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February 03, 2018 – Weekend Market Comment

February 3, 2018 – U.S. stocks fell sharply on Friday after a stronger-than-expected jobs report sent interest rates higher. The Dow Jones industrial average dropped 665.75 points to close at 25,520.96, capping off the index's sixth-largest points decline ever. The 30-stock index also fell below 26,000. Friday also marked the first time since June 2016 that the Dow fell at least 500 points.

The S&P 500 fell 2.1 percent and finished at 2,762.13, with energy as the worst-performing sector. The NASDAQ composite plunged 1.96 percent to 7,240.95 as a decline in Apple and Alphabet offset a strong gain in Amazon shares.

The Dow posted its worst day since June 2016. The S&P 500 and NASDAQ had their biggest one-day fall since September 2016 and August 2017, respectively. 

The correction has been world wide. Chinese stocks had their worst week since 2016, with fresh concerns about Beijing’s campaign to cut financial risk and predictions of a slowing economy. Europe was a down too, largely due to to the poor result from Deutsche Bank which sent the German lender's stock tumbling. The weakness quickly spread to German stocks with the DAX turning negative for 2018, giving up an advance that had reached 5%, as the DAX slides for a fifth straight day. Although this is still on a typical correction, because of crazy stability, this was the worst weekly drop for the DAX since November 2016, down 3.5%

The fear in the USA is this bull market won't die of old age, it will be killed by higher interest rates. The U.S. economy added 200,000 jobs in January, according to the Bureau of Labor Statistics. Economists polled by Reuters expected growth of 180,000. Wages, meanwhile, rose 0.3 percent last month, in line with expectations. The report sent interest rates higher. The benchmark 10-year yield rose to 2.85 percent on the back of the report, hitting a four-year high. Investors have been jittery about the recent rise in interest rates, worrying they may be rising too fast. On Thursday, the 30-year yield rose to 3.074 percent, its highest level since March. Rising yields slow the economy and draw investors out of the stock market. 

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 rising uptrend. Notice the second window, slope is decelerating. Could this be a long term trend change? BULLISH Bull market -- expect bullish outcomes.
103 NYSE High Low Market Forces
Red splash, but don't panic yet but breadth is deteriorating. CAUTION

105 Non Farm Payroll
Lots of jobs! But beware this is lagging indicator. The smart money is gone before this turns down.BULLISH

107 Industrial Production
Strong industrial production. Trump Bump.  BULLISH

115 Renko
Down Bricks CAUTION

203 OBV
OBV (red line) is with the market. 

207 VIX
17 + 
209 VIX Evaluator
Heading up

211 S&P500 over 50 day
Now about 60% of stocks are above their 50 day MA, above last week when it was 89%. BEARISH

213 Green Arrow
Looks very weak.  BEARISH

301 NASDAQ Summation
NASDAQ breadth is in free fall! Expect trouble in  QQQ and technology stocks.
303 Aggressive Defensive
Very defensive. BEARISH

305 Consumer Bonds vs Equities
Bonds rise consumer rise.  

307 Bond Direction
Long term bonds fall slightly. New Direction. 

309 Sectors
Defensives rise and utilities fall,  consumer is a power house. 

311 Nations
Canada trips, Philippines catches a bounce.  Not much to say. 

313 Major sectors
China and emerging not as bad as USA.

! = Pay attention this chart is important this week.

What I Find Interesting
If you have not yet please read my post from last August: "The Warning of 2017"

What Works Now
I have had physical gold Maple Leaf coins and the gold ETF since Christmas 2017. (Ticker:GLD)

Rotating Nations
If you want to put a segment of your funds outside of US lets look at some top performing nation based ETFs. 

Here are my picks for February hold until month end. 
50% FXI China
35% EWY South Korea
15% NORW Norway

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.

Friday's sell off was triggered by a surge in interest rates. The problem is we past a psychological barrier. The economy and the markets do not do well when interest rates rise. The problem is those rates were dropping for 20 years, so what does that do to the market if it now goes the other way?  We all know that zero percent interest is a unsustainable situation. Yields (orange line) were near zero in the summer of 2016, since then there has been short rise up that accompanied some market weakness (S&P500 is in black), then we hit the long term trend line (red line) and respected it until now. If you look at the far right, the orange line broke through the trend, clearing the way for further rate hikes and prolonged market weakness. 

You might recall that last week I said that short term investors should seriously consider taking some risk off. I could give only a few small technical clues but I did feel the market is getting greedy. To see what I mean, have a look at the monthly version of the cap weighted S&P500:

Here is the S&P 500 in monthly bars going back to 2013. The markets have not had a correction since Trump was elected. You can see that second last bar that tracks January 2018 (the big green bar). Wow that is a very tall bar, it was at its peak when I wrote last weekend. In other words the pigs were at the trough. It felt all too good to be true. You might also note that February (the last bar) has been a tough month so far. But in fact it has not moved very far compared to the run up here. 

The anecdotal evidence of "irrational exuberance" is everywhere, just last week I referred to how ho hum things were getting, the market do nothing but going up. Many people were writing to me and telling me how smart they are and what a killing they are making. Young people tell me they want to be a trader like me, they don't know what that is, but they hear it makes you rich. They also think I can show them what I know in an afternoon. 

The scariest thing is the number of big funds using leveraged derivatives to bet on constantly decreasing volatility. They also are buying every dip, leading to unheard of calm in the markets. Even people in investment clubs are bragging about their bets on VIX ETFs. They simply don't understand the danger. When any trade is too obvious, too crowded, it is dangerous. As I wrote last August in "The Warning of 2017" -- 

"The calm  in volatility markets  (both implied and realized)  since implementation of  the 2009 - 2012 wave of global  stimulus  has  been amazing. You can see how steady the VIX is to measure complacency by working out an average VIX volatility. "

"In short people are making huge bets (as in $100 billion) that the market will do nothing but go up steady. In fact the bets are bigger than the market itself.  That is a lot like the leveraged derivative bets in 2017 that mortgages always pay out. The trouble is when you unwind these trades in a hurry, the VIX spikes. Then other lighting fast trading computers are running software that is programed to sell all investment positions if the VIX spikes too fast. Remember the VIX does not measure market up and down, it measures volatility -- in other words how violent is the change in position. The selling thus triggering a insane huge secondary VIX spike. Triggering more selling. Loop loop CRASH!"

You can get a feel for this in Chart 209 - in this chart we are comparing a near term and a mid-term version of the VIX. Last week it turned up and I said it was a danger signal. As you can see to shorting this long term trend was a sure money maker for a very very long time. But what if this is the point it all changes? How will the market react?

OK so now I have just told you something very scary, now I am going to tell you to forget about it. If you are a short term trader, you should be following my lead last week and taking risk off. Don't be betting the farm on housing stocks or some juiced ETF like UDOW, in fact you should not be leveraged at all. Raise cash or buy some gold is a good idea.  But if you are a long term investor, in stable etfs for now relax, this is the first pull back in ages. Despite a near record one day route, we are not even pulled back to the 50 day average. I am still long half of my "defensive" stocks. The chart 101 bull bear lines are still firmly in bull mode and there is no reason to not think that the buy the dip crowded are not waiting to jump at this pull back. Even in the 2008 crash there was a 10% run up before it got nasty. This is NOT a crash yet, it is not even a correction yet.  If "the trend is your friend" you should know that the overall trend is still bullish. 

That said a 600 point drop is a real scary thing, we have not had one since Lehman Brothers blew up -- this is no time to complacent, antennas UP!  Continue to monitor the bull bear lines, continue to watch chart 209 for increased volatility and always watch chart 103 to make sure breath does not disintegrate. Just like you, I can not predict the future, but we were way, way, over-bought in a near record long bull market and for now I am playing it that way. 

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

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