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May 20, 2017 – Weekend Market Comment

May 20, 2017 – 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. You can read the latest version each week by bookmarking http://cme4pif.blogspot.ca/. For full details read my disclaimer (link at the bottom of this page). 

U.S. stocks finished higher Friday for a second straight session of gains, but closed in negative territory for the week, unable to fully bounce back from sharp losses in the middle of the week sparked by White House drama.

The S&P 500 index SPX, +0.68% closed up 16.01 points, or 0.7%, at 2,381.73, with all of its 11 main sectors trading higher. The industrials and energy sectors led the gains both rising more than 1%.




Markets were rattled earlier this week, with investors succumbing to a drumbeat of negative news stories focused on President Donald Trump and his inner circle’s relationship with Russia. President Donald Trump declared himself the victim of the “greatest witch hunt” in US political history as it emerged his campaign advisers had 18 contacts in seven months with Russian officials before the election.



Here is what the charts say this week:





101 Bull Bear
Bull market (dark green over red)  the dark green 50 day average is in a rising uptrend.  NOTICE THE SLOPE (second window), we might be ending our new slope upward.  Bull market -- expect bullish outcomes.
!
103 NYSE High Low Market Forces
Breadth lines are up but recent red zone increase chances of this is the end of the bull market.

105 Non Farm Payroll
Lots of jobs! But beware this is lagging indicator. The smart money is gone before this turns down.

107 Industrial Production
New upswing stronger industrial production.  That is good news.

115 Renko
Sideways?

203 OBV
Market flat to down but OBV is along. 

207 VIX
Big scare but abating now?.
!
209 VIX Evaluator
Still not good.


211 S&P500 over 50 day
Now about 51% of stocks are above their 50 day MA, down from last week when it was 55%.

213 Green Arrow
Only put new money to work when I draw a green arrow. Notice loss of TRIX momentum. 


301 NASDAQ Summation
Nasdaq breadth is dying, but NASDAQ has been all the action, now a breather? Pay attention -- could be volatile.
!
303 Aggressive Defensive
Defensive - Caution

305 Consumer Bonds vs Equities
Bonds up. Consumer flat.

307 Bond Direction
Bonds still trending up.

309 Sectors
Defensives upturn, tech leads, banking lag. BULLISH!

311 Nations
Emerging Markets lead! Canada sucks.

313 Major sectors
Commodities fall, especially Iron Ore, global slow down on the horizon?

! = Pay attention this chart is important this week.



What I Find Interesting


The VIX Before the Storm
This week (the so called fear index) the CBOE Volatility Index decreased 7.6 percent to 9.77, the lowest since 1993. Volatility in the U.S. equity market has dissipated as stock investors whistled past geopolitical unknowns from populist politics to heightened threats from North Korea. While trade agreements, tax reform and the future of financial regulation may hang in the balance, investors have instead focused on one of the best global earnings seasons in a decade and signs of economic growth.

Calm has blanketed other markets as well. Volatility in U.S. Treasuries is down 24 percent since last month and fell to the lowest since October, according to a Merrill Lynch index that gauges volatility from options prices. In the currency market, a JPMorgan Chase & Co. index of volatility in G-7 currencies is at its lowest in more than two years.

In this weeks May 20th edition of the Economist they point out that the two prior times the VIX was below 10 (it did that 1995 and 2007) the next year there was a recession. In the graph below is the VIX, the high spikes (over 30) are market sell offs, always preceded by ultra low levels (sometimes even below 10):

Perhaps more disturbing is who said it. The Economist is a publication that seldom talks about the U.S. equity markets in anything but very broad stokes. If this volatility anomaly has got their attention, it might be a good time to consider if the party is almost over.





Canada Tanks
As Bloomberg pointed out this week, and I warned was coming back in 2012, the Canadian dollar is among the world’s worst performing currencies this year, beaten down by plunging oil prices and the risk of a trade war with the U.S. under President Donald Trump. Enter Home Capital: analysts including those at BlackRock Inc. and Edward Jones & Co. warn that contagion from Home Capital could spill out into the wider economy, further hurting the loonie.

According to Global News the Canadian dollar is headed to 65 cents U.S. in exchange



But will this go beyond and begin a super recession? Many experts see like positive in the economy in Canada in 2017. In March this year the Huffington Post pointed to a new report from one of the world’s top banking authorities is warning that Canada and China are the two countries which face the highest risk of a financial crisis, thanks to elevated debt levels. “Early warning indicators for financial crises continue to signal vulnerabilities in several jurisdictions,” stated the report from the Bank for International Settlements (BIS).




Home Capital has been in the news as it heads for bankruptcy, but Craig Fehr on BNN points out the whole industry is in danger. The risk from Home Capital doesn’t stem from its size or linkages -- it holds only about 1 percent of Canadian mortgages and these are on its own books, which limits spillovers. However a disorderly fallout from Home Capital would damage a sector which is driving Canadian growth. Real estate, residential construction and finance sectors were responsible for around two-fifths of output in Canada’s fastest growing provinces.



As can be seen except for one year after the financial crisis commodities have been falling in price, and the Canadian economy is tied to commodities, here is the CRB index of commodity prices:


With the Oil industry in free fall, all that Canada has left is the housing bubble, pushed up by dirty money being laundered by Canadian law firms in to number companies buying; vacant condos, luxury homes and other real estate. However as I pointed out last December, the flow of Capital from China is slowing.

In fact, home construction is ALL that holds up the Canadian economy now:

The markets benefiting from this are in Toronto and Vancouver. Just look at the skyline of Toronto or Vancouver . . .

Toronto 1984: Office towers and vacant industrial land:

Toronto 2017: condos condos, condos:

Vancouver 1984: Office towers and vacant industrial land:

Vancouver 2017: condos, condos, condos:



Look at this chart of new homes for sale listings in Toronto ... this looks like the panic of the financial crisis.

According to the Financial Post Vancouver sales are down a record 40% and now prices are falling, so far over 8%.


What Works Now
Gold

Gold (Ticker:GLD)


 

AutoDesk
AutoDesk (Ticker:ADESK)


What I Think
I think we are in a cyclical bull market (since February 2016) within a near record long, secular bull market (since early-2009), and neither show signs of abating - YET.

Despite the better markets on Thursday and Friday, this pull back is a time to be unleveraged and in safer investments. Raise cash, raise stops and if you are brave, buy the dip. Be very very careful, a big pull back could resume this week.




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