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02282013 February 28, 2013

Posted by easterntiger in economic history, economy, financial, markets, stocks.
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Weather Report 02282013

Current Positions  (Slight Changes)
I(Intl) – exit; S(Small Cap) – exit; C(S&P) –exit

F(bonds) – up to 60%; G(money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 02/27/13
+11.23, +6.38, +1.88, +0.62   (S&P100 compared to exactly 3 weeks before***)
(3wks ago/2wks ago/1 wk ago/today)

Please direct your attention to the ‘0.62’ in the Weekly Momentum Indicator above.  For clarification, this means that the S&P100 is now at
less than ONE POINT above the level of where it was THREE WEEKS AGO!!  Therefore, the 1.88 says that last Friday’s S&P100 level was less than TWO POINTS above the level of FOUR WEEKS AGO!!

(from the January 10th  post) – One key measure that I follow, a gauge of buying strength between stocks (risk) and bonds (safety), has signaled market turn zones 4 times in the past 2 years, at 0.3549 (2/11), 0.3532 (5/11), 0.3516 (4/12) and 0.3568 (9/12). This measure is now at 0.3555 after hitting 0.3566 last Friday.

(from the January 30th  post) This measure now stands at 0.3688. This is almost an imperceptible level from 3 weeks ago. This denotes decreasing reward and increasing risks in holding equities (S, I and C funds) and decreased risk in the F fund and related L funds.

Ratio update – At yesterday’s close, this ratio is at 0.37.  It was as low as 0.363 at Monday’s close following that day’s selloff.  Further downside momentum is much more likely given this ‘resistance’ near this 0.37 level.  This is also a very good gauge to measure the potential of an advance in the F fund, which got the biggest one-day jump upward since August on the Monday selloff.  This is an indication of the so-called ‘flight to safety’, and away from risk of equities.

Each of the previous ratio peaks in 2011 & 2012 represented multi-month stock price highs.

Similarly, interest rates have once again peaked and reversed from multi-month highs, positioning our F fund in a multi-month buying position.

The Euro has reversed from a one-and-a-half year high and reversed downward.  As usual, this is a mirror image of our dollar, hitting a low and reversing upward from a one-and-a-half year low.  A strengthening/rising dollar is often associated with a weakening US stock market.

Interestingly, even in the midst of the rebounds on Tuesday and Wednesday, there has been no reasonable reversal in this flight to safety since Monday.  Further, neither currency markets nor bond markets, as reflected by the above gauge or ratio, did any ‘confirming’ of the stock move back up.  This means that there was practically no money returning from the bond market from Monday’s run up.  It also shows that the currency markets also did not confirm the Tuesday and Wednesday stock rebound.  Both the currency and bond markets are larger than the stock market.  The stock market needs withdrawals from other markets to sustain momentum. The stock market can’t survive on just retail investors and Fed feeding.  It also needs institutional investors for support and strength.

Extremes or unusual moves in sentiment are in focus, though currently many indicators are twisting around and not giving a consistent picture.  Every day for the past six sessions, the Up Volume Ratio on the NYSE has been above 70% or below 30%.  This is reflecting rising volatility.

Due to that, we’ve touched on market breadth more than usual lately, and it remains curious (other data sources may vary a bit).

That kind of extreme chop from one extreme to the other is indicative of uncertainty.

Since 1975, on the two occasions when the S&P 500 had extreme volatility following the hitting of a 52-week high, as it did this month, it has been down 1 week, 2 weeks and 1 month afterward, by between 1.5% and 6.0%.  Further, under similar conditions, it has been up in only 1 out of 4 similar situations going back to 1951.

The only actual variable that was not in place during these other situations was the factor of direct Federal Reserve Bank stimulation, which in this case would refer to ‘quantitative easing’.  The obvious question would be whether the level of QE is sufficient to maintain market stability, accounting for other factors both positive and negative, in the general, world market dynamic. We don’t know the answer to that question.

Do not confuse ‘volatility’ with ‘price action’.

Example – For the entire month of February, in spite of the recent 1+% up and down ranges, it took yesterday’s rally to erase a negative return for the month on the major US indexes, (including the S&P100, S&P500, NASDAQ Composite, Russell 2000).  The total change for the month hovers between 0.017% per day on the S&P500 to 0.06% per day on the upper end for the Russell 2000 Small Caps.

These marginal gains are not worth the risks associated with them.

Markets that continue to wait or move from one report, conference, meeting or news event to the next are reflections of questionable value, limited returns and higher than average risk.

 

 

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