Sunday, 26 July 2015

July 25, 2015 – Weekend Market Comment

July 25, 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 (link at the bottom of this page). 


The Blah Blah Blah (courtesy of CNBC)
U.S. stocks closed about 1 percent lower on Friday, despite surprisingly strong Amazon earnings, as signs of slower global growth weighed on sentiment. The major averages closed down more than 2 percent for the week, with the S&P 500 and Nasdaq posting their worst since March. The Dow Jones industrial average had its worst week since January, off nearly 2.9 percent for the week.
The Dow Jones Industrial Average closed down 163.39 points, or 0.92 percent, at 17,568.63, with DuPont leading 28 blue chips lower and Visa, Cisco and Walt Disney the only advancers. Visa was the best performer for the week, up 5.5 percent, while United Technologies was the worst, down 10.3 percent.

The S&P 500 closed down 22.50 points, or 1.07 percent, at 2,079.65, with health care leading nine sectors lower and utilities the only advancer, by only 0.03 percent. All the sectors ended lower for the week, with materials plunging nearly 5.5 percent as the worst performer for the 5-day period.
The Nasdaq closed down 57.78 points, or 1.12 percent, at 5,088.63.



What I Think
I think the market is playing a "swan song" and has been for a while, so I expect a correction. You will recall a few weeks ago, I said the bots and the Algos would go on a buying binge like some dog chasing a stick - they did. I said not to play the bounce because it would be short lived - it was.  So here we are after a pull back. 

We are being feed a global fiction:
Since 2013 most of the world has been in contraction. Since 2015 Australia, France, Italy, Russia and China are all either at ‘contracting’ levels or very close to doing so if you look at the leading PMI releases

Europe - The ‘disease’ appears to be spreading; for many years it was Japan that had serious concerns with regard to deflation, now Europe appears to be heading in the same direction. The Euro Area effectively entered deflation ‘officially’ earlier this year, with the Consumer Price Index hitting -0.2%.  The Euro is almost on par with the US dollar. The only solution to save the Euro is to put the Welfare states, like Portugal and Greece, on a steady iv drip of bailout money from the ECB. They use the bailout money to make payments on bigger debts in a sort of pyramid/ponzi scheme. Try this personally with your credit cards and your credit rating will be zero, but economists and nations are allowed to kid themselves.

China - Corporate earnings are showing that China is no longer growing at a 7% rate, and no longer fueling commodities demand. So, companies that were dependent on that growth, such as materials and industrials, are suffering. Meanwhile, the positive impact of lower oil prices has not materialized. Markets will need to adjust those expectations. You can read the last two weeks of posts here and know I think that manufacturing is slowing, real estate in China is crashing down. The stock market is due for a correction, but instead is being held up  by misguided thinking and dictatorial command. 

Canada, Australia, Brazil, Russia - Death of commodities is sucking the life out of these nations that had been congratulating themselves on brilliant leadership that turns out to be a fairy-tail. 

Here is the commodity index for the last year and a half.:

Oil, gold, metals, coal all kaput!

USA - A the last hope, actually also toast. Yes this year we have new highs in the S&P500 and the Nasdaq. But you have a look and the S&P500 from two views, Cap-weighted, is the version you see often quoted. The top 7 firms in the index are bigger than the bottom 200 together, so the index really is tracking firms like Apple and Google with a few hundred along for the ride. Now consider there is an equal weight version, where each of the 500 firms is exactly 1/500 of the index, and my what a difference when you plot them lately. The Green is equal weight S&P500, the red is the cap-weighted S&P500.

The truth is when the market is being held up by only a few big players, the end is near. Think about Google, Apple, Netflix, Amazon. These are all tech companies, they are not labor intensive and there products only serve the US consumer. Similar story in the run up of biotech and Pharmaceuticals.  They contribute little in manufactured goods, yes Apple makes things but the high markup is more about hype, snob appeal and software than say a low margin player like Ford who creates many high paying jobs and delivers a lot of core value. 

A lot of this drive to buy the stock of these big five is from mutual funds and hedge funds, but what they fail to see is they are pushing the PE ratios of these firms to the moon. Netflix with a 250 PE, will need to triple in size every year for a decade or more to be worth anything like what the stock price implies. 

Right now there are 82 companies with PE ratios greater than 100 and market caps over one billion dollars. That only happened twice before in the market's history, for a brief time in 2014 and the top of the tech bubble with 124 such companies. 

The green line above tells you a story, most firms large cap firms in America are declining due to the strong dollar and lower demand. It will not be long until that means layoffs, cutbacks and McJobs, result: people will soon decide they can forgo buying an Apple watch. 

Typically late in an economic cycle the winners are financials like banks and insurance companies...  Here are the charts for Citigroup and Progressive insurance:





OK so the world of central bankers is lying to you, if you can't chart an index like the S&P500 without little traps in it, if the government in China is manipulating the local indexes, if Europe is a debt fuel mess -- what can you use to tell you how the global economy is doing? When things are going well, we build houses, factories and buildings. As capacity grows we expand infrastructure like the power grid. In short we use copper. Here is 5 years of copper prices:

Yes it has been dying for a long time, but it has gotten very ugly since the fall of 2014. 


Market tops are not usually straight up and down affairs but typically experience a trading range separating the primary bull from the bear. During that topping out process, the internal technicals slowly but surely deteriorate. That’s because fewer and fewer issues participate in the uptrend  while a growing number start to move lower.  If we use a broad measure of capitalization, like the NYSE Composite, that recently broke the 200 day simple moving average (red line). It is evident that the market has been range bound for the last year. The pattern is not that dissimilar to the 2000 and 2007 tops.




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. But clearly the light green short term average is in a nose dive. The dark green 50 day ema is also rolling over. So yes green is over red, but it might not be true for much longer.



Industrial Production 
America is nothing without manufacturing might. This recent dip is not a good thing. Looks a little better this week, at least it is not falling.




Non-farm Payroll Employment Index
As a consumer economy America is dependent on strong employment. This chart alone is the brightest spot on this weeks charts! it is the only reson I am not stuffing U.S. dollars under the mattress. 





NYSE New Highs - New Lows
This is a deceptively simple indicator we simple count the number of NYSE stock hitting new highs and subtract the number hitting new lows. Think of this as the vital sign measurement for the health of the market. 

Don't ignore this chart. My big concern is the yellow average line has begun to point down in a big arc, something we have not seen for a while. I am not putting any new cash in long equities until at least the green is above the yellow. 




Market Renko
Renko charts are not based on time (note the funny date scale) and only draw a new brick if the market moves in to a new territory. They really can simplify the whole question of direction. As you can see we have been in an overall uptrend since the 08 crash.

Last week an uptrend bloc appears, this week down!





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
I said not to play this bounce and here is exactly why, one very short ride up . . 



On Balance Volume
Well the OBV line is breaking lower than the market, not a good sign, no panic yet, but this is not good if it keeps going. 



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

From late March through mid-June, equity markets were fast asleep, and volatility was non-existent.  The VIX volatility index (also known as the “Fear Gauge”) had dipped down into the 12s, and it was a snooze-fest on trading floors.  At the end of June, though, Greek debt problems popped up in the headlines again, and then China’s stock market decided to collapse.  For a couple of weeks there, the bears came out of hiding, and volatility spiked.  As shown in the chart below, the VIX index rallied up to 20 in a very short period of time. But in even less time than it took to get up to 20, the VIX has moved back down, and as of last week a new 2015 low! Now it is heading higher. Talk about a quick turnaround!
  

VIX Evaluator
Don't forget this is an experimental VIX indicator. Interesting, it not only predicted the China/Greece mess, then it has calmed down . . .now ready to rise again.




S & P 500 Over 50 day
As you can see this market is stuck in a range. No one is willing to play the "edges" and so the market stalls. Last week I asked "Will we stall out at the 62 as before?"   Well here is your answer - yup.




Green Arrow
Wait for a green Arrow before putting new money to work. Recent signals have been of little value until we break out. This confirms what I said about the NYSE High Low - wait to put new investments to work.




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


Nasdaq Summation
This chart tells us if technology is a good bet now, general the NASDAQ leads the other indexes. The summation index can often spot weakness-strength before the price reflects it.

Google turned things around for a moment last week, and now fizzle. . .   



Aggressive Defensive Chart
Very interesting, big cap defensive type equities are out doing the midcap 400. Is the truth about small cap becoming obvious? Or is this the end of the bounce. 



Bond vs Equities
The consumer is the last hope with Amazon having a great quarter and bonds are doing well as fear creeps in.





Bond Direction
The direction of the bond market at this time is critical. The Bond Bull began in 1981, we have has a 33 year bull market in U.S. Bonds. When it unwinds it will have major implications.  This fall, as the US federal reserves tries to take off the economic training wheels, interest rates are near zero and so have no place to go but up, then again many feel the economy cant take the shock. The 50 day average line (red) is clearly in a downtrend. The US treasury market is is twice the size of the stock markets. As investors flee bonds who will buy them from fleeing investors? This week more embracing bonds not fleeing.



Sectors
This chart shows that everyone wants a bit of tech (Google effect), but perhaps that was over done. Last week i said "Bet you that brown DEF line starts upward this week." It did.
    XLF - Financial Stocks - Dark Blue dots
    QQQ - Nasdaq - Purple
    XLY - Consumer discretionary - Green
    XLU - Utilities - Red
    DEF - Defensive stocks - Brown




Nations
It is a global Market are there better place to put your money? Remember this chart is compared to the S&P 500 U.S. market. If it is falling these all might be along for the ride, even if this chart shows them rising. Look at the now ending relief rally in Germany! Canada you still suck!
    XIU.TO - Canada - Blue dots
    DAX - Germany- Purple
    FXI - China - Green
    EEM - Emerging- Red
    EPHE - Philippians - Brown



Major Market Sectors
This is our newest chart, it shows the over all U.S. Market, from the equal weighted S & P 500. Below it are broad sectors you might want to look at. Well this says, Canada sucks (who knew) and some relief China might be back (hrumph) in other words this week you learned nothing form this chart.

    Canada Dividend Stocks vs S&P 500 in Canadian $ - Red
    Emerging Markets vs  EW S&P 500 - Pink
    US Bonds vs EW S&P500 - Blue
    Commodities vs EW S&P500 - Brown
    Gold vs EW S&P500 - Gold




Section 4: Special Interest

London Calling:Question: A reader from London asked about buying the SPX5 fund on the London exchange. "I cannot invest directly in S&P 500 but via some sort of fund which is trucking its movement. But there are so many of them and it is very confusing for me..."

Answer: Well I know very little about U.K. based funds, but this one looks fine on the surface and the management fees are fair. Understand you are hedged in UK pounds so if the U.S. markets rise and the pound falls you still will not make much. On the other hand a rising U.S. market and a fall in the U.S. dollar could be a double blessing.

That said I think your timing is not very good, I would not put any new money to work until the charts in section one look better. I expect a downturn that might even last until October, so don't rush in this week.  Wait until the bull bear lines are dark green over red (as they are now) AND the NYSE New High New Low Chart in section one has returned to going up. As an added precaution you might wait for a new green arrow on the Green Arrow chart. 



A Bridge Over Troubled Waters
Despite the roller-coaster ride that has been Chinese stocks in recent months, Bridgewater Associates, one of the world's largest hedge funds, had remained bullish on China's market and economy. In a new note released to clients on Tuesday, Bridgewater -- the hedge fund founded by Ray Dalio appeared to change its view on China, noting a number of growing concerns in the world's second-biggest economy. In the note, titled "Greater Risks in China," Dalio and his team said their "views about China have changed as a result of recent developments in the stock market." There are plenty of numbers to note, including Bridgewater's estimates that stock market investors have lost about 2.2 percent worth of household sector income, or 1.3 percent of Chinese GDP, thanks to recent gyrations in Chinese equities. 

Bridgewater noted that while it did believe Chinese stocks were probably in a bubble before Tuesday's note, that bubble was "a double-edged sword, though much more good than bad." Rising prices had attracted "unsophisticated speculators" keen to try their luck in the market; Bridgewater says that 67 percent of people opening new margin accounts in China had less than a high school education. 

Ray Dalio you should have read what I have been saying since 2012.  I told you so . . .

Summary 
Well it is just a tough time to invest in anything, I can see storm clouds in Europe, China and the USA. Trouble is brewing in Bonds, Equities, Gold, Oil, Commodities, Housing, Global Macro, Global Micro and every major currency but the U.S. Dollar.  Perhaps this would be a good time to angel invest in a small business, nothing else looks good in the near term. 

I would raise cash and wait for a buying opportunity. No one can be 100% certain of the market but I think there is a near term pull back coming, but not a crash. Don't forget cash is a position too. Time to do some "sitting". 





Anybody need a loan to open a food franchise store?







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

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

Sunday, 19 July 2015

July 18, 2015 – Weekend Market Comment

July 18, 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 (link at the bottom of this page).


The Blah Blah Blah (courtesy of CNBC)
U.S. stocks closed mixed on Friday, but posted solid gains for the week, as strong earnings boosted the Nasdaq to another record high. "Today Google is certainly in the spotlight because it's having one of it's best days in the history of Wall Street," said Daniel Deming, managing director at KKM Financial. "It's amazing you're seeing this market being able to recoup once (bad news) is taken away. ... I think this has been a classic study in how the psychology of the market really has a big impact." 


The Nasdaq Composite jumped nearly 1 percent to a new closing and intraday high as Google Class A stock briefly surged more than 16.5 percent to above $700 a share. The combined rally in both Class C and Class A shares—with a trade volume about 7 times normal—for a one-day increase of $65 billion at the close was the biggest one-day gain in history, according to S&P Dow Jones Indices.

The Dow Jones Industrial Average closed down 33.80 points, or 0.19 percent, at 18,086.45, with Intel leading decliners and IBM the greatest advancer. The S&P 500 closed up 2.35 points, or 0.11 percent, at 2,126.64, with energy leading nine sectors lower and information technology the only advancer. The Nasdaq closed up 46.96 points, or 0.91 percent, at 5,210.14.


What I Think
Well Google did very well at $672 a share, considering "Mr. Market" was only asking about $125 a share in October 2008. Of course no one wanted to buy it then and now some experts call it a bargain.    



We are stuck in a problematic situation.  Since the year 2000 the average small-cap stock in the Russell 2000 Index is up 151% while the average blue chip in the Dow Jones Industrial Average has gained only 57%. As a result, small-cap stocks now seem absurdly overpriced. According to investment research firm MSCI, the average small-cap stock’s price-earnings ratio is 29. The historical average P/E for stocks is about 15.

Normally we would fix that  buy buying large caps, in a classic arbitrage play. However, Wall Street is boycotting large caps, because the U.S. dollar is too strong and America's biggest companies make money on world wide sales.


Add to that the Chinese stock market if in a very fragile state. An we are all waiting to see it the the band-aid fix they put on last week will hold.  

As I said last week, the problem in China is that they are dealing with a moral hazard, the government has in effect said they will hedge the market to protect participants from all down side risk while encouraging rampant speculation. Of course one day the intervention must stop. For naive investors in China it is a bit like the story of a turkey that is fed 1,000 days in a row. The feedings reinforce the turkey’s sense of security and well-being, until one day before Thanksgiving an unexpected and uninvited "bad event" occurs. All of the turkey’s experience and feedback is positive until fortune takes a turn for the worse.





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 but my fear now is this will be more like October 2015 . . . But you can't predict the market you can only go with the trend. Right now there is a bounce up in an over all 50-day-moving-average mild sell-off. Notice we hit the 50day average and stopped.




Industrial Production
 
America is nothing without manufacturing might. This recent dip is not a good thing. Looks a little better this week, at least it is not falling.




Non-farm Payroll Employment Index
As a consumer economy America is dependent on strong employment.





NYSE New Highs - New Lows
This is a deceptively simple indicator we simple count the number of NYSE stock hitting new highs and subtract the number hitting new lows. Think of this as the vital sign measurement for the health of the market. 


My big concern is the yellow average line has begun to point down in a big arc, something we have not seen for a while. I am not putting a lot of cash in equities until at least the green is above the yellow.




Market Renko
Renko charts are not based on time (note the funny date scale) and only draw a new brick if the market moves in to a new territory. They really can simplify the whole question of direction. As you can see we have been in an overall uptrend since the 08 crash.


Poof an uptrend bloc appears!





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
Looks like the Bots/Alogs and the traders are happy to get back in. After all China and Greece are fine . . .



On Balance Volume
Very encouraging, the big volume players are still in the market, and some sign of enthusiasm as OBV keeps pace with the price.



VIX
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, broke below 12, some time in the mid 11 is generally the bottom (of fear) and the top of the recent market advance.

From late March through mid-June, equity markets were fast asleep, and volatility was non-existent.  The VIX volatility index (also known as the “Fear Gauge”) had dipped down into the 12s, and it was a snooze-fest on trading floors.  At the end of June, though, Greek debt problems popped up in the headlines again, and then China’s stock market decided to collapse.  For a couple of weeks there, the bears came out of hiding, and volatility spiked.  As shown in the chart below, the VIX index rallied up to 20 in a very short period of time. But in even less time than it took to get up to 20, the VIX has moved back down, and as of today it’s at a new 2015 low!  Talk about a quick turnaround!
 



VIX Evaluator
Don't forget this is an experimental VIX indicator. Interesting, it not only predicted the China/Greece mess, now it has calmed down . . .




S & P 500 Over 50 day
As you can see this market is stuck in a range. No one is willing to play the "edges" and so the market stalls. Will we stall out at the 62 as before?




Green Arrow
Wait for a green Arrow before putting new money to work. Recent signals have been of little value until we break out.




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


Nasdaq Summation
This chart tells us if technology is a good bet now, general the NASDAQ leads the other indexes. The summation index can often spot weakness-strength before the price reflects it.

Well we is all loving the NASDAQ ever since Google kicked butt!   



Aggressive Defensive Chart
Very interesting, big cap defensive type equities are out doing the midcap 400. Is the truth about small cap becoming obvious? Or is this the end of the bounce. 



Bond vs Equities
Ah the consumer is selling off and bonds are being bought . . . humm nervous, weaker market?





Bond Direction
The direction of the bond market at this time is critical. The Bond Bull began in 1981, we have has a 33 year bull market in U.S. Bonds. When it unwinds it will have major implications.  This fall, as the US federal reserves tries to take off the economic training wheels, interest rates are near zero and so have no place to go but up, then again many feel the economy cant take the shock. The 50 day average line (red) is clearly in a downtrend. The US treasury market is is twice the size of the stock markets. As investors flee bonds who will buy them from fleeing investors?



Sectors
This chart shows that everyone wants a bit of tech (Google effect), but perhaps that was over done. Bet you that brown DEF line starts upward this week.
    XLF - Financial Stocks - Dark Blue dots
    QQQ - Nasdaq - Purple
    XLY - Consumer discretionary - Green
    XLU - Utilities - Red
    DEF - Defensive stocks - Brown






Nations
It is a global Market are there better place to put your money? Remember this chart is compared to the S&P 500 U.S. market. If it is falling these all might be along for the ride, even if this chart shows them rising. Look at the now ending relief rally in Germany! Canada you still suck!
    XIU.TO - Canada - Blue
    DAX - Germany- Purple
    FXI - China - Green
    EEM - Emerging- Red
    EPHE - Philippians - Brown



Major Market Sectors
This is our newest chart, it shows the over all U.S. Market, from the equal weighted S & P 500. Below it are broad sectors you might want to look at. Well this says, Canada sucks (who knew) and some relief China might be back (hrumph) in other words this week you learned nothing form this chart.

    Canada Dividend Stocks vs S&P 500 in Canadian $ - Red
    Emerging Markets vs  EW S&P 500 - Pink
    US Bonds vs EW S&P500 - Blue
    Commodities vs EW S&P500 - Brown
    Gold vs EW S&P500 - Gold






Section 4: Special Interest

FV - Autoilot

The First Trust Dorsey Wright Focus 5 ETF (ticker FV) is a very interesting ETF, what it does is buy 5 of this week's best performing ETFs from the First Dorcy's family of ETFs. In other words it a sector rotating ETF, giving you kind of mutual fund picking but with less "management" lowering fees and mistakes.

The Good News:
There are many advantages to this ETF, first off it is very broadly diversified so you could put a bigger part of your portfolio in here, and not be taking large risks. It also is very stable, it has a very consistent standard of deviation, about half of the normal S&P500 ETF so you will see a nice steady rise in value. Also to date it is kicking the S&P500 for return. Check the chart FV is in blue and the S&P500 is in red:

The Bad News:

Well first off the fees, at nearly 1% it is a very expensive ETF. Also I think it also pays ETF fees on a hidden level from the 5 ETFs it buys (double whammy).
First Dorcy is a smaller ETF firm so they are going to offer a lot less ETF for the top 5 to pick from, than say if the same product came from iShares or Powershares. Also revision to the mean tells you there will be times when this find putts you into the five most endangered ETFs during a big market reversal.

The Granny Fund:

Sometimes people ask me how to play the markets without a lot of research and needing to pay close attention, I call these Granny Funds, since they could be a way that even your grandmother could play the markets.

This First Dorcy 5 ETF might be a great choice for investors who want the hands off results of a professional adviser without the huge fees. If you were to combine this with the Bull Bear Lines you just might have a great way to invest a modest portfolio with great returns and few decisions. If you were a bit more of a research oriented investor you could use this and some bonds as part of a Naive Graham System.


GOLD looses Luster
Well you all know I have been predicting the death of gold since the summer of 2012, then at $1700 an oz and if it were not for Chinese hiding gold bars under their mattresses it would have been worse. Check out Barrick, or the juiced short gold miner ETF DUST:
Of course the source of the problem, china. Read This:
Gold plummeted from $US1132 an ounce to $US1092 in the space of minutes today after 5 tonnes of bullion was unloaded on the Chinese market.



What Works Now
My buys this week were all ETF's. in Canada ZBK, in the USA FV, ETB, PBJ, and PBS. I still hold Mobileye. 


Summary
We are in an uptrend, as part of a recent bounce. It is still a bull market so: no going short against the American market. After all we just hit a 52 week high in the NASDAQ and it is a BULL MARKET. This has been third-longest period in post-war history without a correction. That alone should make you nervous. We are in a summer consolidation so I do not expect a big break out, and with the VIX in the 11 zone, you might buy some protection. I have no idea when the big pop in China's markets will be, but if it happened this summer that would be no surprise. 

I said last week, this bounce was going to be dangerous, and my opinion has not changed. My stops are tight and I have little faith in this over-bought market. One hiccup in the OBV chart or the NYSE New High New Low chart  and I am greatly reducing my exposure to risk.






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

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