2-4-18 Market Commentary


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Market Breadth: With this past week’s market decline, our Bull/Bear Point and Figure Ratio at 0.75 fell from 1.74 last week, declining into bearish territory. The total count of securities in bullish or bearish patterns increased fractionally to 3554. The count of bearish stocks increased 57%, while the count of stocks in bullish patterns decreased 32%. The Sand 2 Pirls P&F Market Breadth Summary Chart shows us a market now one week in bearish 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) fell 208 points for the ninth decline in 16 weeks. At a positive 238.39 points, it  has fallen below the December 2016, February 2017, May 2016, and July 2017 highs and below the three remaining tops in the last 30 months, and it continues above all four bottoms below -100 in the last 30 months. 

Volume Analysis: In this week’s volume analysis, the NASDAQ Composite Index ended in Distribution mode with average daily volume higher than the prior week. In the last two weeks the NASDAQ had four (4) Accumulation days and four (4) Distribution days. (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 Accumulation mode on higher average daily volume.

Momentum: The CCI(20) daily in a Woodie’s Up trend is now at -21.86 (one day below zero), down from +126.39 last week. At Friday 12/29 close, the CCI(20) daily was within the +/- 50 range presenting a ZLR (Zero Line Reject) pivot and Long entry signal at Tuesday 1/2 close. At Tuesday 1/30 close the CCI(20) fell below +100, signaling the end of our trade. The result of this trade simulation was a gain of 426.18 points on the NASDAQ or $11.01 per share of QQQ.
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 ninety-two weeks ago, while the Daily CCI(20) began a Woodie’s up trend twenty-two weeks ago.
The CCI(20) weekly at +137.18, is down from +193.44 last week after forming a ZLR (Zero Line Reject) Long entry signal for Tuesday 9/5 open. Our rule is to stay in the trade until the CCI(20) drops below +100. We will continue to follow the result of this trade simulation in next week’s commentary.
Industry Rotation the last two weeks: Two of the top five industries are  positive and all of the bottom five are negative. Summary: S&P Retail, and KBW Bank on top; Oil Services, Oil, and Gold & Silver on the bottom. Bullish: S&P Retail continues in the top five. KBW Bank has entered the top five. Oil Services continues in the bottom five. Oil has entered the bottom five. Brokers and Networkers have left the bottom five. Gold & Silver has entered the bottom five. Bearish: Computer Hardware, Disk Drives and Semis PHLX has left the top five.
Focus this week: From www.realinvestmentadvice.comMarket Stumble Or Something More?- 02-02-18” by Lance Roberts | Feb, 3, 2018.

The following are some key points and charts.

Never before in recent history has the market been this overbought and extended from longer-term averages which suggests that a correction that reduces such conditions is highly likely in the near-term.”

Well, this past week, the market tripped “over its own feet” after prices had created a massive extension above the 50-dma as shown below.  As I have previously warned, since that extension was so large, a correction just back to the moving average at this point will require nearly a -6% decline. 

I have also repeatedly written over the last year:

“The problem is that it has been so long since investors have even seen a 2-3% correction, a correction of 5%, or more, will ‘feel’ much worse than it actually is which will lead to ’emotionally driven’ mistakes.”

The question now, of course, is do you “buy the dip” or “run for the hills?”

Don’t do either one, yet.

Yes, corrections do not “feel” good. But they are part of a “healthy” market cycle. In more normal, healthy, bullish trends corrections should be used as buying opportunities to increase exposure to equity risk in portfolios.

However, the recent parabolic acceleration in the markets heading into the New Year was neither normal or healthy. Much of it had to do with the massive liquidity injection by the Federal Reserve at the end of 2017 as shown below.

  • But, after the stumble this past week, it will be interesting to watch the Fed’s balance sheet over the next month to see if they continue with their planned $30 billion / month reduction.
  • If the market rallies back and sets a new closing high, the bullish trend will be confirmed and equity allocations will remain at target levels and hedges removed.
  • If the market rallies back BUT FAILS to set a new high, a series of actions will take place.
    • At the point of rally failure, portfolio hedges will be modestly increased.
    • If the subsequent decline breaks the previous low, the hedges will be further increased and tactical trading long positions will be reduced. 

Why is this important?

  • A Hint Of 1987

    A recent article on Zerohedge discussing a view of Albert Edwards is salient to this discussion.

    Certainly, as we explained at our Conference, the current conjuncture feels similar to just before the 1987 equity crash. All that was missing was the slanging match over the weak dollar between the US and Europe.”

    He’s right. There are many similarities between today and 1987. Recently passed tax legislation reform, exuberance in the markets, and a strong market rally.

    And then the crash.

  • Despite a rampant rise in the markets, the recent spate of economic growth has been due to massive natural disasters across the lower third of the U.S. The impetus from those rebuilding efforts are now running their course and we are already seeing a weakness in the numbers.

    But wages are crushing it, and employment is booming?

    Yes, wages are rising but only for the top 20% of workers.

    And employment in the key demographic is not.


  • The Next Bull Market

    …There are several important points to understand about bonds.

    1. All interest rates are relative. With more than $10-Trillion in debt globally sporting negative interest rates, the assumption that rates in the U.S. are about to spike higher is likely wrong. Higher yields in U.S. debt attracts flows of capital from countries with negative yields which push rates lower in the U.S. Given the current push by Central Banks globally to suppress interest rates to keep nascent economic growth going, an eventual zero-yield on U.S. debt is not unrealistic.
    2. The coming budget deficit balloon. Given the lack of fiscal policy controls in Washington, and promises of continued largesse in the future, the budget deficit is set to swell back to $1 Trillion or more in the coming years. This will require more government bond issuance to fund future expenditures which will be magnified during the next recessionary spat as tax revenue falls.
    3. Central Banks will continue to be a buyer of bonds to maintain the current status quo, but will become more aggressive buyers during the next recession. The next QE program by the Fed to offset the next economic recession will likely be $2-4 Trillion which will push the 10-year yield towards zero.

    The next bull market is coming, it just won’t be in stocks.

    It will be in the U.S. Treasury market which will coincide with the next recessionary drag in the economy within the next 12-18 months (at the most).

  • …over the next several months, higher interest rates, if they remain elevated for long, will have a deleterious effect on the economy. 

    Valuations will become problematic.

    Furthermore, the safety of bonds becomes much more attractive when the yield is significantly above the dividend yield in stocks. (Why take the risk is stocks for a sub-2% yield when I can get 3% in a U.S. Treasury?)

    That’s not hard math.

–Donald Pirl www.s2pmarketsignal.com

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