Saturday, 27 June 2015

June 27, 2015 – Weekend Market Comment

June 27, 2015 – Welcome to my weekend market comment, an analysis tool I use in my own portfolio decisions, published free to the web every weekend before the New York opening bell. For full details read my disclaimer below.  

The Blah Blah Blah 
U.S. stocks closed mixed on Friday, posting a loss for the week, as investors digested earnings reports and awaited resolution on the Greece debt talks. The Dow transports eked out a gain of 0.03 percent for the day but closed 2.01 percent lower for the week. The S&P 500 closed down 0.70 points, or 0.03 percent, at 2,101.61, with information technology leading three sectors lower and utilities leading advancers. Telecommunications was the best performer for the week, up 1.16 percent. The Nasdaq closed down 31.68 points, or 0.62 percent, at 5,080.51. 

What I Think

The market wants to go higher, but it is summer so volume is low and everyone is waiting to see if Greece will stay in the European Union. The result is we are just in a holding pattern. 

As I write this future Markets in Europe are trading down as much as 3%. In a televised address to the nation, Greek PM Alexis Tsipras assured Greeks that their deposits are safe despite an upcoming one week bank holiday and despite the fact that Greek stocks will not open for trading on Monday. Tsipras also said Athens has re-applied for a bailout extension and urged Greeks to "remain calm" in the face of what is sure to be a turbulent week. 

Around 600 million euros was withdrawn from the Greek banking system on Saturday, one senior banker at one of Greece's four big lenders told Reuters. Though that was below the level of over 1 billion euros seen on some days over the past two weeks, the figure was almost exclusively from ATM withdrawals, where the average daily limit of cash that can be taken out is 600 to 700 euros.

As I said before, what is going on is the market is wiggling in little 2.5% ranges, back and forth but mostly that is just noise, overall we are going sideways. Also the wiggles are getting smaller. That is consolidation.

Here is the slope of the 50 day average of the S&P 500 (equal weighted) as you can see the slope is now negative.


It gets worse of you just look at the NYSE made up of larger firms having trouble with a strong US dollar:


U.S. Dollar:


and a weak energy sector:


My biggest worry is this graph, falling industrial production:


Falling share prices in China are a sign that the markets are getting a bit more rational over there. A panic set in this week as margin calls came in an investors were forced to sell. The worst damage was in Shenzhen, where the city's benchmark index fell 7.87 per cent, officially entering bear market territory after a fall of more than 20 per cent from a June 12 high. In the past two weeks, 14 trillion yuan (HK$17.4 trillion) has been wiped off the value of mainland stocks - some 20 per cent of mainland market capitalization. To put that in perspective that is three times the value of Apple, the company with the world's biggest market cap. Don't forget a few weeks ago, I showed you these investors are mostly buying on margin so much more pain when no gain, could be the start of a major stampede:


Perspective
But most of all remember this is summer. The markets are behaving like summer, lethargically going no where and most summers include a decent pull back and a summer rally. In a bull market a pull back is an opportunity, but wait until the market turns back up and beware the dead cat bounce.
 



It All Shows Up In The Charts . . .
Section 1: The Big Picture
These charts tell us if we should even be in the market at all.


Bull Bear Lines
Well of course the big picture is now and has been for several years now, you can't be wrong if you are long. I said before that you can expect a repeat of Jan 2015 and so far that is what is happening. A month of sideways is now three weeks old.





NYSE New High Low 
More hesitation. We may look back on this as the sign of the long term top.




Section 2: Short Term Timing
Consider this as fine tuning. As you learned in section one of the CME4PF School most investors don't need to plan the short term, But you can use this section to decide on ratios of risk. For example you can time a strategy of moving from a defensive ETF like DEF and an aggressive ETF like QQQ. or between a ratio of equities and bonds. You could move from broad safe indexes like DIA (the dow 30) and  aggressive equities like Google and Amazon. Remember don't use these  charts to anticipate, and don't do counter trend strategies like shorting a bull market. 



Primary Sell  
The market hates uncertainty and a Greece exit of the Euro creates uncertainty. Smart Money is predictably buying insurance. In fact I wonder why they are not buying more, could it be they just don't think Europe will loose Greece? The danger is that the smart guys keep getting caught on the wrong side of the market, if it goes on too much they lighten up.   
 


OBV
On Balance Volume our "canary in the coal mine" is looking like it should, it is not important that it is going down, just that the red line is near the current market or above. A very good sign!


VIX
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.



Aggressive Defensive Chart
Defensives win win win. Then again, according the stochastic oscillator perhaps for not much longer.










Green Arrow Chart
Our last green arrow was not a great signal and clearly this is not a great time to enter the market. Pay special attention to the lower portion of this chart, 

mid-caps vs the over all market is falling, fear is coming in.





S&P500 Over 50 Day
I said two weeks ago it might bounce, it did, then this. 




Section 3 Allocations and Sectors
OK Now you know  the market direction, where should you put your money?



Nasdaq Summation
Not much fun in the high tech world, the recent rally in health care and semiconductors has fizzled.




Bond vs Equities
Well equities clearly did better than bonds. But really it was bonds imploding, not the equities market that made this work. Expect this continue if rates move up, equities will be the only game in town. Nice to see a bet on the consumer, the fall back trade. 

 

 
Sectors
The consumer has been the play for the last two weeks, but utilities are getting a bounce, an odd thing in a rising rate environment.

XLF - Financial Stocks - Dark Blue dots

QQQ - Nasdaq - Purple

XLY - Consumer discretionary - Green

XLU - Utilities - Red
DEF - Defensive stocks - Brown








Section 4: Special Interest

In this section I will introduce some new ideas or interesting things in the market.


Short
Shorting the market is dangerous and you never should short a Bull Market. As you know the  Bull Bear Lines are telling you, this is a bull market in U.S. Equities. However the Bull Bear lines can be used to look at other markets like Bonds or China.

Never bet big money on short positions, but if you have a little gambling money perhaps you can try these ideas. 

Short Bonds
The Bond Market continues to be in a slump here is TLT about to violate the rule of green over red.


You can short treasuries using the TBT ETF. Just one caution this trade could be a mess if there is big trouble in the Greek Exit.


Other ways to play rising bond yields are to buy insurance companies (like Prudential shown here) and financial stocks like banks. 

Short Commodities
If you read my rant call Pop Goes the Commodity Bubble, as many economists did at the World Bank, you will know that the game is up for making a killing taking rocks out of the ground. Here is the Bull Bear Lines for Commodities

Here is a short ETF in Base Metals



Short China
You might think things are awful in China, but the Bull Bear Lines have NOT (yet) crossed.




You can short the Chinese market using  FXP


U.S. Housing
Americans continue to buy homes in fact the housing market average price has just about fully recover to the 2007 level before the financial crises. In Fortune Magazine they feel it is already too late



Summary
This is a bull market, so if you respect that you must be long and buy on pull backs. I expect a strong sell off on bad news from Greece followed by a bounce based on the idea that this is not the last nail in the Euro coffin after all. That said the broader market is much weaker than it has been these past few years. Bounces will not be what they used to be. If you want to play the bounce please WAIT FOR THE TURN, no catching falling knives. This market has some very concerning things, that COULD be the start of a long term market top. Things like a 6+ year run up without a big correction and specific things like falling industrial production, a sell off in China and the possible first nation to exit the Euro. 

That said, consumer stocks and housing stocks are rising, U.S. employment is rising. Even without Greece in the long run Europe is still rich and powerful none of this stuff looks like it will kill the 6 year bull market.  Lets face it nobody is starving in America:

So you play this but being a little deeper in cash to buy good stocks and broad ETFs on the dips and not playing volatile equities. Be patient look for opportunities.









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



Don't squint, All graphics can be enlarged by click on them.











Sunday, 14 June 2015

June 13, 2015 – Weekend Market Comment

June 13, 2015 – Welcome to my weekend market comment, an analysis tool I use in my own portfolio decisions, published free to the web every weekend before the New York opening bell. For full details read my disclaimer below.

The Blah Blah Blah 
U.S. stocks closed lower on Friday, as continued uncertainty over Greece pressured stocks and investors kept an eye on a calmer bond market ahead of next week's Federal Reserve meeting. The major averages ended the week flat. The S&P 500 ended the week up 0.06 percent for the longest streak of sub-1 percent weekly moves since 1993. The Dow eked out gains of 0.28 percent, while the Nasdaq Composite closed 0.34 percent lower for the week. The Dow transports closed 0.4 percent lower, for its fourth negative week out of the last five.

The Dow Jones Industrial Average closed down 140.53 points, or 0.78 percent, at 17,898.84, with Merck leading all blue chips lower. The S&P 500 closed down 14.75 points, or 0.70 percent, at 2,094.11, with energy leading all 10 sectors lower. The Nasdaq closed down 31 points, or 0.62 percent, at 5,051.10.



What I Think
What is going on is the market is wiggling in little 2.5% ranges, back and forth but mostly that is just noise, overall we are going sideways. Also the wiggles are getting smaller. That is consolidation.

You can look at my 50 day EMA chart I put down in the Bull Bear Lines section, but also here is a snippit of a chart Arthur Hill presented that illustrates the same point. The Market just can't get past those pesky red lines. 





So what is causing the indecision? Well Greece refusing to play ball is a concern but that is a story that still has a few rounds to go. As I said before the issue is a potential end of easy money, as in rate hikes. The red line is the 50day MA of the US treasury Bond

One of the recurring explanations given why the Fed is eager to hike rates is so it has some dry powder ahead of the next recession which, some 6 years after the last one ended is overdue (especially with a negative GDP Q1).  Which, incidentally, is just the topic of the next Economist cover titled simply "Watch out" adding that the world is not ready for the next recession...
 
This week The Economist said  . . .

It is only a matter of time before the next recession strikes. The rich world is not ready

Read it here 

As one prema-bear put it: "The question of just how much dry powder does a 25 bps increase in the Fed Funds rate provide, especially considering that Europe tried precisely that in the summer of 2011 only to unleash a crippling recession on the continent that required yet another Fed bailout in November 2011."


The rate hike issue is like a locomotive, big noisy and you know it is coming miles away, so it should not be that big of a deal, if we are in for a big sell of it will be something subtler. Generally it will be that speculators painted themselves in to a corner and can't get out.  However there is a subtler side to the bond issue, my personal favorite is this one on CNBC from the world's leading expert on bonds, Mohamed El-Erian, yes it is also about bonds, but it is a bigger problem than the fed. To give you some perspective, the global bond market is about $82 trillion.  The global stock market hovers around $40–$50 trillion.  So, on pure size alone, the bond market is almost twice the size of the stock market. Now in the days of my childhood little old ladies bought a government bond at 10% return, held it until it matured and bought another one. Today granny has given way to big government wealth funds and corporate treasuries. Global pension funds alone are 24 trillion dollars. These guys don't give a rats ass what the bond yield is, just as long as they can buy a bond this week and dump it next week at a big profit because interest rates have dropped. What Mr. El-Erian talks about on CNBC is "liquidity" but what he means by that is, treasury and corporate bond holders are a very conservative bunch and hate losses, as in they simply will not hold bonds in a rising rate environment. Well Mr. El-Erian knows they can't all sell their bonds on the same day, if there are no buyers what will keep up prices . . . so what if they do sell at once? Scarey?

Of course just get me started on China's bubble markets, and to add fuel to the fire here is a bit in Bloomberg. Stock forecasters in search of an early-warning system for the next Chinese bear market are zeroing in on the country’s record $358 billion pile of margin debt. Check out their graph, its not hard to see what is pushing up equity prices.


Well that is all well and good, but don't panic just yet ... there are few things you should keep in mind; first off it has been less than a month since we hit 52 week highs in the major indexes and small caps. Second certain small  technology issues are doing well (example AMBA), not the stuff of big recessions. Finally there is the idea that if bonds are being sold, some of that capital will flow in to stocks . . .So relax?




It All Shows Up In The Charts . . .

Section 1: The Big Picture
These charts tell us if we should even be in the market at all.


Bull Bear Lines
Well of course the big picture is now and has been for several years now, you can't be wrong if you are long. You will note we are turning back up about where we often have in the past, with the 4 day average (light green) making a little dip under the 50 day average (dark green).


 

But lets ZOOM in on this puppy for a better look at the 50 day EMA (dark blue). I placed above it (for those of you that can't see the obvious)  a slope indicator and as you can see the 50 day slope is now negative. That is not the end of the world, this happens but, it is a cautionary tail. The Goldilocks market is on vacation, from here we maybe in a more traditional market, slugging it out for gains. Or this could be the start of something more. I love the simplicity of this view, it really says it all.



Primary Sell
Smart Money is getting optimistic now, but it is anemic. The danger is that the smart guys keep getting caught on the wrong side of the market, if it goes on too much they lighten up.


 



NYSE New High LowThis is the graph that I said two weeks ago was giving me some confidence in a long term bull, now ewww, not so much . . . (yeah I added a zoom panel). We may look back on this as the sign of the long term top.
 
 


OBV
On Balance Volume our "canary in the coal mine" is looking like it should, it is not important that it is going down, just that the red line is near the current market or above. A very good sign!




VIX
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.5. Notice the lowest panel shows the price of SPY in the Elder's Impulse system, yup more blue bars due to a shortage of conviction in direction.





Section 3: Timing and Sectors.
Consider this as fine tuning. As you learned in section one of the CME4PF School most investors don't need to plan the short term, But you can use this section to decide on ratios of risk. For example you can time a strategy of moving from a defensive ETF like DEF and an aggressive ETF like QQQ. or between a ratio of equities and bonds. You could move from broad safe indexes like DIA (the dow 30) and  aggressive equities like Google and Amazon. Remember don't use these  charts to anticipate, and don't do counter trend strategies like shorting the a bull market. 


Aggressive Defensive Chart
Woosh a sudden up turn in risk, or is it a total hate of big defensive stocks in a strong dollar environment?
A bit of both.



 

Bond vs Equities
Well equities clearly did better than bonds. But really it was bonds imploding, not the equities market that made this work. Expect this continue if rates move up, equities will be the only game in town.

 


Green Arrow Chart
Our last green arrow was not a great signal and clearly this is not a great time to enter the market. Pay special attention to the lower portion of this chart, small uptick in performance for mid-caps vs the over all market. A good sign.






Nasdaq Summation
Well this is telling you the NASDAQ is holding but with not a lot of gusto. Drones, nuvo-semiconductors and biotech are doing well, traditional firms like Intel and Microsoft are facing the paradigm shift of the death of the PC.




S&P500 Over 50 Day
Could be the point it bounces, it was before..


 


Sectors
I told you a few weeks ago the financials were do for a run and here it is folks. That is good news, don't expect it to continue. In fact you look at this set up and really I am expecting a strong move to defensive stocks next . . .  look at this bounce in DEF


XLF - Financial Stocks - Dark Blue dots

QQQ - Nasdaq - Purple
XLY - Consumer discretionary - Green
XLU - Utilities - Red
DEF - Defensive stocks - Brown




 

Section 4: Special Interest

In this section I will introduce some new ideas or interesting things in the market.

Self Driving Vehicles

As a child in the 1960's science was always delivering us something really new. Passenger jets went super sonic, car transmissions shifted by themselves and tiny transistors guided spaceships to the moon. But in the last twenty years not a lot of really new has happened. Electric cars existed time the time of Henry Ford and cellphones and the discover of the gene were from the 1970's. But a true driver-less car is a true disruptive break through. Not just for drivers, but for what it means robots in general can do and be trusted to execute flawlessly.


Trucks too . . 
There was a fascinating write-up this week in the medium.com blog about trucks that drive themselves.  I was interested to learn that, in so many sates, the most common job was truck driver. OK a lot of people drive truck,  but I disagree with the author's concussions that very many truckers will loose their jobs. First off this really is no more damaging to jobs than trains are or using earth-movers 100 years ago to replace many pick ax labors. I also think that airplane have autopilots but we still fly important things (passengers) manned and trucks will have drivers overseeing their trips for at least some 20 years out.  Also the article fails to point out many "truck drivers" do local jobs like couriers and garbage truck drivers, so this is not applicable except to long haul driving. (pictured below a Mercedes Benz self driving truck bearing the first Arizona autonomous vehicle license plate)


One area this disruptive technology could make a big change is state revenue. For example on average New Jersey fines generate $30,000 for every mile of road in the sate. What if all those cars were programed to not exceed 5% of the local speed limit?

I have never feared automation. However, I was also surprised how fast this technology is coming. These test truck are on the road now in Arizona and will be everywhere before I am ready for an old folks home.  In fact Google self driving car program has passed 100,000 miles and every accident (all 11) were due to humans running in to their test cars. That is impressive.
 
Still one note of caution, some technologies take off in a big way, but across so many players, that there is no way to benefit financially. A case in point was the compact disk, they made a zillion of them but over all this was just a new way to build records and cassettes. No one player dominated, not Sony, Panasonic, Akai, RCA or anyone else. Even if you went back in time there is no investment you could make that would zoom ahead based on this technology.





Summary
We are in a bull market, therefore you should only be long. A pull-back in a bull market is a buying opportunity.  This week I did buy a few prime issues,
 

Two in Canada
- BDI - a play on oversold oil and gas
- RNW - a play on renewable energy



Two US ETF
- ETJ - Stability with hedging
- HACK - feed the paranoia of the US government


One US Equity
- MBLY - a key firm in the driver-less car, see above.



I bought these with a part of my account I set aside for speculation,  regular readers know that the majority of my accounts are held in super stable, broad based stable ETFS and fixed income.

Diverging indicators are a sign of a rift in the market, it often shows a decrease in participation and prices at "perfection" -- that is common as the season switches to the summer low volume trading period. I would proceed long with caution, and be very aware of any spikes in the VIX and softness in the OBV indicator.








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


Don't squint, All graphics can be enlarged by click on them.