


Markets rebounded this week. The S&P 500 closed up 0.72 percent while the Dow added 139.16 points for the week. The Dow closed 30.27 points higher to end at 21,813.67, with Home Depot and IBM contributing the most to the gains. The S&P 500 ended 0.17 percent higher to close at 2,443.05, after energy and telecommunications stocks gained. The Nasdaq composite fell 0.09 percent to end at 6,265.64.


Here is how the S & P 500 did this week:




Here is what our charts say:


CLICK HERE: To see the 100 and 200 series charts





101 Bull Bear
Bull market (dark green over red)  the dark green 50 day average is in a flattening uptrend.  NOTICE THE SLOPE (second window), we might be starting a big sell off.  Bull market -- expect bullish outcomes.
!
103 NYSE High Low Market Forces
Breadth lines CROSS up! 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
Renewed stronger industrial production. All hail the Trump Bump. BULLISH
!
115 Renko
4 Down Bricks CAUTION

203 OBV
OBV (red line) is slightly below the market. CAUTION

207 VIX
Fear subsiding

209 VIX Evaluator
Looking better


211 S&P500 over 50 day
Now about 47% of stocks are above their 50 day MA,  slightly up from last week when it was 43%. 

213 Green Arrow
Only put new money to work when I draw a green arrow.

!
301 NASDAQ Summation
Nasdaq breadth is falling. Pay attention -- could turn here.
!
303 Aggressive Defensive
Very defensive.

305 Consumer Bonds vs Equities
Bonds rise consumer down. BEARISH

307 Bond Direction
Bonds Rise! BEARISH

309 Sectors
Banks look better, caution rising utilities and defensives.
CAUTION

311 Nations
World sucks less than USA. China and emerging best places to hide.

313 Major sectors
China and emerging rule.

! = Pay attention this chart is important this week.



What I Find Interesting


The Warning
Nobody knows when the next sell-off is due, but for those that say there is nothing on the horizon that is a problem... Please read my rant on why the markets are not ideal.



Whole Paycheck 
The 800 lb. gorilla has spoken.  Amazon.com (AMZN) announced that Whole Foods Market would be cutting their prices and that its Prime members would see discounts on  purchases.  That was enough to send competitors reeling.  Consumer staples (XLP, -1.38%) badly lagged as food retailers & wholesalers ($DJUSFD) dropped a collective 4.12% on Thursday.  Kroger (KR), the largest grocer in the U.S., tumbled 8.10% to close at 21.10, its lowest level since early 2014.


Risky Business
Howard Marks in my Warning of 2017 has cautioned us on the crowded trade in VIX futures (and even VIX ETFs). In other words the "ants" have found some honey on the sidewalk and don't understand how easily they can be stepped on. I know a few home traders who are playing the XIV ETF, it is hard not to be greedy when you see the vast fortunes being made since 2012 in this super leveraged investment. Almost 6 times your money in two years! I also talk to a couple of VIX future traders (Hi Mario in Lima) and they have made some amazing returns lately. But if you were listening, what I was saying was that we have not had markets this stead since the 1960's. Don't count on that party going on in the second half of this year.


This last few weeks the market gave them a little spanking, but in a third-quarter 2017 sell-off this could drop 5 times faster than it rose. For a tasty sample look at the autumn of 2015, notice the clif like plunge! That was a far less crowded trade then.  

I have often said, new traders look at return, professional traders look at risk. The XIV etf tracks the VIX futures, and you will notice in the offices of people who know more than you (Wall Street and global banks) far more traders are trading Bonds than Futures -- there is a lesson in there.


US Treasury Broke - Again
On Tuesday next week the U.S. Treasury either gets a pass to borrow more or the U.S. government is out of money. Goldman Sachs, in guidance to investors last Friday, pegged the odds of the extension at 50/50. Treasury Secretary Steven Mnuchin wrote in the letter to Congressional leaders. "I believe that it is critical that Congress act to increase the nation's borrowing authority by September 29, 2017,". We have seen this movie many times before and at the last minute the vote comes through to fund. This time the wild card is U.S. president Trump, if he is in a bad enough mood he might refuse to sign the measure.


Emerging Over USA
For 10 straight weeks a total of $30 billion has left U.S. stocks, marking the longest streak of outflows since 2004, Bank of America Merrill Lynch said in a Thursday report, citing EPFR Global data. Investors turned instead to emerging markets and European and Japanese stocks, which saw $36 billion in inflows over the last 10 weeks. 


Chart 103 Then and Now
I love Chart 103 NYSE High Low Market Forces. Learn more in the CME4PIF school Lesson 5.  As I say below I am concerned when this chart falls off as it is now. So what is a good looking chart 103 and when does it predict danger? I think one key is the second window red splotches, the more you see and the closer together and the deeper they fall, the shakier the market. Keep in mind alternating red and black splotch is like distant thunder, be aware that the market is getting soft.   Here we go back in time and visit the chart in three times;

Early 2006 -- The start of 2006 is when The 2005 Economist Article on the U.S. housing bubble had hit home to Wall Street "the cat was out of the bag". This was not going to end well but mostly the insiders knew how bad it would be. A few smart guys started selling synthetic CDOs, a big bet on the disaster coming. AIG, Bear Sterns and Lehman Brothers failed to get the memo and played right into their hands. 


Late 2007 -- By now the suckers knew they were duped. Panic set in at AIG, Bear Sterns and Lehman Brothers -- after doing the math... they knew they were dead meat. What's more, at other banks they could smell the blood, shorting the market and selling their CDO's to sucker clients. Traders dumped equities and shorted the walking-dead financial institutions. The bump Christmas was the last as the buy the dip crowed flooded in. By 2008 it was nothing but down.




Today - So this is why the red splotches in the 103 chart are so interesting to me. Notice how today's chart looks a lot like 2006. Probably we are not going to blow up like 2008 and so the chart does not look like 2007 but you can see that once again the pros are getting nervous.



Also you see why I say this is a time of weakness and is probably headed within a year to a sell-off.  


Transport to Nowhere
The DOW Transport index is a leading indicator of the market... right now it is not indicating much,
 


What Works Now
Silver
Canadian silver miner Sabina (ticker SBB.TO)


Alternate Energy
Plug Power is an American company engaged in the design and manufacturing of hydrogen fuel cell systems that replace conventional batteries in equipment and vehicles powered by electricity.

Plug Power's GenDrive system integrates fuel cells manufactured by both Plug Power and Ballard Power and incorporates a hydrogen storage system that allows the system to "recharge" in a matter of minutes as opposed to several hours for lead-acid batteries. It allows hydrogen-powered forklifts to run at a constant steady power compared to conventional batteries, which experience "droop" in their output towards the end of a shift. GenDrive units occupy the same space designed for conventional batteries. (Ticker: PLUG)


Emerging Growth
The India ETF has been mention many times before... still growing many say its the new China. (Ticker:INDA)




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 with some signs of abating of the cyclical market.

As predicted here, we’ve had a very large decline in stocks last week and a rebound. Depending on what index you use and how you measure, it’s one of the biggest in the past few years.


One trading blogger pointed out that on average since 2012, the market has rallied 4% after a pull back. To suggest that perhaps we should all buy the dip and jump on the rally. That "since 2012" is the key to the statistic. From 2009 to 2011 the market was roller coaster as people tried to decided if the economy was going to ever recover. Would the Great Recession become Great Depression 2.0 -- there was a lot on the line, was this a recovery or was the end of the America era. It was in 2012 I published "Why I Believe in America" (and re-posted in 2014). Because I was optimistic about the economy and investing. From 2012 to now the markets have agreed, with strong manufacturing and employment data ever since. In other words the blogger who quotes the 4% bump is cherry picking statistics from a record breaking epic rally.





As I said before a bump this week, after a sell off was likely, perhaps even a summer rally has started. Yes it is still a bull market and the bounce we had this week was really no surprise.

However, before you back up the truck full of money to invest, I also said the weather had changed, based on the market breadth chart we are entering a period of market melaze. Keep an eye on those red splotches in the second window of chart 103 NYSE High Low Market Forces.

Remember that since 2009, the S&P500 has rallied a whopping 320%. Breadth has been fading significantly since April, masked by fewer and fewer big names alone supporting the indexes. This is always a recipe for trouble.

I think we are prime for a autumn sell off and I expect no big up side for the rest of the year. Valuations are high and opportunities few. I also still think this is the transition from the Trump bump to the Trump dump.

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