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May 05, 2018 – Weekend Market Comment

May 5, 2018 – U.S. stocks closed sharply higher Friday as Wall Street shrugged off lackluster numbers in the government's monthly jobs report while shares of Apple hit an all-time high to lead the technology sector higher.

The Dow Jones industrial average closed 332.36 points higher at 24,262.51 thanks to a 3.9 percent rally in Apple's stock, which jumped after famed investor Warren Buffett revealed that he bought millions of shares of the iPhone maker in recent months. By the closing bell, Apple had posted a gain of 13.45 percent for the week, its best since October 2011. The S&P 500 rose 1.2 percent to finish at 2,663.42 after falling 0.4 percent earlier in the day, buoyed by a nearly 2 percent gain in tech, which led all 11 sectors for gains. The NASDAQ composite rose 1.7 percent to close at 7,209.62, its first positive day in the last three sessions. The index was led higher by the aforementioned rally in Apple, a 1.4 percent gain in Facebook and a 2.4 percent boost in Google-parent Alphabet.

Here is what our charts say:

100 Series: In Market? Aggressive or Defensive?   CLICK HERE: View 100 series charts

101 Bull Bear
Bull market (dark green over red)  the dark green 50-day average is in a dropping trend. Notice the second window, the slope is negative and staying negative.  BULLISH Bull market -- expect bullish outcomes.
103 NYSE 52-week high low market forces
Breadth negative again. Also a lot more red in the second window. Not good. As I said before, February dip below 400 on the second window, says a long-term danger of more pain to come. BEARISH

105 Aggressive Defensive
Aggressive but late in the cycle not for new positions. Mostly due to trouble in classic defensive stocks, could be a false signal.   BULLISH

Long-term Investors: Stay the course it is still a bull market.
Swing Traders: Remain aggressive, but not for new positions. The path of least resistance is up. (You might ignore this signal until chart 103 improves).

100 Canadian Series: In Market? Aggressive or Defensive?   CLICK HERE: View 100 Canadian series charts  <-- This is NEW.

200 Series: Market Health   CLICK HERE: View 200 series charts

201 Renko

203 OBV
OBV (red line) is way ahead of the market. The big boys still have strong faith! BULLISH

207 VIX
VIX near 15 and falling. Making a huge jump, from near 14 intraday on Wednesday to briefly above 18 in trading on Thursday, now fading out. CAUTION

209 VIX Evaluator
Neutral.  CAUTION

211 S&P500 over 50-day
47% of stocks are above their 50-day MA, just below last week when it was 50%. CAUTION 
213 NASDAQ Summation
Small bounce with lousy breadth. BEARISH

215 Consumer Bonds vs Equities
Bonds rise. Consumer holds in there. 

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

219 Industrial Production
Strong industrial production. But beware this is lagging indicator.  BULLISH

300 Series: Market Segments   CLICK HERE: View 300 series charts

301 Bond Direction
Long-term bonds falling. BULLISH

303 Sectors
Consumer peaks and utilities strong. Tech surges on Apple -- NASDAQ rises. CAUTION

305 Nations
Emerging is dead. Canada & Germany gets a lift in flight to quality. BEARISH

307 Major Sectors
Canada pulls ahead, slow commodity lift.

! = Pay attention this chart is important this week.

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

Way to Go Canada!
Canadian stocks after a long time in the doghouse are getting a boost from commodities and a stronger U.S. dollar. (Ticker: XIU)

Reminder: Stocks Tank Long Before the Economy
I have often said this is the second longest economic expansion in our lifetimes.  The longest was March 1991 to March 2001. If the economy does not fall into recession in before July 2018 this will be the longest economic expansion in our lifetime. Economic expansion is time between recessions, but the stock market is forward looking and the market can and generally does plunge far in advance of economic contraction.

Look below at the end of the last long bull run at the turn of this century. The market topped in the late summer of 2000, the bull bear lines crossed by the early fall of 2000 but the official recession was still six months away. As you can see the bull bear lines kept you on the right side of the market, except for a tiny whipsaw in the fall of 1998. (click on chart to enlarge)

Looming Death Cross
When the Bull Bear lines cross down the term used is a "death cross" and it might be soon. One way the two lines could cross is that the 50-day is not going any higher so the 200 will simply at some point run into it. If this market continues to go sideways like it has, then over the next three to five weeks, the S&P will hit a 50/200 day ‘death-cross’ at about 2,629, right around Memorial Day (May 28, 2018). That would be the end of our "bull market", with me stepping to the sidelines.

Joanne Klein Best Market Timing Indicator
Ms. Klein is a popular market blogger, who has a timing system that is popular with swing traders, published each day on the website.  She has her own version of the Bull Bear lines. She calls it: "Chart 57 - Best Market Timing Indicator"  She looks at the S&P500 10 and 50-week EMA and has a stochastic RSI oscillator on the bottom of the chart. Viewed from a 20-year period it gives a good representation of the economic cycle.

On the bottom window, the Stochastic RSI oscillator is heading for the .2 zone where trouble starts and on to .1 where she says to give up all hope of a quick recovery.  As you can see the 10 week is at about 2660 and the 50 week is at about 2590. Like my bull bear lines chart, it is clear this is near a cross-over.  The dotted blue line is the 600-week "recession" line currently way down at 1,800.  That is a long way down, at about 2014 market levels!
The Warren Buffett Index
Famous investor Warren Buffett (pictured here doing "coke" like a Wall Street high flyer) says he can spot an overextended stock market by dividing the value of the Wilshire 5000 index by the U.S. GDP. That is what the chart (below) from the Federal Reserve shows. You can see it is true that the indicator does roll over before a recession (gray bars). It is also clear that currently, we have a very high level, the first ever +1.7 reading. The trend is clear and obviously high -- what is not so easy to know is, when will it end?

This Could be Why
In 2007 you could feel the market begin to "lag" clearly something was starting to bother it and I even thought that the red-hot real estate speculation bubble was the second biggest problem in the markets. In those days there were stories of people walking away from their homes and price falling a bit. But you never "see it all" at the time. In 2007 I assumed we would have a normal 30% pullback and a few savings and loans would get absorbed into bigger banks. Who fully knew that the problem was so large due to big bets on derivatives. I never dreamed Lehman Brothers would collapse. Still, there was that lag in the market, as the insiders moved out of the market. The charts knew long before I did.  

Now here we are in 2018 and again you can feel the lag in the market. There are some diplomatic tensions, but mostly global peace. There is full employment, factory output is high and banks are better capitalized than they have been in 50 years. When trouble comes it will be hard to see at first, then look obvious later.  So what is the market worried about now?

In the November 4 Market Comment, I said that impeaching the President would be a disaster of epic proportions and I detailed how the stock market fell apart during the Nixon Watergate mess. 

This week the Washington Post says U.S. President Donald Trump is confronting the extraordinary possibility of being compelled to testify via grand jury subpoena. Any way you slice it, his options don't look pretty, constitutional and legal scholars say. If Trump challenges the order in the U.S. Supreme Court, he probably loses. If he agrees to testify, he risks committing perjury, resulting in impeachment. If he refuses to comply, he opens himself to political harm and embarrassment — and even jail time if he's held in contempt. Could this be the big surprise?

Too Much Corporate Debt?
The Institute of International Finance noted in a report last month that U.S. non-financial corporate debt rose to $14.5 trillion in 2017, an increase of $810 billion from 2016 and a figure that equates to 72 percent of the country’s gross domestic product (a post-crisis high).
That is bad news as the borrowing cost are also increasing. As an example, the three-month LIBOR has jumped to almost 3% from 1% at the start of 2017. While that’s still low historically, any small increase gets magnified across such a big amount of borrowings. 

National Association of Credit Management says it's "dollar collections” statistics (which measures the ability of creditors to collect the money they are owed from their customers) are falling. It tumbled to 46.7 in April from 59.6 in March, putting it at its lowest level since early 2009, the height of the financial crisis.

The worst hit industries are retailers, supermarkets and energy companies. According to the Houston Chronicle, the 2017 bankruptcy rate for companies in Texas is the worst in nearly a decade. 

Good News -- Internet Tech Hangs In
The Internet Tech ETF is still holding well above its 50-day moving average (green area). (Ticker: FDN) 

Most Valuable Brand Map
The good folks at created the map below by adjusting the size of each country according to the market value of its most valuable brand and color-coded each country based on two measures of the companies brand strength.

In this year's map; Amazon replaced Google and Canada once again features the vampire-squid-banking-monopoly RBC. Also, no surprise; any African nation, any central American country, Greece and Portugal did not even rate a mention. It is amazing that Nokia in Finland still rates.

Doggy Do

What Works Now
Canadian Wood
Canfor Forest Products is busy supplying the Canadian housing bubble. 
(Ticker: CFX)

First World Problems: Fat Asses
Mind Body Inc. gets you hooked when the user downloads a free App then sells you expensive local fitness classes. (Ticker: MB)

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

Here are my picks for May, hold until month end.

50% EWJ Japan
35% EWS Singapore
15% THD Thailand

What I Think
I think we are in a near record long, secular bull market (since early-2009). Currently in a sideways consolidation or correction. 

It is still a bull market, so don't let too much gloom seep in. On Friday Warren Buffett announced he was buying a bigger piece of Apple, so the stock made an all-time high. Then John Williams of the San Francisco Federal Reserve said "comfortable overshooting 2% inflation for a while" and whoosh the market rallied impressively. Speculators also liked the soft job numbers that help lower fear of more than four rate hikes this year. But any one day does not change my view on the market, it is still soft. The good news is that American Internet tech firms are doing OK and much of the buying is the big players, driving the OBV chart higher. Canada is doing well, as the price of oil is rising, gold is profitable, commodities are stronger and the rising U.S. dollar is making Canadian products look like a bargain.
Despite the "animal spirits" on Friday, as far as I am concerned this market correction continues. We are still in a consolidation wedge on the charts. Until Friday the Dow and the S&P 500 were below their 200 day moving averages. The 50-day and 200-day bull bear lines are still being drawn into an area where they may cross soon. Industrial and financial stocks are leading the drop this week. Understand, it is late in the cycle, volatility is plaguing the market, inflation looks real, commodities are rising making goods more expensive, interest rates are rising. Overall it is not a very happy market. 

Don't fight the market. Go to your blender, grab a few limes, ice, a decent bottle of tequila and a Corona beer -- make yourself a huge "Bulldog" and say -- Happy Cinco De Mayo!

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

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