Daily update 7/31

I guess that settled that.  I have been talking about the weak market internals for weeks and it looks like they finally mattered.  Here is the daily SPX chart.

That was some smack down.  Breadth was 88% negative which was the worst since June 2013 during the so called taper tantrum.  Quite a bit of volume there also as they really ran for the exits today.  There were 102 new lows and only 30 new highs.  That is the most new lows since the Feb. low.  Lets take a look at the futures chart.

The futures dropped straight from the 100 SMA to the 200.  This is a logical place to bounce from.  We also have a short term oversold condition.  It may just depend on whether there is anymore bad news overnight.  A bounce back up to the 100 SMA might provide a good short entry.  SPX closed right on the low of the day.  Most of the time a gap up will retest that low before any meaningful rally begins.

The dip buyers came out as they have been to load up on the gap down.  However, they really got run over today.  I would say that was the most selling pressure since last summer.  I have always suspected this bull market might end like it started with a big gap that went unfilled.  I have pointed out how we have all the usual things that happen at bull market tops.  The only thing we lacked was the topping pattern.  IWM has an obvious pattern.  SPX has a topping pattern also.  It may be one not commonly known about.  I used to have a PDF that described a top and bottom pattern that I can't recall ever reading in a book.  Unfortunately I can't seem to find it.  SPX fits that pattern if it ends up breaking the April low.  We have the technical diverges normally found at bull market tops.  We have had three 90% down days since last June.  It is entirely possible today was the kick off of a new bear market.  We will have to watch how the market reacts in the days ahead.  It might be just a blip, but we have some serious warning signs.  I don't think this is a time to be complacent.  Needless to say I had to adjust the trend table tonight.

Bob

Daily update 7/30

Some stuff up, some stuff down and my poor little brain was going round and round.  What a weird day.  I am going to skip right to the futures chart tonight because SPX didn't really tell us much.

The sellers did not waste any time selling into the big gap up.  The futures tested the all important 100 SMA on the sell off and bounced a bit going into the FED announcement.  After the announcement the futures rallied back up to where they opened.  Sellers showed up again and they drifted lower into the close.   The bears were definitely more aggressive today then they have been lately.  There is quite a battle raging here between bulls and bears.  Price action intraday has been very sloppy with rather sharp up and down moves that end abruptly.  It seems like the bulls need to show some real strength pretty soon or we will end up breaking the 100 DMA.  That could bring in considerable selling pressure given the weak internals.  Tomorrow being month end is sometimes a muted day, but who knows.

I don't know if this is important or not.  I normally don't report stuff without a chart that I can see to verify for myself.  However, with the market in the weakest technical condition we have seen in this bull market I thought maybe I should mention this.  I read this today in Morning MoneyBeat: Bearish Stock Bets Mount

An ominous signal is rising from the options market, where the pile of bearish options bets is growing larger by the day.

The average of outstanding “put” options on the S&P 500 and the S&P 100 indexes last week rose to twice the number of bullish “call” options, said Jason Goepfert, founder of Sundial Capital Research.
Only twice during the past 20 years has that ratio been so lopsided to the bearish side — in mid-February 1996 and in July 2007, Mr. Goepfert said.

Both times, the market floundered in the weeks and months ahead.
“Mostly,” Mr. Goepfert wrote, “the higher the [put/call ratio], the more likely stocks would struggle.”

It is more common for professionals to use puts on the indexes themselves then for retail traders.  Most retail traders use the ETF versions.  That makes it somewhat more likely that it could be smart money buying the puts, but they could just be for hedging purposes.  The 1996 instance saw a little pullback.  However, the July 2007 instance saw a rather large move down into the middle of Aug. from a similarly weak technical condition.   Here is a rebuttal article Why it's not time to worry yet  Unfortunately the rebuttal is an opinion piece.  So basically I have no data to work from.  I hate that.  As you probably know by know I hate opinions not based on at least some facts.   At any rate I thought I would mention it just in case it turns out to be important.


I thought this chart was interesting.

Wall Street loves to say that corporate balance sheets are in the best shape ever.  The reality is a completely different matter when debt is taken into account.  Both gross and net debt have made new highs since the financial crisis.  That should be no surprise really.  Even cash cow AAPL has taken on debt these days.  A lot of that debt has been added to buy back stock and pay out dividends.  Neither activity generates revenue to pay off that debt.  In my book that makes it a very stupid way to use the money and will eventually be a problem somewhere down the road.  One could make a pretty good argument that corporations are actually in the worst shape in the last 60 years.  Wouldn't that help to explain why they are so stingy on giving out raises and hiring new workers?

Bob

Daily update 7/29

The pre FED day gap up strikes again.  As I theorized last night some people did sell into it.  SPY just touched the 7/24 low to fill the 7/25 gap down.  It stalled there until news of further sanctions on Russia came out.  That sent the market down in the afternoon.  Did that catch people by surprise?   I thought the market was supposed to be smart.  It could not see that coming.  Really.  Here is the daily SPX chart.

SPX closed slightly under the 18 SMA and the uptrend line.  The volume increased considerably today.  This continues to look like a W top forming.  If people want an excuse to take some profits the Russia/Ukraine situation might give it to them.  I suspect this is a long way from being over.  Lets take a look at the futures chart.

The futures did indeed kiss the trend line and turn back down.  This looks like the uptrend from the April low is over.  Do we continue sideways or enter a pullback?  The next support is the 100 SMA.  After rallying back above that line in April the futures never broke it on the down side.  Maybe this time will be different. 

For more then 18 months this bull run has laughed in the face of divergences that would normally stop a rally at least for a while.  This looks like the weakest technical condition of this entire bull market to me.  I don't think it will be quite as easy to shake things off this time.  Tomorrow is FED day and is a bit of a wild card.  If we follow through on the down side it is probably time for SPX to head down to the 100 DMA again.  This is one of the longer stretched between touches.

Bob

Daily update 7/28

A little selling and a little buying.  While SPX was flat the transports were down over 1%.  Here is the daily SPX chart.

SPX tested below the 18 SMA yet again today, but managed to close back above it.  The dip buyers came in on the early morning weakness and swept up those bargains.  However, the rally stalled in the afternoon.  Here is the futures chart.

The futures made it up to the underside of the up trend line and stopped.  This could be a kiss good bye, but until it rolls back over we can't know that.  We ran into resistance and stopped for now.  The 60 min. chart is also interesting.

 The 18 and 50 SMAs have come together with price.  Price compressed in the afternoon with a couple of doji bars indicating indecision.

Quite a battle going on between buyers and sellers.  The sellers are looking for strength to sell into and the buyers want weakness and hesitate to chase price.  The end result is a market going nowhere fast.  Eventually this stalemate will end.  I am really hoping that happens before I get bored to death.  We have another FED meeting on Wed.   I have noticed a pattern of the market rising the day before.  It appears they moved the FED day rally that used to be so prevalent to the day before.  Don't be surprised if we gap up in the morning.  However, we are still in the area where we have been seeing resistance.  I don't know if they will be looking to sell into a gap up still or not.  Price action continues to be very sloppy and therefore predictions are pretty useless.  I would say SPX needs to get below 1950 to bring out real selling pressure.  Resistance seems to be from 1970 all the way to 1990.  Until we get out of this range buy dips and sell rallies like everybody else I guess.

Here is an interesting chart I saw today.

Despite the massive share buyback in the first quarter GAAP earnings actually declined.  Not to worry though the fictitious numbers were up 4.6%.  It will be interesting to see what happens this quarter.  While earnings are beating estimates I have not heard anything about projected growth yet.  Historically the higher the market's valuation the more important it has been for earnings to grow.  I don't know if that still matters or not since that is a fundamental thingy.

Bob

Daily update 7/25

It seems like the number one sport these days is bear bashing.  They had quite a bear bashing party on CNBC this afternoon.  I have seen many articles with more of the same.  It is reaching a crescendo rarely seen in my experience.  The majority of market participants are so sure of the trend they feel it is safe to chastise non believers.  This is not a new phenomenon in market history.  However, it most often shows up at primary trend changes.  In Signs of a bull market top   I wrote "1. Sentiment - The one element that occurs at virtually every top is a very common belief that the market can only keep going up.  This is largely caused by the market ignoring everything that should be causing it to go down."  We have this item in spades.  I have heard lots of comments about how the market is ignoring this or that and just keeps going.  There are two times when the market tends to do this. One is at the beginning of a bull and the other is at the end.  Which do you think this one is more likely to be?

The bears won the day.  Here is the daily SPX chart.

Volume dropped off considerably with the slight down opening.  There was no panic selling.  This looked like a buyers strike more then anything.  SPX is still above the 18 SMA, but touched it yet again intraday.  The break out to a new high failed.  New highs dropped down to 90 just one day off a new high close.  Very weak numbers yet again.  Lets have a look at the futures chart.

The futures ended the day below the uptrend line again.  So far this month they have bounced from around that line twice.  Each time we had blue price bars indicating price was extended.  We do not have that condition this time.  I think the odds are higher there will be down side follow through this time.  The apparent W top is still valid and is starting to look more likely to play out.  As always follow through is key and the break of the trend line needs confirmation.

Both SPX and the COMPX failed their break outs to new highs today.  I had to down grade their short term trend status to neutral by removing the upside bias.  I also changed the primary trend for the Russell2000 to neutral.  Lets look at the weekly IWM chart which closely matches the index.

We have a possible triple top even though each top is slightly higher.  This is nearly a 7 month formation now and price is back below the first peak.  This is clearly a formation that could be an end to the primary trend.  The move into this formation is very straight up.  There really isn't any other major low anywhere nearby to use as a sign the trend has changed.  If IWM breaks that May low marked by the green line it is entirely possible its primary trend will be turned down.  For that reason I believe it is prudent to give the current primary trend status a neutral rating.

The current sentiment and technical picture is very consistent with a bull market top.  The last few days on SPX really, really look like trouble with the narrow range and increase in volume.  They would make a perfect bull market final high pattern.  The major indexes are masking very weak market internals.  If this market gets going on the downside it could pick up considerable speed.  I think we all know how the market can flip a switch and act in a completely different way.  This is a setup for such a flip.  Be careful.
 
The July initial jobless claims data is often very flaky.  This is caused by the automakers often shutting down production at some time during the month.  However, the duration of the shutdown varies from year to year.  I was going to look at some charts to demonstrate this when I noticed something a bit odd.  Here is the seasonally adjusted chart.

Notice how the claims have been falling lately.  They are also making lows below the low print in 2013.  Now look at the non-seasonally adjusted data.

This week did not produce a new low for the year.  That is not all.  The claims are actually running higher then the low point from last year.  It appears they have flattened out rather then continuing to fall this year.  This paints a somewhat different picture then the seasonally adjusted data.  This is another piece of data that calls into question whether the economy is as strong as the pundits proclaim. 

This came from Visa after yesterday's earnings report.

In a conference call with Wall Street analysts, Visa's Chief Financial Officer Byron Pollitt noted that the company is guardedly optimistic that the slowing of cross-border volume growth has bottomed.
"In short, we are approaching 2015 bullish on the long term but cautious in the short-term," Pollitt said. "While we expect U.S. and international payment volume growth to remain healthy, we have not yet seen acceleration in global economic growth."

I keep seeing comments from retail companies talking about lack of sales.  Visa obviously is a broad barometer of retail activity that is not store specific.   Its stock topped back in Jan.  While the weather has warmed up it is not so clear the consumer has.  The stock chart of MA is showing the same pattern so it is not specific to Visa.  The U.S. consumer is a big part of the economy and there are real questions surrounding their spending at the moment.  I said this not long ago, but I will repeat.  The data is mixed enough that it is impossible to say that we are not in or about to be in a recession.  The only way one can say that we are absolutely no where near a recession is by cherry picking the data.  The most common cherry picked data I have seen is employment and ISM manufacturing data.  Both of those items have been proven unreliable indicators of future economic activity.   Employment data is heavily revised and used to be referred to as a lagging indicator.  People seemed to have forgotten that these days.

The market and sector status pages have been updated.  Have a great weekend.

Bob

Daily update 7/24

It was certainly a good day to be on vacation.  Talk about a ho hum market.  Here is the daily SPX chart.

We ended the day with a doji bar on yet another increase in volume.  More selling into strength again.  This market is really doing a damn good impression of an important top.  While there was an increase in new highs at 205 the breadth was slightly negative.  Narrowing price range on increasing volume is not what good break outs are normally made of.  The SOX was down another .84%.  That confirms its break of the 18 DMA yesterday.  We have not had so many big divergences since 2011.  This really looks like a heavy market to me, but that could be my bearish bias coming through.  After all I have absolutely no doubt we have the 2nd or 3rd most overvalued market in the last 100 years.  Lets take a look at the futures chart.

As you can see we have a stall over the last few bars.  The futures are down a bit as I write this.  Apparently AMZN had a big miss.  It was down 10% at last check.  At any rate the uptrend line keeps rising and price is not getting any more altitude.  The possible W top is still hanging out there in plain view.  The dip buyers have been rushing in to buy every little tiny break in price, but back to the highs there seems to be very little buying interest.  Here is another look at the IWM chart.

It bounced from oversold as I mentioned it could a few days back and that allowed SPX to get to new highs.  However, the bounce appears to be running into trouble at the 50 DMA.  It could easily roll back over from here.  I still think this is a key index to watch.  Do the bears show up again?

Here is an interesting article Bulls Take Notice - Caution Suggested as Credit Markets and Equity Markets Diverge.  Here is a snippet.

There was plenty of cash on the sidelines from everyone positioned for the mid-term election year cycle to play out and when it didn’t and the economy accelerated they moved back into the market. However, given their risk adverse bias towards the market these same investors and strategists likely went reluctantly back into the market for fear of being left behind but likely did so by buying safer assets like large blue chip stocks and investment grade bonds. This likely explains the underperformance of risky assets in 2014.


I mentioned a few times how low the 10 DMA volume lines were on the latest break out to new highs.  That was lowest advancing volume rally in this bull market.  People were reluctant to put money to work, but afraid of being left behind.  So buy they did, but with only a couple of fingers instead of both fists.  That is a very good article I recommend reading the full thing.  There are some interesting charts in there.

For bulls that want some confirmation bias here is an article for you. 5 reasons why the market won't crash  Too bad it did  not have any nice charts,

Bob 

Daily update 7/23

What a snoozefest of a day.  Here is the daily SPX chart.

Another increase in volume today.  That suggests more selling into strength.  So far this does not really look like the beginning of new leg up.  I think people have been waiting to see if earnings were good enough to justify higher prices.  So far the jury is still out.  We have had a pretty good sampling across industries by now.  Since SPX closed only 2 points higher then it was on 7/3 before earnings we know there has not been much buying interest from earnings.  It seems like we should have had that by now.  That makes me suspicious the jury might come back that prices are too high.  Lets have a look at the futures chart.

The uptrend line continues to rise with the futures not getting much altitude above it.  This is a possible rare W top forming.  Maybe it is my imagination, but it sure looks like the market is really struggling to go up here.  The most interesting thing that happened today was the SOX.  Here is the daily chart.

This index was down 2.3% today.  QCOM had earnings after the close and it is down 4% as I write this.  The SOX has been the best performing U.S. index this year.  This is a volatile sector and does not have the same leadership role it had in the 90s.  However, it still a fairly big weighting and is economically sensitive.  With IWM and RTH already lagging another important sector falling behind would not be particularly good for the market.  Maybe this is a one day aberration, but the chart looks questionable.  I have no idea why the big sell off.  They were so busy on TV crooning over SPX making a new high by 2 points they did not seem to have time to cover why the SOX was down big.  Lets see what shakes out with this one.

Plenty of technical divergences abound, but so far SPX is holding up.  Will it be able to maintain the status quo?  The last two days look like possible distribution and market internals still look pretty fragile.  I think the bulls need to step it up to keep this rally going.

Here is an article on more trouble in China Chinese Home Prices Decline In Record Number Of Cities, Average Sale Price Has Biggest Drop Since Lehman.  Falling home prices is really what got the U.S. subprime problem going.

Bob

Daily update 7/22

Yet another gap up to start the day.  Yet again there seemed to be no fundamental reason for it.  Lately it seems like if the world doesn't end overnight the market celebrates by gapping up.  Here is the daily SPX chart.

SPX made a fractional new high today, but failed to make a new high close.  There was not a lot of buying interest after the open.  This was the third close above 1980.  The market pulled back the other two times.  Will the bulls hold tight and push higher or fold again?  Lets take a look at the futures 60 min. chart.

I marked the four upsdie gaps we have had above 1970.  The only one that got any buying interest to speak of was the first one on 7/3 which was a half day.  I am sure that means the big boys were out of the office that day.  With nobody around to sell the market continued up and made the highest close to date.  None of the other upside gaps carried very far.  We clearly have resistance here.  Here is a look at the overnight futures chart.

The futures broke the upper trend line overnight.  Despite the price pattern tightening up and an over sold breadth condition they were unable to make new highs and stay there.  Total volume was more then 10% higher then yesterday, but very little upside progress was made after the open.  This did not really look like a launch to me.  It appeared more like people selling into strength instead.  So we have horizontal resistance here and the uptrend line just below.  If we pullback again I would think we would end up breaking that trend line.  With all the divergences we have in place I would expect selling pressure to pick up.  The bulls need to blast through this resistance pretty soon.

This is an interesting chart.

So long term investing is now around a 6 month holding time.  Is that because of the speed at which stocks move these days?  I knew holding times had dropped considerably, but I had no idea of just how much.  I am not real sure I understand this.   This seems more like gambling then investing.  I guess the trader comment the other day that the 1.2% drop from an all time high was a long term investing op was not so far off after all!  This does not seem like a good thing to me, but it makes me wonder why volatility is so low.  Are people just selling to the next person at a higher price?  If that is the case we are in serious trouble.  If a lot of the stock holders at the end of this bull market just bought the stock in the last year or less they will have a high cost basis.  It would not take much of a decline to cause some serious pain.  I am sure it is silly to even mention that the bull market will end some day.  We all know bear markets have been ended permanently by the FED.

Bob

Daily update 7/21

Friday was an inside day of Thursday's big down move and today was inside of Friday.  Here is the daily SPX chart.

SPX has been doing a lot of testing of its 18 SMA.  So far it has been holding, but if it does not launch pretty soon it will fail.  We had 97 new highs (22 in SPX) today.  Weak numbers this close to the highs, but what else is new.  There was a lot of talk of how resilient this market is.  That talk always cracks me up.  There have been many resilient markets in the past and the resilience has always ended.  I don't think anybody really believes the market will never have another bear market ever again.  One common characteristic of a final move up in a bull market is that it ignores bad news which is also known as a resilient market.  Sometimes they end with just a normal correction or a prolonged sideways move.  Sometimes they end with a new bear market.  The point is they always end some time and rarely with a big sign that everybody can read.  Lets have a look at the futures chart.

The futures tested below the trend line this morning, but held once again.  We have a pattern of declining tops though.  Price seems to be forming a triangle now.  The lines are coming together so we will break one of them tomorrow.  With price apparently winding up the last two days it should lead to a good move.  All the divergences we have should mean the market ends up going down.  However, this resilient market ... 

IWM waffled around its 200 DMA quite a bit today.  It closed above it, but it is not clear to me whether it is ready to bounce or not.  I think whichever way it decides to go will take SPX with it.   Will it bounce or break? 

I want to revisit the supposed bond bubble for a minute.  I think most market pundits think bonds are in a bubble.  When rates surged last year after Bernanke mentioned tapering QE Bill Gross said the secular bull market in bonds was over.  Many people were predicting higher rates this year and in the future.  They said the same thing in Japan way back in the 90s.  Shorting bonds became known as the widow maker trade.  Check out this chart of nominal GDP and corporate bond rates.

Up until 1980 GDP spent most of the time above the interest rate.  It wasn't until inflation got totally out of control in the late 70s that rates got consistently above growth.  After the FED made a concerted effort to break the back of inflation the situation reversed.  Growth rates have been consistently below interest rates ever since.  Could this be what has put downward pressure on rates?  The drop in growth can easily be explained.  We have had consistently higher oil prices, government and private debt, and greatly reduced manufacturing.  All these factors have been historically proven to be a drag on growth.  I suspect we won't see a true long lasting upward shift in rates unless we get significantly stronger growth.  Is that likely to happen in the next few years?  The movement of manufacturing overseas has slowed down, but neither of the other two factors are improving or expected to improve any time soon.  I suspect we are nowhere near any major sustained up move in rates. Time will tell.  Also notice nominal GDP has never been this low without being associated with a recession.  Strange times we live in these days.

Bob

Daily update 7/18

I think people have absolutely lost their mind.  They were busy celebrating today's turn around on TV and I swear I heard one of them say yesterday's 1.2% dip in SPX was a long term investors buying op.  Really.  That is an insane thing to say.  I would bet a lot of money that there are far fewer instances of a 1.2% pull back from a bull market high being a price not seen again for 5 or more years then instances where price was lower within the next 12 months.  I guess in today's world the definition of a long term investor might be a holding time of a few hours.  I thought people reached a craziness in 2000 that I would never see again in my lifetime.  Wow.  I was seriously wrong on that one.  The worst part is it was a guy that I have heard many times over the years and he is usually pretty reasonable.  That is what euphoria sounds like.

Yesterday the VIX was up 32%.  I looked back through the entire history of SPY back to 1993 and found 18 instances.  I could not find a single instance where the low of that day was not at least slightly exceeded in the days ahead.  We gapped up this morning and did not retest yesterday's low.  If we don't see yesterday's low within 10 days or so it will be a case of it is different this time.  Lets take a look at the SPX daily chart.

SPX retraced the news driven down move all in one day.  However, the percentage of stocks above their 200 SMAs did not make up for the damage yesterday.  The divergences we had on Wed. are now even bigger.  Here is a the futures chart.

The futures never confirmed the trend line break and climbed back above it today.  The market also found resistance in the same area it has been.  Was that enough of a pullback to entice buyers to push us to new highs?

The bounce today got IWM back above the 200 DMA, but still below the 50.  It is probably over sold enough on a short term basis that it could bounce further.  That would likely get SPX to new highs.  However, it is still in poor technical shape and has a lot of work to do to get itself back in a true bullish position.  That could make any trip to new highs short lived if IWM rolled over again.  At the same time it would appear we have very high odds that SPY will revisit yesterday's low again in the not too distant future.  It might want to start that journey on Monday.  On Wed. I said the market was on shaky ground.  The last two days seemed to have made the ground even shakier.  Since I can make a case for a move in either direction on Monday I am not going to guess at it.  At the moment the only thing that would surprise me is if SPX breaks out to new highs and just keeps going from here.  Saying that in the blog probably just made that the most likely scenario.

I thought this chart was interesting.

This chart is from the Merrill Lynch Fund Manager Survey.  Here is a snippet from Merrill.

Improving investor sentiment on global growth, inflation, equities and risk-taking are all testament to a potential macro normalization in the second half. This could eventually feed into a normalization of rates. If growth does pick up, volatility will rise too,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research.

Global Asset Allocators overweight on Equities rose to highest reading in over three years. The reading of net 61% OW is the second highest reading in the surveys history. Merrill Lynch warned that any summer “melt-up” in stocks, “is likely to be followed by an autumn correction. This aggressive positioning for recovery in H2 reflects a significant increase in investors’ inflation expectations,” the survey said.

I added vertical lines marking instances where the survey got above the +1 STD line.  The market did not correct every time.   However, the second time above the line usually does.  The only time we got two peaks above the line without a notable pullback was in 2013.  This is now the third trip above the line.  Will it spark a pullback this time, or just keep on trucking?

The market and sector status pages have been updated.  Have a great weekend all.

Bob

Daily update 7/17

What a difference a day makes.  Here is the daily SPX chart.

The divergences I mentioned last night played out today.  SPX closed below the 18 SMA for the first time since back in May.  New highs dropped down to 95 (33 in SPX).  Breadth ended the day at 78% negative.  That is the worst since back at the Feb. low.  Needless to say it was a very broadly negative day.  Here is a look at the futures chart.

The futures ended the day below the trend line that extends back to the April low.  It needs to confirm that as a break, but if that happens it should indicate the rally from that April low is over.  We have had lots of warning signs lately so that seems likely to happen.  We got the sell warning signal marked by the yellow arrow.  The 10 DMA breadth lines were negatively crossed on the retest of the high.  Tons of divergences in all market internals.  Now we seem to have confirmation of the down side on a very negative day.  Lets take a look at the current breadth chart.

This is an odd setup that is very rare.  The McClellan oscillator is in very over sold territory just one day off a test of an all time high.  A very similar setup happened back in mid Dec. in the circled area.  In that case we traded sideways into the FED taper announcement then rallied to new highs.  The 10 DMA breadth lines were negatively crossed on a retest just like now.  It is amazing how similar the chart looks.  Most of the time that is good for a 5% or more pullback.  However, it was Dec. and everybody was expecting the famed Santa rally.  Things are completely different today.  Instead of being in the seasonally best time of year for the market we are heading into the worst.  At that time IWM was at the highs like everything else.  Not so now.  In fact today it closed below its 200 DMA.  I think we will get a much different outcome this time.  This has been the first or second longest streak without a touch of the 200 DMA for SPX in history.  Everybody piles in slowly on a run like that, but tend to run to the exits all at once.  I don't know if this is the start of a run or not, but the setup looks like it could be. 


I was able to find a better way to look at corporate cash flow on FRED.  Here is the chart.

Cash flow peaked in 2011 Q4.  Maybe that explains the decrease in the Capex line I talked about in yesterday's update.  I don't know if it is a problem that we have not set a new high in cash flow since 2011 or not.  That is supposed to be one of the best indicators of corporate health.  That likely reflects the fact that global growth never really recovered from the mini global stock crash in 2011.  The cash flow stalled going into the 2000 top and clearly turned down going into 2007.  I might need to keep on eye on this in the quarters ahead to see what happens.

There were some downgrades of trends in the trend table tonight.  Follow through will be key on whether we are really starting a pullback or not.  I have this feeling that a lot of people are sitting with their finger on the sell button, but were scared to pull the trigger for fear of missing out on future gains before tapering was complete.  I don't know if today flipped the switch to protect gains or not, but with the weakened technical position we are in it might have.  The VIX was up 32% today so lots of protection was being bought.  Even at that it is still low at 14.54.  It might not be high enough to really bring out the buyers yet.

Bob

Daily update 7/16

A new all time high close on the Dow.  SPX fell a little short.  Here is a little different view of the daily chart.

As you can see the number of new highs in SPX has dropped way off as the rally progressed higher.  That happened while SPX climbed higher without ever even closing below its 18 SMA.  Normally divergences like that happen when there is at least a little selling pressure to make people a little more cautious.  This appears to be a case of buying interest falling off as price climbed.  Obviously if that continues SPX will eventually stop climbing.  Frankly I was surprised they started selling just a few minutes after the open this morning.  I was expecting SPX to make a new high.  They came out and bought the dip, but the bounce ran out of steam before making a new intraday high.  SPY came within .03 of its high.  Lets take a look at the futures chart.

The futures are showing resistance above 1971.  Buying just dries up.  There are lots of divergences  in probably just about any indicator you want to look at.  Here is a look at the number of SPX stocks above the 50 DMA.

Since the 7/8 lowest close of the month this number has actually dropped while SPX has moved up.  There are too many other examples to show.  IWM was down .46% and closed below its 50 DMA today.  It looks to me like this market is on pretty shaky ground here. 

In Signs of a bull market top I showed some valuation charts that indicate we are at the second or third highest valuation in the last 100 years.  There is lots of academic research from Dr. Shiller and many others that clearly show that the higher equity valuation is the lower future returns over long time periods in the 10-25 year range.  Valuation is not a good market timing indicator though. According to all the research I have seen this is either the second or third worst time in the last 100 years to invest new money.  If it is a lousy time to invest new money is it really a great idea to remain fully invested.  Just a thought. 

Here is an interesting chart I am not quite sure what to make of.

What really caught my eye was the Capex+Acquisitions+Dividends line.  I circled three instances where that line turned down.  The red arrows mark approximate SPX tops in 2000 and 2007.  The blue arrows mark approximate starts of the recessions that followed.  In both of those cases the Capex line did not turn down until well into the recession.  Those lines turned up after SPX and well after the recessions ended.  So why has it turned down now?  The Dow made a new high and nobody thinks we are in a recession that I am aware of.  Interest rates have risen some, but are still way low.  I honestly have no idea why it has been falling.  The last two times the Capex line fell stock buybacks dropped with it or shortly after.  I don't know if that will be the case or not this time.  Possibly of more concern is the cash flow line which seems to have flattened out.  If it turns down it would definitely curtail the buybacks.  It is possible this means that CEOs as a group are less confident in the economy these days.  Time will tell if it is important or not.  I really don't know.  I just find it curious.

Bob

Daily update 7/15

Another outside day.  At least volatility picked up a bit today.  Here is the daily SPX chart.

SPX came within 3 points of its all time high.  The Dow made a new intraday high, but fell a bit short of a high close.  There were 106 new highs (32 in SPX).  That is a considerable drop off from yesterday.  Breadth was 63% negative despite SPX being barely lower.  Volume picked up considerably.  The FED released a report that mentioned that certain sectors of the market have stretched valuations.  Is that news?  Really.  I guess some people thought so as the volume picked up on the down side.  We seem to be having trouble getting the launch off the 18 DMA this time.  We have touched it 3 of the last 4 days.  Will it break or take off to the upside?  Lets look at the futures chart.

We ended the day with a white bar.  This is the first time since the break out in May that we got green bars and did not make a new high before turning white again.  We seem to be losing some upside momentum.  It is pretty easy to turn down from this position.  Will the bears take a stab at it?  Lets take a look at the IWM daily chart.

IWM held the 50 SMA today, but it is not looking all that great.  I still believe what happens to this ETF is important.  The SPX break out to new highs in May happened only after IWM found a bottom and started to rally.  A bounce from here could help the other indexes get to new highs again.  However, if this thing does not break out itself I don't see the rest of the market going very far.  This sector is in bubble valuation.  It is so bubbled up even the FED has noticed.  I think it is going to be very difficult for this ETF to break out and keep going.  I guess we will see.

What happens over the next few days will likely be earnings driven.  Will they be good enough to justify the current high prices?

Here is an interesting chart from Japan. 

They embarked on a massive money printing adventure in late 2012.  That caused a big crash in the currency.  That helped with exports and boosted the economy initially.  However, there is one serious problem.  Japan imports a lot of food and energy.  The currency crash greatly increased the prices of those imports.  As this chart shows the net result was a lot of inflation with no real increase in wages.  This is not making the people happy and is starting to have a serious negative impact on their economy.  Recently machine orders  dropped 19.5% month-over-month the biggest drop ever.  They are now talking about -4% GDP for the second quarter.  Of course the tax hike in April only made the situation worse.  Given the size of their economy their money printing operation is larger then ours.  I guess it is not working particularly well.  I am sure Paul Krugman will say they just did not print enough.  For some reason my little brain just can't grasp the concept of printing and spending your way to prosperity.  If only I was just a little smarter maybe I could understand.

Germany is starting to slow down of late.  China is dealing with huge credit market problems that is surely going to cause a slow down.  I don't really know how strong the U.S. economy is.  I am sure it is not nearly as strong as the pundits would have us believe.  If the global economy slows down significantly the U.S. will also.  We are too interconnected these days.  There is no escape. 

I downgraded the R2000 intermediate trend to neutral today.  It is back negative on the year so kind of hard to say it is in an uptrend.  I should have initialized the table that way.  I just did not really think about it with all the other indexes clearly going up.

Bob

The economy

Everyday the pundits are talking about how strong the economy is.  These same people never recognized a recession until many months after it started.  The reason is that every recession is different and often the data in real time gets changed later.  The most often cited data for economic strength is the job market.  Here is a chart of the data the last few years.

The last few months have been pretty good with numbers over 200,000 a month.  However, we also had a strong period in early 2012 that was similar, but did not last.  Employment data is highly revised and is not a reliable gauge of future economic strength.  Most of the time job data goes negative near or before a recession, but that is not always the case.  Here is a look at the data around the 1973 recession.

Just before the recession started the job data looked pretty good.  The month just before the recession saw 306,000 jobs created.  Job data was positive for another eight months.  That particular recession was caused by an oil price spike.  Here is a look at the 1960 recession.

That recession started with 354,000 jobs gained.  There are a number of recessions where job growth was over 200,000 within a few months of the start of the recession (e.g. 1990 and 2000).  There is no employment numbers that can be used to say a recession is not possible or is a long way off.  The economy can be generating jobs pretty strongly and reverse quickly. 

Another indicator often cited recently for economic strength is the manufacturing sector.  I believe a significant part of this is the PC upgrade cycle caused by Microsoft dropping support for Windows XP in April.  That event will be short lived, most of it will probably be completed this quarter.  Lets take a look at the recent ISM manufacturing data.

Currently the ISM is pretty good, but is it a reliable indicator of economic growth.  The first quarter of 2011 had three ISM prints above 59 in a row.  That quarter saw 2% growth which dropped to 1.9%and 1.5% over the next two quarters.  The first half of 2012 saw 3.3% and 2.8% growth.  The ISM numbers during that time frame were all in the low 50s with 53.7 being the highest.  The ISM number at the start of the 1973 recession was 68.1.  Again it was not a good indication of the true state of the economy.  There are many historical instances with the same result.  The ISM data is not a reliable indicator of current or future growth.

Therein lies the problem.  The stock market is at all time highs and the pundits are screaming the economy is getting stronger.  However, the pundits are using unreliable economic indicators to make their case.  Lets look at a couple of different charts starting with retail sales.

The growth rate of real final sales has never gotten this low without being associated with a recession.  Check out this next chart.

The growth rate of GDI has never gotten this low without being associated with a recession.  This does not look like a positive for the economy.  I already showed the GDP chart where a reading as bad as we had in the first quarter (-2.9%) has never happened outside of a recession.

Some data indicates the economy is ok and other data indicates we are likely in a recession.  What is really going on here?

Bob

Daily update 7/14

The futures had a 4.25 point intraday range.  If the range gets any smaller they might as well close the market.  Here is the daily SPX chart.

We started with a big gap up, but nobody seemed to know what to do with it as SPX was sideways after the open all day.  This was the third highest close on SPX ever and just a fraction below the 2nd.  There were 170 new highs (40 in SPX).  Not very good this close to all time highs, but what else is new.  I read today that we have had three of the top ten narrowest range days on SPX since 1972 in the last few weeks.  Even in a low volatility time period this is extremely low.  How long before it reverts to the mean?  Here is a look at the futures chart.

We got green bars again.  Is this a retest or start of another leg up?  The lack of enthusiasm today suggests it might just be a retest.  We will have to watch closely and see what happens.  Here is a look at the current breadth chart.

Both indicators are currently negative.  Retests that fail in this condition tend to lead to 5% or more pullbacks.  We haven't had one of these in quite some time.  Will the bears strike or will the bulls pull out another miracle save and propel the market higher?  The answer may lie with IWM.  It is clearly showing considerable relative weakness since March and is a key risk on/off index.  If we don't get more strength there pretty soon I would expect the market will roll over.  I would consider a break of the SPX 18 DMA as a sign the market is turning down.

I found this chart and article very interesting.

Source: Dr. Ed Yardeni

The bull market in the S&P 500 since March 2009 has been marked by corporations buying back their shares and paying out dividends. From Q1-2009 through Q1-2014, S&P 500 companies repurchased $1.9 trillion of their shares and paid out $1.3 trillion in dividends. During the first quarter of this year, buybacks totaled $637 billion at an annual rate, nearly matching the previous record high during Q3-2007.
As I have often observed in the past, corporations have an incentive to borrow in the bond market and use the proceeds to buy back shares when their earnings yield exceeds the corporate bond yield. That’s been the case since 2004 thanks to the Fed’s easy monetary policies under both Alan Greenspan and Ben Bernanke, and now Janet Yellen.
Buybacks are a form of financial engineering since they boost earnings per share whether a company’s fundamentals are improving or not. They’ve certainly contributed to the bull market’s great run in an economic environment that has been widely described as “subpar.”
When the next recession hits, corporate cash flow will decline and investors are likely to be less willing to buy corporate bonds. As a result, buybacks will dry up as they did during 2008, exacerbating the eventual bear market in stocks. 

I was shocked to see that companies bought back $1.9 trillion of their shares.  I view that as a complete waste of money.  It does absolutely nothing to generate future business.  What does that say about the state of the economy if they think that is the best use of excess funds?

Bob