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12152015 December 15, 2015

Posted by easterntiger in economic history, financial, markets, oil, stocks.
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Current Positions  (CHANGES)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) –exit

F(bonds) – no more than 25%; G (money market) – remainder

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Weekly Momentum Indicator (WMI) last 4 weeks, thru 12/15/15

(S&P100 compared to exactly 3 weeks before***)

-11.06, -34.86, 30.94-4.57

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(Today from 3 Fridays ago; 2 Fri’s fm 4 Friday’s ago; 3 Fri’s fm 5 Friday’s ago; 4 Fri’s fm 6 Friday’s ago)

MajorStockIndexes

(Click to enlarge – press back button to return to this page)

Year-to-date, most of the indexes are still underwater.  Recall that the ‘all-time high’ announcements are fading further and further into memory, most of which happened in May and June.  More than 2/3 of the NYSE stocks are below their 200-day moving averages.  Market breadth, the number of advances compared to the number of declines, continues to deteriorate.

A primary fuel for market progress, margin debt, now shows a peak in April, a month before market prices also peaked.  The last three months have been below the 12-month moving average.  This is the first time since 2011 that this has happened.  That period coincides with a 20% decline in market prices around that point.

Margindebt

Anticipation for Wednesday’s FOMC meeting and wild swings in oil prices drove recent sessions. The indices, like oil, experienced some large swings as traders position for a possible rate hike on Wednesday and expiration of options and futures on Friday.  The relentless upward pressure of ‘pretending’ to raise rates for over a year has had a flattening effect on our F fund.  The impression of market calm and lack of a need for the safety of bonds is patently false, even if the perception of low risk is delayed, and deliberately deceptive.  I am reducing my F fund allocation, in anticipation of tomorrow’s reaction of the rate increase, if it happens, and the follow-on ramp up, known affectionately as the ‘Christmas rally’ into the end of the year.  Last weeks’ reduction of price levels sets the stage to a make-believe ‘rally’ for the next two weeks.  Everyone wants the shoppers in a good mood to spend during the last few weeks of December, so, depressions or declines in stock levels are mostly off the table until January, even if just for psychological reasons.

The event most important to the market is the FOMC meeting on Wednesday. They are largely expected to raise rates for the first time since the financial crisis and likely spark some market movement. Along with policy, indications of future increases will be very important.  I would not recommend any holdings in the equity funds, since the volatility surrounding the Fed announcement increases risk this week.  The expiration of futures and options this week also creates an atmosphere of avoidance this week for many traders.  Remember – this is a trading environment, not an investing environment.

SPXS&P 500 – C fund proxy – Year to date

 

The global markets saw some indecision but did not have an overly large impact on our market. In Asia, Japanese and Hong Kong markets were down in the range of -1% while the mainland Shanghai index rose more than 2.5% in a day of trading that saw intra-day losses greater than -5%. European indices began the day with gains but the plunge in oil sparked a sell-off that carried down by roughly -2% by days end.

 

 

EFAEFA – I fund proxy – Year to date

 

 

So, November began with the S&P500 at 2100. Six weeks later, it hit 2000. The US Treasury withdrew $310 billion from the market in November, as it sold immense amounts of new debt to replenish its cash coffers after running them down to near zero while bumping against the debt ceiling. That had an impact.  It sucked cash out of dealer and institutional investor accounts as they paid for the new paper, and simultaneously bought enough in the market to keep prices elevated for a while.

But then they had to rebuild their cash levels. Perhaps the dealer and institutional liquidation to rebuild cash has run its course, but while in progress prices took big hits in other markets as the reliquefication spread to junk debt, commodities, and emerging market equities. That triggered margin calls, obliterating lots of trading capital. We can’t quantify that until well after the fact, if at all. But we see the news stories of runs on hedge funds and mutual funds and resulting shutdowns.  All of this stuff can suddenly snowball. This is how crashes begin, with the sudden need to shift a fixed supply of money into too many places at once.

 

IWMIWM – S fund proxy – Year to date

 

The 4th quarter is normally a period of strength for small cap stocks.  So far, this has not materialized.  Some of the reasons include the anticipation of the Fed meeting/rate increase, and that impact on companies that do a substantial share of their business with overseas clients.  A rate increase should put upward pressure on the dollar, making our goods more expensive for foreign purchasers.  Obviously, this rate chase/avoidance has had negative pressure on the S fund all year.

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