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Tuesday, March 31, 2015

Daily update 3/31

As expected getting three up days in a row was too much to ask for. 

The bears did not get all of yesterday's gains, but they took quite a bit.  The Dow was down enough today to make it negative for the first quarter.  The transports have been relatively weak since last year and are also down for the quarter.  SPX had a miniscule gain for the quarter of 9 points.  That is what happens when you change direction every few days.  It looks like SPX may have got rejected at the 18 and 50 SMAs.  Downside follow through tomorrow would confirm that action.  If this bounce is over it would be the smallest bounce yet off the 100 DMA buy signal. 

The bulls came out to buy the gap down after yesterday's strength.  However, after nearly filling the gap the sellers showed up and took over.  The futures are now back below all the key moving averages except the 200 SMA.  I would say the bulls need to show up in force tomorrow or we are going to end up breaking the last swing low.  That event would likely send SPX down to its 200 DMA.

Last year SPX made a new all time high the first few days of April before a sharp sell off started on 4/4.  There has been a pattern in recent years of selling in the two weeks leading up to tax day. 

This was the first March we did not make a new bull market high since 2011.  That was the only other March in this bull market not to make a new high.  We know what happened later that year.  Also remember that prior times when Dec. and Jan. were both negative stocks could be bought later in the year at significantly lower prices.  The 1983-84 occurrence was the only time that pattern did not occur in a full fledged bear market.  Also remember the transports did not confirm the new high this year in the Dow.  So we have several warning signs that indicate there could be quite a bit more weakness this year.  It would not be surprising if we were entering a full fledged bear market.  Its just too early to tell yet.  However, caution is definitely warranted.


Monday, March 30, 2015

Daily update 3/30 Quicksilver Markets

We broke the string of no back to back up days.  Interestingly enough the streak ended at 28 days which is the same as the last two longest streaks since WWII.  According to Bespoke those streaks were in 1970 (bear market) and 1994 (multi-month correction).  It certainly is not what strong up trends are made of.

Quite a sizable up day, but a also a sizable drop in volume.  Breadth was a strong +70%.  New highs picked up a bit to 151.  Still nothing to write home about.  So far the bounce still looks like the dead cat variety.  We will see what happens tomorrow.  The early part of April has been negative the last few years.  Last year was pretty vicious.  Will that pattern repeat?  Strength in Asia and Europe brought out the buyers in the U.S. today, but will they keep on buying.  The current pullback has not really gotten very oversold like most of the time when we hit the 100 DMA.  I just don't think there will be enough fuel to send us higher this time.

The futures now have green bars so what little over sold condition we had has been alleviated.   We stopped today at the 100 SMA.  That could be significant resistance.  There was not enough upside to make a positive DI cross yet.  If we roll over here it seems likely to go through that last low to me.  If we get a confirmed break on the upside of the 100 SMA it could get the bulls back in control.

Given how hard it has been to get two up days in a row, three might be asking a bit too much.  The bears may want to take advantage of those higher prices to sell into.  If the bears show up tomorrow we will have to see how much damage they do.  If not too bad the bulls might try for more up.  It is just hard to say with the way we keep changing directions this year.  Evey time the market is ready to break out or break down it reverses.

The Office of Financial Research (OFR) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  Here is what they say about themselves.

Our job is to shine a light in the dark corners of the financial system to see where risks are going, assess how much of a threat they might pose, and provide policymakers with financial analysis, information, and evaluation of policy tools to mitigate them.

There recent report Quicksilver Markets was quite interesting.  If you are a longer term investor I suggest taking a few minutes to read it.  Many of the charts in there I have shown on this blog.  There are also some charts I have not seen before.  This table of valuation and returns was interesting.  They put the circles on there, not me.

Here is their conclusion:

Markets can change rapidly and unpredictably. When these changes occur they are sharpest and     most damaging when asset valuations are at extreme highs.  High valuations have important implications for expected investment returns and, potentially, for financial stability.

Today’s market environment is different in many ways from the period preceding the Great        Recession, because regulators and market participants have made adjustments to enhance financial stability since the financial crisis. In that time, stock returns have been exceptional and market volatility generally subdued. Today, many market strategists see the bull market extending throughout 2015.

However, quicksilver markets can turn from tranquil to turbulent in short order. It is worth noting that in 2006 volatility was low and companies were generating record profit margins, until the business cycle came to an abrupt halt due to events that many people had not anticipated. Although investor appetite for equities may remain robust in the near term, because of positive equity fundamentals and low yields in other asset classes, history shows high valuations carry inherent risk.

I would like to know more about what adjustments market participants have made to enhance financial stability.  From what I can see leverage has never been higher.  At any rate the government is telling you the stock market is over valued and carries "inherent risk".  It is not just crack pots like me telling you the market is a risky place these days.


Friday, March 27, 2015

Daily update 3/27 Global EPS recession?

Not much buying enthusiasm today. 

SPX managed to close in the plus column today, but volume fell considerably.  The bulls have been adding 15 points or more most of the time on the first up day after the close below the 100 DMA.  We didn't even get 5 points this time.  For now buying enthusiasm has clearly waned.  We will have to see if it gets rekindled or not.  Breadth was +55%.  New highs increased some to 55.  New lows also increased some to 30.  It looked a lot like a dead cat bounce to me.

The futures found resistance all day at the 200 SMA.  The price bars look like a consolidation of the big move down so far.  This could turn into a reversal, but that looks like the lower odds scenario.  I think we go lower still. 

The transports touched their 200 DMA yesterday and are not far above their Feb. low.  Remember they did not make a new high this year with the Dow.  That set up a Dow Theory non-confirmation.  A break of the Feb. lows by both indexes would constitute a Dow Theory sell signal.  The Dow still has a good ways to go yet.  This is something to watch in the weeks ahead.

Today looked like a pause day in the downtrend.  We have not had consecutive up days all month.  Will Monday continue the pattern and be down?  I still think SPX is headed to its 200 DMA.

People are starting to talk about a possible profits recession (two quarters in a row of declining earnings) in the U.S.  However, it may be a global phenomenon.

Something is different then what we have seen in this recovery.  Is this why the global stock ETF GWL broke down months ago?  Will a profits recession turn into a full fledged global recession?

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


Thursday, March 26, 2015

Daily update 3/26 Bull/bear market model

 Downside follow through.  However, Bob Pisani was very encouraged since the futures were down 18 points in the early morning when he got up and we ended only down slightly.

SPX closed slightly below the 100 DMA for the fifth time this year.  Will the 100 DMA dip buyers show up again?  New highs were the lowest this year at 24.  Breadth was -58% and TRIN was 1.21.  No sign of panic selling in the stats. 

The -DI line crossed above the 35 threshold again.  As I have previously noted it has done that with a lot more frequency since Oct. then in the prior years of this bull market.  We are definitely seeing higher levels of selling pressure on pullbacks these days.  I read that this was day 26 without consecutive up days which is the longest streak since 2001.   As I am sure you are aware that 2001 was a bear market year.  The market is throwing out warning signs right and left.

I have no way of knowing if the people that have been buying at the 100 DMA are still interested in doing that or not.  It obviously has not been working so well this year.  We also have the added distraction of war in the middle east.  We have considerable room to bounce without disturbing the short term downtrend.  Whether we bounce or not likely depends on the news flow.  We have not had a TRIN over 1.5 on this pullback yet and that tends to diminish the odds of a swing low that runs to new highs.  Bounce or not tomorrow I expect we will see lower prices yet to come.

I saw an interesting article with a somewhat misleading title.  Is a New U.S. Bear Market Hanging Over Our Head?  The author has a decent looking model for entry and exit into a bear markets.  Here is the long term view.

In December 2010, the Forecasting Advisor began to calculate in real-time the probability for the S&P 500 stock price index of entering a bear market phase with its proprietary stock market cycle model. In practice, this means that at the start of each month the probability of entering a bear market was calculated for the current month and the subsequent month, using a number of U.S. economic indicators, such as a proprietary coincident index of economic activity, the unemployment rate, interest rates, the price-to-earnings ratio, and consumer confidence. (The model predicts the start of a bear market if the probability equals to or exceeds the usual 50% threshold. Otherwise, the bull market is projected to continue.) Figure 1 illustrates the performance of the model in predicting bull and bear markets over the past fifty years. The model does very well in predicting all the reversals from a bull (bear) to a bear (bull) markets during that period. On average, the model signals the start of a bear market with a lead of less than a month before its actual start and the start of a bull market with a lead of one month. A description of the model and its performance can be obtained from: http://www.theforecastingadvisor.com/background-papers.php).

That certainly looks interesting.  Here is a closeup of the last bear market.

We have a 0% probability now.  This model did an excellent job with the last bear market.  Now here is the problem.  They started calculating this model in 2010.  That was long after the last recession was over and plenty of time for the final data revisions.  I really wonder if this model will work at all in real time.  In general most economic data is often revised, but going into and out of recessions the revisions tend to be even bigger.  I intend to watch for this in the future.  I suspect they will put it out there as soon as it triggers the next bear since they will be wanting the publicity.  If this works in real time it would be an excellent long term investment management tool.  I have my doubts, but one can always hope.


Wednesday, March 25, 2015

Daily update 3/25 Valuations and future returns.


Breadth was -71% and volume increased considerably.  New highs dropped down to only 84.  New lows remained tame at 13.  That suggests they were selling stocks closer to their highs then their lows.  Needless to say today turned the short term trend down again.  I am getting dizzy from changing it.  Up, down, up, down ...  While many people like to say the market is still in an uptrend the underlying action says differently.  This is not an up trend.  The market is dealing with issues and there are people on both sides of the trade.  Today the bears won.  I noted a distinct lack of buying enthusiasm the last two days.  Today was the result.

This morning the futures confirmed the red bar from yesterday with a lower close.  This afternoon they plummeted all the way down to the 200 SMA.  The -DI line has not gotten up to 35 yet, but it doesn't need to.  Since SPX did not make a new high the door to a bigger sell off is already open.  The FED meeting induced move has now been retraced as they so often are.  However, that left us with a chart clearly in bear mode. 

SPX closed on the low which normally means a gap up tomorrow would have high odds of retesting today's low.  The TRIN was only 1.12 on the close so this is unlikely to be a swing low.  My best guess would be that we visit the 100 DMA yet again.  Keep in mind that we have already bounced off it four times this year with only one new high in SPX so far.  That could easily dampen the enthusiasm of those that have been responsible for those bounces.  Should SPX fall through that MA then the 200 SMA becomes likely.  On the upside I don't have anything for you.  The market has some work to do to get bullish again.

I ran across an interesting article with a slightly different historical look at valuations.  On My Radar: Investors Behaving Badly

What the Percentage of Household Equity Ownership Tells Us About Probable Future Returns
Here is how you read this chart. First, the blue line shows the percentage of household financial assets invested in equities. The dotted black line plots the actual rolling 10-year returns of the S&P 500 Total Return Index.
Correlation measures how closely the market’s rolling 10-year returns follow the Household Equity Percentage. A correlation of 1 is a perfect match. A reading between 0.80 and 1.0 reflects a very high correlation. You can see it visually in how closely the dotted black line follows the blue line.
The red arrow at the top of the charts shows the ownership at the market peak in 2000. The left vertical scale shows that households had 65% of their money invested in equities at the market peak in 2000. It accurately identified the 10-year period of negative returns that followed.
The smaller red arrow marks the percentage of equity ownership at the market peak in 2007. Same story.
Take a look at the green arrow at the market bottom in 2009. Great annual returns followed but were individual investors prepared to seize that opportunity? Then, fear in the air was palpable.
The orange circle shows where we are today. Expect low forward returns, be risk focused, stay tactical and patient – a better buying opportunity remains ahead.
This chart shows 10 year returns estimated to be slightly more then 2% per year.  That is inline with models from John Hussman and Jeremy Grantham.  While correlation may not imply causation when the correlation coefficient over a 50 year period is 0.94 you might have some causation involved.  A lot of good stuff has already been priced in.

I find this next chart pretty interesting also.

This chart shows several things.  After the bubble in 2000 the near 50% drop in SPX into late 2002 did not really scare people.  This is similar to what happened in the 1960s and 70s.  The second bear market in both instances caused considerable fear.  What is really different today is what happened after the 1974 bottom when compared to 2009.  Back then investors lost trust in the market and stayed fearful for over a decade.  After 2009 faith in the FED completely erased all the fear from the 2008 crash.  We are now back to the second highest equity allocation in the last 60 years only being surpassed by the 2000 bubble.  According to the table on this chart returns should be negative.  However, I did not see the time period specified in this chart or the article.  I don't know if those are 10 year returns or what.  Needless to say this is likely the second worst time in the last 60 years to invest money for the long term.

I think I have shown charts like this before based on SPX. 

Based on revenue the average SPX stock has not bee more over valued in the last 50 years.  Most valuation models I see are done on SPX.  This next one is on all the NYSE stocks.


This chart indicates the broad stock market is the most over valued it has been in the entire history of doing this calculation.  While the SPX P/E was way higher in 2000 then it is now that was driven by a fairly small number of companies at exorbitant prices.  It could be argued the broad market is more over valued now then it was then.  While there was no forward returns with this chart I can tell you that there were significant sell offs after 1962, 1969, and 1998.  The market paused in 2005 then continued up into 2007.  As they say valuation does not matter until it matters. 

Here is an interesting article on what happens to stocks during recessions based on valuation before the recession started.  Equity Valuations, Recessions and Stock Market Declines  This table is very insightful.

It is pretty clear we are in a position where there is significant downside risk in the next recession.  Most economists think that is still well off in the future.  However, most economists never know we are in a recession until 6-12 months after it starts.  The 1973-74 bear market was caused by the oil embargo and major oil price shock.  That was the only time the market went down over 30% from a not very high starting valuation.  I would call that a black swan event.  The crash of 87 is not in the table because there was no associated recession.  That was also a black swan event caused by portfolio insurance.  Unless we never have a recession ever again it is very likely there is another crash waiting to happen.  We live in interesting times.  Some would say a little too interesting.


Tuesday, March 24, 2015

Daily update 3/24 China slowing more

The bulls did not show up on schedule today.  That breaks the recent pattern of every other day a different direction. 

There seemed to be a distinct lack of buying interest above 2105.  Breadth was -54% which was not particularly high.  Volume was light so it did not take much selling pressure to send the index down.  New highs dropped down to only 109.  That was 145 less then yesterday.  That seems like quite a considerable drop in the enthusiasm level relative to the size of the move down.  From what I can gather there were a couple of FED speeches lately that attempted to put June back on the list as a rate hike possibility.  That may be putting a damper on the buying enthusiasm.  At any rate if the bulls don't show up tomorrow this little bounce could be over.

The futures landed right on the 18 SMA at the end of the day.  We have a red price bar at potential support.  If this rally is going to continue that should be enough to bring out the bulls tomorrow.  Except for Jan. they have been really good about buying the first red price bars after bounces off the SPX 100 DMA.  We did not usually get the red price bars though until we were well clear of the Keltner channel.  The rally in Feb. is the only move up this year that really showed some enthusiasm.  The rest of the bounces have been pretty lethargic. 

I had to laugh today I read a piece that said something to the effect that by any measure this market is on a tear.  As I look at the daily char I see SPX right where it was 3 months ago.  Since 2009 the market has definitely been on a tear.  However, in the last six months that really isn't the case.  We are a whopping 3% higher then we were back in Sept.  At .5% a month I would dare say we are creeping not flying.  That author sees the market as very strong while I see a market struggling to go up.  That is a big difference in perspective.  Am I the one out in left field?  Is this still a very strong market or one that is struggling?  Will the bulls show up tomorrow and send this market sky rocketing once more to new highs and beyond?  If the bears show up again tomorrow and we end up lower this bounce is probably in trouble.

Recent data out of China does not look particularly good.  Is China's growth slower than the 7% consensus?  There are a number of interesting charts in that article.  Here is one of them.

Here is another article with some charts.  China Lands Hard: Rail Volume Plunges, PMI Tumbles Into Contraction, Employment Worst Since Lehman  This chart may be showing that the stimulus they keep doing in China is having less and less effect.

China is experiencing falling real estate prices over large parts of the country.  We know how that can be very rough on an economy.  I think it is highly likely that China is struggling much more then the government would like the world to believe.

I saw this rather interesting quote from Jon Markman:

I promised I would quit ragging on the Apple Watch, considering it has not even released yet, but need to break that vow for just one minute. I was talking this weekend to someone who has an inside view of Apple's television commercial development process. He said the ad development team had spent the past month creating spots for the Apple Watch and were amazed at how ordinary and over-priced the devices are. Apple's in-house marketing team apparently has a cynical attitude that they can slap an Apple logo onto anything and persuade people to buy it. I think that attitude is going to be tested in this case. Unless I am missing something, I bet the Watch unit sales disappoint. 

I have seen quite a few regular Apple supporters having trouble figuring out a reason to buy the watch.  I also have a feeling there is risk that sales disappoint.


Monday, March 23, 2015

Daily update 3/23 Biotech valuations

SPX tried very hard today to buck the trend of the month with a consecutive up day, but to no avail.   IYT was down from the start and stayed down all day.  IWM, QQQ, were in and out of positive territory through the day while SPY remained positive until very late in the day.  It was yet another strange day with the breadth.  With SPY barely up and all indexes flat or in the red the breadth was +63% or better. We ended the day with breadth at +56%, but most indexes in the red.  A lot of stocks were only up a tad I would guess. 

On Friday we cleared the 2103-05 resistance area.  Today we closed back at the top of it.  Is this a test of it as support or are we going to go back down through it?  To go along with the strong breadth early in the day there 254 new highs.  If you just looked at the market internals this morning you would have thought it was a strong day.  However, none of the indexes rallied strongly.  Even IWM which is usually the most affected by breadth as it is a very broad index was weak.  At any rate the bulls were not anxious to push price higher today.

The futures chart shows some upper tails indicating resistance at 2106 (around 2114 on SPX).  Buyers are a little scarce up there.  At least the futures are hanging outside the top of the Keltner channel.  It may find support there for a push higher.  There isn't much more room to go down from here though.

Every other day in this rally has been a different direction.  Will the pattern repeat with an up day tomorrow?  If so we could easily get a new closing high.  On the downside, falling back down through 2103 could spark some selling.  The 18 SMA at 2086 could provide some support.  Of course there is always the possibility we will completely retrace the post FED meeting up move at any time.  Despite the apparent strength in the internals today the market seemed to have no energy on the upside.  It is not like we are extremely extended in the short term either.  This market has plowed higher lots of times from much more extended conditions.  Maybe the bulls will come back with more juice tomorrow.  If not this bounce could end up falling short of a new high in SPX.

I saw a rather interesting article on biotech valuations.  Nearly 75% Of Biotechs Have No Earnings
The title speaks a thousand words doesn't it.  There are 150 companies in the NASDAQ biotech index.  Here are some interesting stats from the article.
  • Below is a chart of the 150 companies that make up the Nasdaq Biotech Index (NBI), broken down by Net Income.
    • Of the 150 companies, in the last 12 months only 41 had earnings, i.e., Net Income, amounting to just under $31 billion
    • Of this $31 billion in earnings, just 5 companies - Gilead, Amgen, Shire, Biogen and Celgene - had net income over $1 billion
    • Just these 5 biotechs represented 83% of all the earnings generated in the NBI
  • 109 companies in the NBI lost money in the last 12 months.
  • In summary: only 41 companies in the index were profitable, which means 72.5% of biotechs lost money
  • 83% of Biotech earnings were generated by just 12% of the companies
This is an interesting look at the market cap vs income.

If all that does not remind you of the dot com era I don't know what would. 


Friday, March 20, 2015

Daily update 3/20 Biotech bubble and Fisher says stocks hyper overpriced

The bulls showed up today to send some indexes to new highs.

SPX got within 4 points of its high close before turning down going into the close.  Breadth was +77%.  New highs were the highest since Jan. at 299.  That is more then double the new highs from yesterday.  A sudden jump in market internals like that sometimes ends up being a buying climax that leads to a short term top.  There are many short term tops on expiration Friday as well.  Monday is going to be interesting.  Will the March pattern of no consecutive up days play out once again or will it be different this time?

The futures ended up at the post FED meeting high to the tick.  SPX managed to close a little more then 1 point higher.  For as strong as today was there was not any new ground reached.  Notice how the DI lines are braided on this rally.  That indicates a lack of trend.  This pattern is inherently unstable and unpredictable.  This is not something we have seen since I have shown the chart on the blog. That is problematical to have a retest of a prior high with a trendless move up.  I believe the odds favor a failed retest here that leads to lower prices.

The COMPX and IWM made new highs.  Still missing from the new high list this year are the transports and XLF.  Key indexes that must make new highs to keep the rally going.  I just have a feeling they won't have the juice.  The market internals are showing lots of divergences.  Check out the number of SPX stocks above their 200 MAs.

The last pullback was really shallow.  I am surprised to see the divergence this big.  There are many internals in the same or worse shape.  We will see what happens next week, but I believe it will be a tall order for SPX to get significantly higher from here.

The biotech ETF IBB had a big gap up today and is up around 20% this year.  Here is a look at the monthly chart.

About a year ago I heard someone on TV say the P/E on IBB was 199.  I can't even imagine what it is today.  I recently read an article saying they have brought out some biotech IPOs with drugs that were only in clinical trials and they have never done that before.  Can anybody say dot com.  The chart and the atmosphere surrounding these stocks is clearly indicating a bubble.  There are around 106 stocks in IBB.  That is pretty comparable to the NDX 100 that was the big bubble in 2000.  Here is a look at its run up into the top.

That was some run up and crash. They sure look a lot alike don't they. NDX still has not gotten quite back to that peak and it has been 15 years.  Now lets look at the daily IBB chart.

Notice the high volume the last two days.  This ETF has been going up for years and people are just now piling in?  This looks like a pretty high risk of being a volume climax top of considerable consequence.

The trouble with parabolic moves up like IBB has made is they always seem to end in a crash.  Everybody piles in slowly, but they all want out at the same time.  There are some fine companies in the biotech space along with the junk.  During a crash they throw the baby out with the bath water.  If history is any guide many of those fine companies will see their stocks seriously hurt.  The junk will end up going out of business.

If the biotech sector is about to top and crash will it take the broad market down like NDX did in 2000-02?  It certainly has the potential.  Last spring when the sector had a correction there were quite a few times when it dragged SPX down with it.  I even commented on it in the blog on numerous occasions.  I think I will have to keep an eye on this one for a while to see what happens.

I happened to be listenng to the TV when they interviewed retiring FED president Richard Fisher today.  There is a clip you can listen to at "Market Is Hyper Overpriced" Warns Retiring Fed President; "Significiant Correction" Coming  He has been classified as a hawk, but he made some rather frank comments for a central banker.  I could not believe it when he said the market was hyper overpriced.  I about fell out of my chair.
Santelli: “If you had to rate the US economy 0-10 where would you peg it?”

Fisher: “We’re #1., we’re a 10. We’re the epicenter of growth and in the sweet spot.”

Santelli: “Do you think any part of the stock market being high has anything to do with the committee you just left and if you didn’t grade the economy on a curve would you still give it a 10?” 

Fisher: “Well, what worries me is how totally lazy investors have gotten, totally dependent on the Federal Reserve and I find this to be a precarious situation.”

Fisher: “Are we vulnerable in my personal opinion to a significant equity market correction? I believe we are.” 

The comments on what happened with Yellen this week are quite interesting.  Some people heard rate hikes have been pushed out way into the future.   Yellen said several things that we already seem to know.  Which makes the market reaction seem a bit much.  We were all pretty sure the word patient would be dropped.  There is supposed to be at least a two meeting lag after patient was removed before a hike.  That meant there should be no hike in April, but there could be a hike in June.  Before the meeting the FED funds futures were indicating the Sept. or Oct. meetings were the most likely time to hike.  During her press conference Yellen specifically said there would be no hike in April (knew that).  She also said they may or may not hike in June (knew that).  Then she said they planned to hike this year (knew that).  What exactly is different?  Then there was this today.

Atlanta Federal Reserve President Dennis Lockhart said on Friday he expects the U.S. central bank to raise interest rates at either its June, July or September policy meetings, barring a significant downturn in the U.S. economy.  

"I continue to believe that mid-year or a little later is appropriate timing. That would allow the June meeting to clearly be taken seriously as a meeting for the 'lift-off' decision. I would add to that July ... And, of course, September," Lockhart said. 

"I can't be certain it is going to happen in those three months ... But I think it is realistic to assume that is the period in which we will be taking on this decision with a high likelihood of pulling the trigger," said Lockhart, a Fed centrist. 

That was today and after Yellen.  Lockhart is pretty much considered middle of the road on the hawkish/dovish scale.  It seems like his comments should be taken into consideration.  Which pretty much validates what I said above.  Nothing that we did not already know happened with this FED meeting.  I don't know if this increases the odds of a complete retrace of the move or not, but I thought it worth mentioning.

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


Thursday, March 19, 2015

Daily update 3/19 Debt vs Growth

The March pattern of no back to back up days in SPX played out again today.  QQQ, IWM and IYT ETFs all showed relative strength to SPY all day, but the market just could not get going up.  That is a bit unusual. While small caps can outperform big caps on the upside at times, the general direction the market goes is set by the big caps.  If SPX continues to show real weakness IWM will eventually follow it.

SPX managed another close above the 18 SMA.  However, we did not get the confirmation to yesterdays upside break.  Breadth was -63% which is considerably negative with several key indexes slightly positive on the day.  New highs saw a big drop down to 139.  New lows also saw a drop to 36.  This market has had no trouble stringing back to back up days together for several years.  In fact we have had 6-7 day streaks quite often.  Something is different at least for now.

The futures gapped down again for the third day in a row.  That is starting to look like a pattern developing with price starting to fall on the European open.  Are they pulling money out of the U.S. and taking it back to Europe for the ECB QE?  I theorized a couple of months ago we could see that.  If it keeps happening would it put a damper on the dip buyers spirits?  For today the upper Keltner channel held as resistance.  Have we started the FED induced rally retrace already without ever trying to go higher?  

While we are in a short term uptrend with price, all the breadth indicators are negative.  It might not take much to get the market going down in earnest once again.

Will the bears come out again tomorrow or will the bulls show up with some vigor?  I suspect if see downside follow through tomorrow and SPX closes below the 18 DMA the bounce is in trouble and a return to the lows is probable.  The bulls need to get SPX above yesterday's high and keep it there.  I think the power is up for grabs here.  Which side reaches out and takes it?

I have seen a number of ways to show that economic growth is getting less and less for every dollar of new debt.  I think this chart makes it the most obvious.

Debt needs to be serviced and at some point the cost to service the outstanding debt can become more then the economy can bare.  I don't see any de-leveraging in this chart do you?  Now take a look at GDP over the same time frame.

It is pretty clear that growth has been decelerating since the 70s which is the same time that debt really started to take off (I know correlation does not mean causation, but there is so much academic research that shows that debt hurts growth).  Despite all the heroics from the FED growth is slowing.  I contend it will never really get better until we deal with the debt.  I don't understand why central banks and government officials don't get it.  This is a global problem.  The current solution seems to be for everybody to devalue their currency.  The experience from the 20s and 30s indicates that the only result from currency wars is overall reduced trade.  That of course only makes the debt problem worse.  Which leads to more currency devaluations.  Which leads to ...  I am sure you get the picture.  This method of operation has been tried before and led to the great depression.  Can we somehow get our leaders to take a different approach?


Wednesday, March 18, 2015

Daily update 3/18 Gaming the system

That was an interesting flight to everything after the FED announcement.  Stocks, bonds, gold and oil all up markedly.  This is a classic example of gaming the system.  Leading up to the FED announcement there were plenty of people saying the word "patient" would be removed from the statement and that the market would sell off.  I even read somebody saying the headline scanning computers had their algorithms programmed to sell if the word was missing.  When I saw that this morning I thought that was really odd.  Since when do the Wall Street firms tell people how their computers are programmed.  That was all disinformation designed to get people to go short before the announcement.  The futures started cruising up a couple minutes before the announcement.  I don't think it actually would have mattered what the statement was.  I think the computers were all set to buy no matter what.  They bought all kinds of assets as mentioned above.  That caused a massive short squeeze.  The big boys had a field day today and there is probably a bunch of them sitting in a bar somewhere in NYC laughing their asses off.  Job well done!

SPX tested up into the 2103-05 resistance area and was turned back (at least for now).  Breadth was a strong +78% as they were buying everything.  New highs even popped up to 218.  New lows remained elevated at 67.  SPX crossed the 18 SMA.  Can it stay there? 

The futures ran into the upper Keltner channel line.  That line was resistance back in late Jan.  Will that be the case this time?  The futures got within 10 points of the all time high so this qualifies as a retest of the highs.  Will it power through or be turned back? 

Today should have flushed out all the weak shorts.  SPY completely filled the 3/4 gap down also.  This is an interesting situation.  He we are testing the highs on a FED induced move.  We know those moves have high odds of being completely retraced and usually within a few days.  If we retrace this move now it will look like a failed test of the high.  Will we get a second up day in a row tomorrow or will the March pattern repeat with a down day?  I guess we will see.  This may take a few days to shake out.

Today turned all the short term trends up.


Tuesday, March 17, 2015

Daily update 3/17 All eyes on the FED

Despite a sizable gap down it turned out to be a fairly quiet day.  The pattern of the month where every up day is followed by a down day held again. 

The dip buyers were present enough to keep SPX from tanking early this morning.  The breadth was only -52% at the end of the day.  It was much more negative early in the day so people were swooping in to pick up some bargains.  New highs were 110 to 72 new lows.  That is a considerable drop from the highs yesterday.  It was a pause day.

The 100 SMA on the futures acted like a magnet today.  It would not let price stray very far away.  The futures are still showing green price bars so there is a bit of an uptrend.  The DI lines crossed back negative, but so far price has not resumed the down move.  It looks coiled up for the next big move though. 

Tomorrow is the FED meeting.  There has been lots of discussion about them removing the word patience from the statement.  I am not going to predict what they will do or what the market reaction will be.  We look setup to make a move after the meeting whichever way it goes. 


Monday, March 16, 2015

Daily update 3/16 Factory output falling

The bounce setup mentioned last night played out  nicely today.

SPX ended the day up 1.35%.  The breadth was only +62% which was rather weak for such a big move up.  Volume dropped from Friday's down day.  Not a particularly good thing when coming off a low.  New highs expanded to 158 which was the best we have had over the last couple of weeks.  However, new lows remained very elevated at 96.  This does not look like a blast off to new highs to me.  Today registered a technical exit from 3/11 buy signal which simply means the extreme short term oversold condition has been alleviated.  Will buyers continue to push price higher now that we are no longer oversold?

The futures got above the 100 SMA today, but have not confirmed the move.  As I write this they are down about 7 points from the 4:PM close.  I have no idea what that is about.  The DI lines got a slight bullish cross today.  The lines are both high which gives the highest odds of this being what I call a bounce cross where the lines cross and almost immediately cross back the other way.  A negative cross should indicate the down move is ready to continue.  So far this month we have not had two up days in a row.  Will that pattern continue or do the bulls have some gas left in the tank?

The FED meets again on Wed.  There is much speculation that they will remove the word patient from their statement.  Many think the market will sell off if they do.  That may be what caused the tepid buying we saw today.  There is still room up to the 18 DMA on SPX for more bounce, but as mentioned earlier the market has struggled to get back to back up days.  I don't know why the futures are down or if they will still be down by morning.  There is certainly some risk of retracing some of today's gain.  There could be upside resistance from 2085-90, but the stronger resistance is in the 2103-05 area.  On the downside we have 2040 and not much else before we get to the 200 DMA.

The economic data continues to soften.  Here is a look at factory output.


This is the first time in this recovery output has fallen three months in a row.  This is yet another sign the economy is slowing not accelerating.  Things are slower then in 2011 or 2012.  I have shown that very clearly in charts over the last few weeks.  We are now the closest to being in a recession we have been in this recovery.  The FED has plenty of reason to not raise rates or even remove the word patience.  So what will they do? 


Friday, March 13, 2015

Daily update 3/13 PPI crashing

They could not wait to sell this morning.  However, selling eased off when SPX got down near 2040.

SPX gpt within 2 points of Wed's low before rebounding a bit in the afternoon.  That seems close enough for a retest to me.  Maybe we can head up and fill that big gap down now.  Breadth was -68% so they were selling lots of stuff.  New lows outnumbered new highs 121 to 76.  We are still above key support here.

The futures ended up well off the low.  This looks like a good setup for a bounce to me.  We got the retest ADX suggested we should.   Now it has turned down and we have a few green and white price bars. Are the bulls up to the task?

Mondays have been up on merger news pretty often lately.  It is possible people are starting to buy in anticipating that to happen.  Next week is option expiration which usually has an upside bias.  We have a nice bounce setup lets see what the bulls do with it.  On the downside I don't see any support between here and the 200 SMA.  Should we break Wed.'s low that is where I would expect to head.

Interesting PPI data this month.  Check out these three charts.

These three charts show we have never seen declines of these magnitudes except in a recession.  Here is the core PPI which most people concentrate on.

The core PPI almost never goes negative.  If I turned off the recession bars would anybody be able to tell when recessions happened?  I don't think I could.  To me this chart is useless.  The other charts present a reason to wonder about the strength of the economy though.

We have seen the inventory to sales ratio rising sharply, manufacturing new orders tanking, and now PPI crashing.   The charts I showed for each of these data series look like we might be heading into a recession.  This data is revised much less then GDP and employment.  The economy is clearly weakening not strengthening.  So far I don't see any sign we are decoupling from the global weakness that is causing central banks around the world to ease.  While we might not be in a recession yet I believe there is reason to worry about it happening.  I think the FED probably should not raise rates at this point.  It will be interesting to see if they remove the word patient everybody is so worried about.

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



The information in this blog is provided for educational purposes only and is not to be construed as investment advice.