5-28-17 Market Commentary



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Market Breadth: With this past week’s market advance, our Bull/Bear Point and Figure Ratio at 1.30 rose from 0.98 last week, advancing back into bullish territory. The total count of securities in bullish or bearish patterns was virtually unchanged at 3134. The count of bearish stocks decreased 14%, while the count of stocks in bullish patterns increased 14%. The Sand 2 Pirls P&F Market Breadth Summary Chart shows us a market now one week in bullish territory. Paid subscribers have access to the OpenOffice Calc data from which the chart is generated.

The well known market breadth indicator, the NASDAQ McClellan Summation Index (NASI) rose 52 points for the third advance in five weeks. At a positive 92.7 points, it continues below all eight tops above +100, and it continues above all five bottoms below -100 in the last 3 years. 

Volume Analysis: In this week’s volume analysis, the NASDAQ Composite Index ended in neither Accumulation nor Distribution mode with average daily volume lower than the prior week. In the last two weeks the NASDAQ had three (3) Accumulation days and one (1) Distribution day. (Accumulation days are counted when the index closes up on higher volume than the prior day while Distribution days occur when the index closes down on volume higher than the prior market day.) Last week the NASDAQ ended in neither Accumulation nor Distribution mode on higher average daily volume.

Momentum: Now at +177.35, up from +15.52last week, the CCI(20) daily Woodie’s CCI(20) up trend and ZLR Long trade simulation continues. At Friday 5/19 close after 2 days below zero, it formed a valid ZLR (Zero Line Reject) long entry signal for Monday 5/22 open. We will continue to follow this trade simulation in next weeks commentary.
In Woodie’s CCI trading system, six consecutive bars above or below zero are required for a change of trend. The Weekly CCI(20) of the NASDAQ Composite Index began a Woodie’s up trend fifty-six weeks ago, while the Daily CCI(20) began a Woodie’s up trend twenty-seven weeks ago.
The CCI(20) weekly has risen to 161.57 from 125.40 last week. We await the return of the CCI(20) weekly to the +/-50 range for another trade.
Industry Rotation the last two weeks: All of the top five industries are  positive and all of the bottom five are negative. Summary: Some tech and REITs on top; Oil Services, Oil, and Banks on the bottom. Bullish: Semis PHLX continues in the top five. Disk Drives and REITs have entered the top five. Networkers and Brokers have left the bottom five. Gold & Silver PHLX has left the top five. Oil and Oil Services PHLX have left the top five and entered the bottom five.  Bearish: KBW Bank has entered the bottom five.
Focus this week: From www.zerohedge.comCarson Block Says “Laws Of Economics” Dictate China Will Face “Day Of Reckoning”“. The following are some key points and charts.

  • Muddy Waters Research founder Carson Block believes that China’s overleveraged economy will eventually face a “day of reckoning.” He just can’t say when.
  • Betting against the Chinese stock market in aggregate could end up being a “widow maker” play like shorting Japanese government bonds was for several years.
  • Instead, investors should bet against individual firms or sectors – a less-risky option, in Block’s view.
  • There are many [Chinese companies] that somehow manage to keep going even though the financials suggest that they’re doomed. Understanding which companies have the guanxi – a Chinese term meaning business and political connections – to enable them to continue operating, and which companies don’t, is the most challenging aspect of betting against Chinese firms, Block asserts.
  • The argument that the Chinese government will be able to pull off a “soft landing” while successfully transitioning from a manufacturing powered to a services-powered economy is predicated on the view that Xi Jinping and the Communist Party exercise absolute control over the economy, and have near-unlimited resources to help them thwart an economic collapse.
    Block says this assumption, common among westerners, is an example of “cognitive dissonance” often applied to the PBOC. Even though many westerners believe it to be true, China’s central bank isn’t some all-powerful monolith, Block contends.

    “These guys are no more capable than our policy makers in the US have been. The US government has the most power in the world to avert a major economic catastrophe.”

  • The Chinese yield curve experienced a “double inversion” this week when three year yields eclipsed five year yields and seven year yields eclipsed 10-year yields. At the same time, rising base funding costs and interbank credit risk concerns have pushed banks’ cost of borrowing beyond the rate they charge customers for loans for the first time in history. The one-year Shanghai Interbank Offered Rate has exceeded the Loan Prime Rate, the first time this has happened since the latter was introduced in 2013.X

  • Meanwhile, China’s total debt-to-GDP has reached all-time highs.

    Moody’s Investors Service sent offshore yuan tumbling earlier this week after it downgraded China’s credit rating to A1 from Aa3, saying that the outlook for the country’s financial strength will worsen, with debt rising and economic growth slowing. This leaves the world’s hoped-for reflation engine rated below Estonia, Qatar, and South Korea and on par with Slovakia and Japan.

–Donald Pirl www.s2pmarketsignal.com

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