Saturday, 24 January 2015

January 24, 2015 – Weekend Market Comment

January 24, 2015 – U.S. stocks mainly retraced on Friday, with the S&P 500 halting a four-session winning run, as investors considered economic data, energy costs and a reduced 2014 earnings estimate from United Parcel Service. Near session lows, the Dow Jones Industrial Average declined 141.38 points, or 0.8 percent, to 17,672.60, with Exxon Mobil leading blue-chip losses that extended to 24 of 30 components.

The S&P 500 shed 11.33 points, or 0.6 percent, to 2,051.82, with materials and telecom hardest hit and utilities and technology faring best of its 10 major sectors. The Nasdaq gained 7.48 points, or 0.2 percent, to 4,757.88. For every three stocks rising, nearly four fell on the New York Stock Exchange, where 785 million shares traded. Composite volume cleared 3.6 billion.

What I Think . . .
My guess is after four strong days we're going to be in lockstep with energy prices. This is indicative of the market going forward this year, it's a volatile, extremely nervous market, because it is full priced. What's going to turn it around? Earnings have the potential. Earnings will give us some good bumps, so to speak, but the No.1 thing we need to see for any prolonged stability in the market is for crude oil to trade in a range for two to three weeks.

Saudi Arabia's King Abdullah bin Abdulaziz Al Saud has died at age 90 this week but the royal succession has been in the works for years and should be smooth. Saudi Arabia led OPEC's decision to maintain its production levels on November, triggering a further collapse in oil prices. Oil prices have plunged more than 50 percent since mid-2014, with Brent at $48.52 a barrel at Thursday's close, and Nymex crude trading at $47.62.

One thing that has me concerned is that the market has been favoring very defensive sectors and big cap stocks since last fall. For example two of my staple graphs the higher tech Nasdaq summation index and the NYSE High Low  Graph are at odds with each other, looking at the major firms this is strong bull market ... but only defensive stocks are doing well. 

You also can see that when you look at the leading sector since last fall has been the utility sector, here is the utility ETF XLU.

Investors consider utility stocks to be defensive due to the widely-held belief that these stocks will perform well in the midst of economic downturns. Defensive stocks are also known as non-cyclical stocks. As utilities provide what are considered by most to be basic needs, companies that provide these services will usually continue to record solid earnings even when the economy is performing poorly. Theoretically, defensive stocks provide higher-than-average returns in a declining market. Utility companies return dividends that are likely to offset declines in the company's stock prices.

Still there is hope for this market, many of the major hedge funds use computers that do statistical arbitrage, in other words the computers often buy the weakest part of the market. If we look at the sector graph we can already see that defensive stocks like utilities (red line) are generally at the top of their typical range. Notice the strong bounce in purple for the Nasdaq QQQ index. 

Here is a close up of part of the 6 month Aggressive Defensive Graph. It shows two ETFs one is called DVY (brown line) and tracks the big companies with strong dividends and the other is MVV (green line)a juiced version of the Midcap 400.

In finance, the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset. CAPM “suggests that an investor’s cost of equity capital is determined by beta. In other words the more unstable a stock is, the greater reward the investor deserves. Higher risk (beta) should equal more reward if you are right. In theory a diverse portfolio of less stable stocks should beat the returns of the steady big plodding firms. That is why the NASDAQ should do better than NYSE over all. 

But as you can see that has not been the market in the prior 6 months. In other words the best opportunities right now might be in smaller less table stocks. 

It All Shows Up In The Charts . . . 

Bull Bear Lines
The Bull Bear Lines say this is a bull market and probably in an upward bounce.

Aggressive Defensive Graph
The Slow Stochastics on the top of the graph are in a nice bounce up.

Bond vs Equities
Equities (stocks) were not able to put perform bonds this week. Still jitters out there.

Green Arrow Graph
Our Green arrow graph got us long a few weeks ago, and that was not the best week to be long, this week it looks a little happier about that move. 

On Balance Volume is keeping pace with the current market showing that institutional large volume buying is still active. This is one of the more interesting graph, even though it is declining if this was a true panic sell off the red line would be lower. 

Primary Sell 
A bit early to call this but I would say the pros are definitely slowing up on buying protection.

S&P500 Over 50 Day

The percentage of stocks over the 50 day moving average is bouncing up about where it should, very encouraging. As I said last week this is a likely place for an oversold bounce.

The CBOE Volatility Index, a measure of investor uncertainty, fell to 16.66.

What Works Now
Well I hope you followed my prior market comment pick of Southwest airlines. 

Well if the market is returning to risk then anticipate with these index funds:

XIU.TO Canada

EEM Emerging markets
All but forgotten the world is back in play again for anticipated global recovery.

XIV Vix Futures 
As fear subsides this ETF is the one to ride.

Nasdaq Juiced QLD

MVV Midcap 400 2X
Never hold juiced ETFs long term

Stock Picks

Alfred Nobel- was a Swedish chemist, engineer, innovator, and armaments manufacturer. His life was spent building the tools of mass destruction and his famous legacy is the Nobel peace prize. 

I intend to leave after my death a large fund for the promotion of the peace idea, but I am skeptical as to its results.
- Alfred Nobel

Like Mr Nobel now you too can become wealthier from the arms race. This week I am focusing on the world of death and destruction. Weapons has always been a good seller. There are nearly 300 million guns to be found in the USA, one third of them handguns. This represents the highest concentration of private ownership of side arm weapons in the entire world. The rate for murder by gunfire is 100 times that of the United Kingdom. Every year, 17,000 people are killed in America, 70 per cent of them with guns, and nearly 20,000 people commit suicide by shooting themselves to death in the home. The slaughter of children by gunfire in the United States is 25 times the rate of the 20 next largest industrial countries in the world combined.

So here are my picks, you should get richer ... just hope you can sleep well. 

TASR - TASER International
More Zap for your buck look at this baby climb

ATK Alliant Techsystems Inc.
An Aerospace, defense, and sporting goods company. Vista Outdoors (Pending:VSTO) is in the process of being spun out from parent company Alliant Techsystems (NYSE:ATK) as part of ATK's merger with Orbital Sciences (NYSE:ORB). Company is more focused on ammunition and accessory sales. With the majority of the business's profitability stemming from ammunition sales, the continued success from the Company will somewhat mirror the ongoing success of the firearms industry, the health of which can be evidenced in the evisceration of Ruger and Smith & Wesson over the past 12 months.

LMT Lockheed Martin
Lockheed Martin is one of the world's largest defense contractors, and plays an integral role for the U.S. military. Learn more about LMT here.

And other picks . . .

TECHY Tencent Holdings Limited
Well if you want a crazy flier look at this pink sheet listed firm.  Tencent Holdings Limited is a Chinese investment holding company whose subsidiaries provide mass media, entertainment, Internet and mobile phone value-added services. Tencent's many services include social network, web portals, e-commerce, and multiplayer online games. Its offerings include the well-known (in China) instant messenger Tencent QQ and one of the largest web portals in China, Mobile chat service WeChat has helped bolster Tencent's continued expansion into smartphone services. It is the fifth-largest Internet company in the world after Google, Amazon, Alibaba, and Ebay as of October 2014. In 2012, Tencent's revenue outstripped Facebook's by over $2 billion. In September 2013, Tencent's market valuation rose to US$101 billion, nine years after going public.

Internet giant keeps doing deals to fend off e-commerce company Alibaba. It snapped up stakes in Craigslist-like, search engine Sogou and logistics outfit China South City Holdings. In July it won permission from Chinese regulators to open one of the first private-sector banks, in Shenzhen. Its WeChat messaging app reached 438 million monthly active users worldwide in June. Sales ballooned 41% last year and net profit rose 25%.

FISV - Fiserv, Inc. 

Fiserv, Inc. is an American worldwide provider of financial services technology. The company serves more than 16,000 clients worldwide, including banks, thrifts, credit unions, investment management firms, leasing and finance companies, retailers, merchants and government agencies. Fiserv is one of the largest providers of information technology services to the financial services industry and was ranked third by revenue in 2013 by American Banker.Fiserv reported total revenue of $4.55 billion in 2013. Read more here.

Over all the market looks ready to bounce. There is no doubt their are pockets of pessimism and clearly the days of a full blown bull run are behind us as the market completes its recover and returns to more normal growth. 

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

Saturday, 17 January 2015

January 17, 2015 – Weekend Market Comment

January 17, 2015 – U.S. stocks jumped Friday to close higher for a first session in six, while tallying a third weekly drop, as energy led gains with U.S. crude rising and as investors considered a mixed bag of economic reports. Down 1.3 percent from the week-ago close, the Dow Jones Industrial Average rose 190.86 points, or 1.1 percent, to 17,511.57, with Home Depot and Exxon Mobil leading blue-chip gains that extended to 27 of 30 components. The S&P 500 added 26.75 points, or 1.3 percent, to 2,019.42, with energy leading gains that extended to all 10 of its major industry groups, and leaving it with a weekly fall of 1.2 percent.

The consumer-price index declined 0.4 percent in December, with he cost of living falling by the most in half a dozen years following a 0.3 percent fall the month before, the Labor Department reported. A third report had factory production slowing in December, up 0.3 percent versus a 1.3 percent increase in output in November.

What I Think . . .
The market is reacting to economic data that is more good than bad, to energy being up 3 and 4 percent, and before a long weekend, when investors don't tend to be bearish. The negative reports that stuck out were the industrial production numbers, which dovetails well with the very poor retail-sales number, and may point to additional weakness in the U.S. economy. But stock climb a wall of worry, and lets not forget this is still a bull market. This is our seventh pull back of about 5% in the last 2 years. 

Here is an interesting graph it shows how the major market sectors oscillate. As you can see the defensive areas like utilities (red) and defensive stocks (brown) have done really well, as the market has been anticipating weakness. 

The big losers are the financial stocks as a double whammy of weaker housing market and a looming disaster in junk bonds funding the shale oil boom is coming to light. Let plot a chart of  corporate bonds showing how junk bonds do vs high quality top ranked corporate bonds.

Only when the tide goes out do you discover who's been swimming naked.
     - Warren Buffett 

Bond investors who helped finance America’s shale boom are facing potential losses of $11.6 billion as oil prices plummet by the most since the credit crisis.The $90 billion of debt issued by junk-rated energy producers in the past three years has fallen almost 13 percent since crude oil peaked in June. Well it looks like a lot of junk bond have been sold by Wall Street based on projections of ever increasing oil prices. . . .and the tide is out,

Still from a mean reversion stand point it is clear that many of the "risk on" type equities are oversold and I would expect a relief rally is very possible in the next week. 

I am also very encouraged by strength in the German market. Despite two Greek banks teetering on default the German DAX is near all time highs with impressive buying on Friday.

It All Shows Up In The Charts . . . 

Primary Sell 
The pros are definitely buying protection but this could be the bottom of it.

Aggressive Defensive Graph
The Slow Stochastics on the top of the graph remains firmly down but looking at what happened in the Dec 10th retreat this clearly could be the bottom of the sell off.

Bond vs Equities
Equities (stocks) outperform this week. Another sign of potential bottom. This week gentlemen do not prefer bonds. 

Bull Bear Lines
We are clearly in a Bull Market even pull backs are short and the pull back is typical. The current pull back appears to be out of steam already. Volatility is increasing. 

Green Arrow Graph
Our Green arrow graph got us long a few weeks ago, and that was not the best week to be long, this week it looks a little reluctant about that move. 

Nasdaq Summation
The Nasdaq Summation index shows that is is bad time to be in high tech Nasdaq stocks. Again if we are following the last pull back this could be the turn.

NYSE New High Low
Showing strength on the big board. Quality still rules.

On Balance Volume is keeping pace with the current market showing that institutional large volume buying is still active. This is one of the more interesting graph, even though it is declining if this was a true panic sell off the red line would be lower. 

S&P500 Over 50 Day
The percentage of stocks over the 50 day moving average is on dropping off as the fast money exits equities for safe bets. Still this is a likly place for an oversold bounce.

The CBOE Volatility Index, a measure of investor uncertainty, fell 6.4 percent to 20.95.

How to Play This

Well first off nothing in the charts says buy... but the possibility of a strong bounce next week is uber obvious. Yeah but we don't catch falling knives so how can we participate and lower our risk? This might be a great time to use a stop. Yup, a lot of people use stops for downside risk protection, and that often results in bailing just as a bottom is in, however stops can also be used to generate a computer buy order as a rapid bounce is in full swing. Its called Buy on Stop. Everything that makes the stop-loss order so useful also holds true for its mirror image, the buy-stop order, which ironically most investors never consider using at all. A buy-stop order is entered for a security you don't own at a price above the current market. Once your specified price is breached, the shares are purchased. What makes buy stop orders effective is that they are triggered by the market's only important indicator, price.

Lets look at the last bounce, Here is the action on Dec 17:

In hidesite if we had a buy order in place that was a buy on stop order set on Dec 16 to buy on stop any violation of the Dec 12 high, we would have bought on Dec 18th in the morning. The high Dec 12 for the SPY was 202.70 so our order would have been, 
VALUE 202.70
Any value form 202.70 to 204.70 would get us in. 
In other words we are ready to buy if the market takes off and still on the side lines if it fails. 

For example the current 3ATR value of SPY is $203.68 so we might set this buy order this weekend
VALUE 203.68

Or if we wanted to take on more risk we could look at the juiced version on the midcap 400. The high on Jan 12 was 72.79, if we pass that we might assume the bull is on. and if it does not go there we risked nothing. 

VALUE 72.79

Long equity investing means looking for a fundamental revaluation of an asset. Whether it's gold going from being frowned on to gorged upon or Latin American stocks transitioning from being avoided to embraced, the idea isn't to grab a quick scalp, but to participate in a longer-lasting trend. To that end, I look to put buy stops where a market would begin to break out to higher, The buy-stop order works because it purposefully puts us in the market exactly when that transformation in the midst of occurring: when what we had imagined beings to actually become real. Buy on stop can be a real edge that gets you in the market with computer quickly buying for you ... even when you are busy elsewhere.

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

Saturday, 10 January 2015

January 10, 2015 – Weekend Market Comment

January 10, 2015 – The U.S. stock market ended a volatile week on a down note Friday, with strategists blaming the slide, in part, on December’s jobs report that revealed a drop in wages.

Slumping oil prices and headlines about a dual hostage crisis in France added to the negative mood.  With explosions and gunfire, security forces Friday ended three days of terror around Paris, killing the two al-Qaida-linked brothers who staged a murderous rampage at a satirical newspaper and an accomplice who seized hostages at a kosher supermarket to try to help the brothers escape.

December’s employment situation report received a mixed investor reaction, as the number of jobs added to the economy was strong, however wage growth ticked down.

ISM numbers are still very strong and all are above 55. Anything above 50 favors economic expansion and these numbers are not even close to being below 50. Motor vehicle sales fell, but remain near the 17 million mark (annualize) and strong overall. The labor market is strong as non-farm payrolls exceeded 200K each of the last eleven months. The housing numbers fell last month, but remain strong overall because starts and permits remain above the 1 million mark.

The main benchmarks finished lower for the week, which has been marked by sharp sell-offs on Monday and Tuesday, then big rallies on Wednesday and Thursday. The Dow Jones Industrial Average moved by triple digits for the fifth session in a row. Friday’s losses put the main indexes back into negative territory for the year.

The S&P 500 SPX, -0.84%  closed 17.33 points, or 0.8%, lower at 2,044.81, and ended the week with a 0.7% loss. Financials and consumer-discretionary stocks led the losses on Friday, while all 10 sectors ended lower. Energy stocks lost 3.6% for the week, as oil prices continued to fall.

The Dow Jones Industrial Average DJIA, -0.95% slid by 170.50 points, or 1%, at 17,737.37 ending the week 3.5% lower. The Nasdaq Composite COMP, -0.68%  finished down 32.12 points, or 0.7%, to 4,704.07, recording a 0.5% loss for the week.

What I Think . . .
We are in a period of consolidation, the market is nearly fully valued and the Fed will need to stop the economic resuscitation resulting in increasing interest rates plus with rapidly dropping oil prices their is a real possibility of a period of deflation. Deflation is when prices rise at a slower pace it can help consumers boost their purchasing power. But when they actually drop, economic activity can screech to a halt. Households hold off making purchases as they anticipate further price declines; companies postpone investment and hiring as they are forced to cut prices. Sliding prices eat into sales and tax receipts, limiting pay raises and profit margins. They add to the debt burdens of companies and governments that would otherwise be eroded by inflation.
Deflation fueled two of the worst economic disasters in modern times — the Great Depression of the 1930s, and the less catastrophic but more recent experience of Japan’s lost decades with almost no economic growth.  Deflation took hold in Japan in the 1990s when banks, wounded by a burst real estate bubble, stopped lending. Wages stagnated and consumers reined in spending.  The International Monetary Fund has studied which economies are vulnerable to deflation, and has raised concern that even a period of ultra-low inflation could do damage. Here is a bit from CNBC on deflation dangers.

On the flip side each week U.S. employment is growing an so is industrial production, current near zero interest borrowing is keeping things popping and there are even warnings that instead we could fuel hyper inflation in 5 years. Here is a bit from Forbes.

Yeah I know, it can't be both! Mixed signals . . . who knows? Well I don't worry about it. It is a bit like driving on a dim lit road, You simply can't see what is way far ahead . . . but really you don't need to know. I just use my charts to tell me what is just up ahead and the future will take care of itself. As the pros say just take what the market gives you. 

There are tools to look at the market at times like this. Lets explore a few. First the simplest is just zoom out. It can be very helpful to look at a long term historical chart. One market pro I heard about threw his charts on the office floor and stood on a chair, while he viewed his charts, talk about the long view perspective. The long term chart here is the DOW since 1900. What I take away from this view is we are in a bull market after the deep sell off off 2008. We have recovered most of the loss and are back on the normal trajectory for the market. 

In other words if you are only returning to the market now . . . you just missed the "sale of the century". For example look at the stock price changes in one of America's  top tier companies, the Prudential Insurance company. In the 2008 sell off the stock had drop from over $100 to about $8 only to gain it all back, Here is the last 13 years.

OK big picture gives you some perspective. It is also why I look at the Long Term Bull Bear Lines chart as the first chart I review. It important to have a tool that gives you big picture perspective. 

The current message of the Bull and Bear lines  is clear  . . . we are in a bull market ... but with decelerating gains (see slope line on bottom). The Bull Bear chart use moving averages. By using moving average cross-over we reduce whipsaw but the cost is we introduce some lag. 

The other way we could do this is to chart a more stable group of equities. In this case I will use an ETF called the iShares Select Dividend ETF ticker symbol DVY. These are very large dividend paying equities and the graph tends to be more stable. Then we will chart it using a Japanese charting technique that reduces noise called a Renko Chart. Now we can clearly see the market direction, Finally we must have an exit strategy, a way to say enough is enough time to sell so we are not long in a major downturn. In this graph I am using a line invented by Chuck LeBeau called a Chandelier Exit. The name comes from the nature of this trailing stop that hangs off the price action like a chandelier. You might enjoy this little story from Chuck click here. So here is the DVY Renko chart, as you can see there were a few false exit signals but they were few and the system kept you on the right side of the market most of the last 10 years. 

There are other charts of this kind I could show you like the Parabolic SAR and point and figure charts. However the message is the same.  The real point is ... its still a bull market baby. 

It All Shows Up In The Charts . . . 

Primary Sell 
The market pros are waffling no clear signal here.

Aggressive Defensive Graph
The Slow Stochastics on the top of the graph has rolled over now black over red, Some minor toe dipping on risk.

Bond vs Equities
Bonds outperform equities (stocks) this week. Safe havens rule this week. 

S&P500 Over 50 Day
The percentage of stocks over the 50 day moving average is on dropping off but perhaps we pause here. This could be like May or Aug, no clear direction yet. 

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 17.55 generally on a retreating slope. Notice the bounce in the CCI graph at the top. You can learn more about the VIX index here.

VIX Evaluator

On Balance Volume is keeping pace with the current market showing that institutional large volume buying is still active. This is one of the more interesting graph, even though it is declining if this was a true panic sell off the red line would be lower. 

Green Arrow Graph
Our Green arrow graph got us long last week, and that was not the best week to be long, this week it looks a little reluctant about that move . . . but it is still on the buy side so the jury is out on this one so far.

Nasdaq Summation
The Nasdaq Summation index shows that is not a good time to be in high tech Nasdaq stocks. Again hesitantly.

NYSE New High Low
Showing strength on the big board.


From the big picture we are in a bull market, the pros are struggling with mixed signals and a full priced market, this leads to a period of consolidation sideways.  Anything could happen... but the path of least resistance right now is up.

Today's market comment is coming to you form the beautiful island of Caye Caulker Belize... my winter home. 

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