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Wednesday, July 16, 2014

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.


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