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Friday, July 28, 2017

Daily update 7/28 Markets Relax Merrily on a Powerful Time Bomb

More waiting.

The market gapped down a bit, but there was no interest in selling into the weakness.  The breadth was negative most of the day until a buy program kicked in the last 30 minutes.  Breadth ended at +51%. New highs dropped way down to 86 and new lows increased again to 25.

The futures ended the day just below the 20 SMA.  They have not confirmed a break of that MA yet.  The jury is still out on what they want to do next.

The green count slipped a bit more, but remains above the red line. 

QQQ opened below the key 143.90 level.  It made several attempts intraday to get above it, but each attempt was thwarted.  While it closed at 143.84 a few cents is not really enough to say the break out failed.  I think it is fair to say it better get going on the upside Monday.

Seven of the last nine days had down volume higher then the up volume.  All the while the major indexes have hit new highs.  That is a clear sign of distribution going on under the covers.  More evidence of a top forming.  I am becoming more certain we are in for some kind of correction soon.  I am pretty sure the action in the transports is a big warning sign.  Something just doesn't seem right with that.

Yesterday Howard Marks put out some comments on the market.

"Given my view of the environment, the only reason to be aggressive today is because defensive investing implies low prospective returns. But the question is whether pursuing high expected returns through aggressiveness can be counted on to be rewarded," Marks wrote in the investor letter Wednesday. "If the answer is no, as I believe, then this is a time for caution."

He talked about high valuation noting:
1. "The S&P 500 is selling at 25 times trailing-twelve-month earnings, compared to a long-term median of 15."
2. "The Shiller Cyclically Adjusted PE Ratio stands at almost 30 versus a historic median of 16. This multiple was exceeded only in 1929 and 2000 – both clearly bubbles."
3. "The 'Buffett Yardstick' – total US stock market capitalization as a percentage of GDP … hit a new all-time high last month of around 145, as opposed to a 1970-95 norm of about 60 and a 1995-2017 median of about 100."

Maybe those comments sparked the sell program that hit tech land yesterday.  The more interesting thing to me was comments by Josh Brown on CNBC today.  He really chastised Mr. Marks for daring to even thing about being cautious.  He went on a rather long tirade about it.  Mr. Marks' firm Oaktree Capital has $99 billion of assets under management as of June 2017, according to its website.  I am sure he did not get to where he is by being stupid.  I see headlines that he warned about the Dot com bubble and the financial crisis.  Josh Brown on the other hand is a financial advisor.  Who should we listen to?  This is another case of the bulls hammering anybody that is not wildly bullish like they are. I have commented in the blog in the last few months about seeing this type of behavior.  I can't remember seeing this much of it since 2000.  This is clearly a time to be cautious.

I have talked about the large amount of margin debt and how it is a loaded gun and we have no idea when the trigger will be pulled.  That is just the on the books margin debt.  This article indicates there is a large but unknown amount of off the books margin debt.  Markets Relax Merrily on a Powerful Time Bomb  Just think our illustrious FED is condoning this bad behavior.

Have a great weekend.


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