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Weather Report – Interim – 04162017 April 15, 2017

Posted by easterntiger in economic history, economy, markets, stocks.
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Current Positions  (Changes)

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

F(bonds) – up to 100%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 04/14/17

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

-3.43, -6.54, -1.94, -13.7

The absence in creating or changing positions since the election can be summed up by these two headlines, nearly five months apart.

November 9, 2016

There’s hope for the market under Trump

…..hope….

March 21, 2017

Stocks Plunge, Trump Trade Dies, Fed ‘Doesn’t Care’

….back to reality….

Technically, bonds are regaining strength, reversing the previous trends in interest rates.

Stocks have given up much of their gains built on the ‘hopes’ of healthcare reform, tax reform, relief in regulations, or, any of the political promises that fueled one more fluff-filled rally.  Optimism was enough to create this last opportunity.  It is not enough to sustain, or, incur any reasonable risk.

We know the prices, and the returns.  How do we evaluate the risks that come with appreciation?

Prof. Robert Shiller of Yale University invented the Schiller P/E to measure the market’s valuation. The Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. This is similar to market valuation based on the ratio of total market cap over GDP, where the variation of profit margins does not play a role either.

At the market peak on March 1st, the S&P500 reached 2400.  At that point, this ratio was at 29.5.  The S&P500 is now at 2328.95, as of the close on Thursday, April 13th.  This places the current ratio at 28.8, or 71% higher than the historical mean of 16.8.  We are in the third most expensive market of the past 100 years!!!

There is simply no way to justify holding comfortable positions in U.S. equities at this point.

I will elaborate on these points in the next few days.

All of the pieces are in place for what appears to be a ‘final top’, or, at the very least, an extended, risk-filled churn to an insignificant new high, with an equal chance for measurable losses in the near-to-medium term.

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06232016 June 23, 2016

Posted by easterntiger in economy, financial, markets, stocks.
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Current Positions  (No Changes)

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

F(bonds) – up to 75%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 6/23/16

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

-1.89, -13.58, 16.45, +19.5

======================================================

(Today from 2 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)

TSP Fund Proxies Year-To-Date

Top left – F fund/+4.04% YTD, Top right – I fund/+1.46% YTD

Bottom left – S fund/+2.87% YTD, Bottom right – C fund/+4.15% YTD

(press any image to expand – press ‘x’ button at top left to return)

From the Weekly Momentum Indicator on the S&P100, notice the TWO POINT difference in price from today from NINE DAYS ago!

‘The market is up/The market is down’ virtually means nothing when the market is crossing back and forth in the same area for weeks and months at a time.

The high’s made in May/June of 2015 have still not been broken. Year-to-date is still fluctuating between single-digit plus or minus gains or losses.

Today, as all week, the entire financial world is hovering around the outcome of the referendum on whether the United Kingdom will ‘BREXIT’ or ‘BREMAIN’ in the European Union.   The results are expected sometime tonight with an immediate reaction in the world equity/currency/bond markets tomorrow.  The immediate impact is expected to be fairly ‘huge’ given recent narrow ranges.  A ‘BREMAIN’ will be seen as a stabilizing influence on the Eurozone, resulting in a positive direction on many, if not all, markets worldwide.  A ‘BREXIT’ will be seen as a very negative signal.  Prices would then expected to show immediate and possibly substantial penetration into the RED zones, reflecting the instability that an exit from the European Union by the United Kingdom would mean.

While the UK only represents 3% of world GDP, the economic impact of an exit has been summarized by legendary investor/trader George Soros, as a consequence of a devaluation of the British Pound – “Too many believe that a vote to leave the EU will have no effect on their personal financial position,” he adds. “This is wishful thinking. It would have at least one very clear and immediate effect that will touch every household.”

Soros cites data from the Bank of England, the International Monetary Fund, and the Institute for Fiscal Studies stating that if Britain leaves the EU, the average U.K. household will lose £3,000 to £5,000 annually.

Underneath the surface, in the bigger picture ‘beyond the BREXIT’, and regardless of the short-term momentum after the vote, by next week, expectations are for some downward pressure on all the equity indexes.   Following the indications from the Federal Reserve over the past two weeks, of a plan to delay raising rates based upon conflicting data, the F fund has surged relative to a two-year low in benchmark (10-year treasury note) interest rates last week.  As a side note, these low interest rates have not translated to an increase in housing demand.  This is a significant sign of other dragging factors at work, possibly tightening consumer credit conditions, income stagnation, or consumer risk aversion. OTHER SIGNS OF ECONOMIC WEAKNESS are beginning to emerge.  Consumer spending and U. S. GDP is expected to lag in the lower end of recent ranges into next year.  Equity prices, already losing momentum from the loss of (1) Fed-sponsored Quantitative Easing (QE) since October ’14, (2) the peaking of New York Stock Exchange (NYSE) margin debt over a year ago (May ’15) and, finally, (3) the recent estimate of stock buybacks, from  JP Morgan Quant Marko Kolanovic, who announced that buybacks have dropped 40% ($250 billion) on a 12-month trailing basis. Share buybacks take approximately 6 quarters to execute so the recent drop will translate into roughly $40 billion less equity demand per quarter. In the chart below, notice how the S&P500/C Fund has remained in an upper range, IN SPITE OF the decline in buybacks.  This WILL be reconciled in the coming quarters.  The three elements are/were the primary sources of U. S. equity strength for the past 7 years.  Many other world indexes are already off in to negative ranges for the year.

us_buybacks

Risk continues to rise, even as prices appear to be unfazed.

 

05232016 May 23, 2016

Posted by easterntiger in economy, financial, gold, markets, oil, silver, stocks.
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Current Positions  (No Changes)

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

F(bonds) – up to 75%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 5/20/16

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

-6.62, -20.76, -11.11, +6.71

======================================================

(Friday 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)

TSP

As the calendar flips to May, the U.S. stock market enters what is historically its worst six months of the year, in which it typically under-performs the November-April time frame.

This is a well-documented seasonal trend with solid historical numbers behind it. It begs the question: Should investors follow the old Wall Street adage to “sell in May and go away?”

The numbers back it up. Looking at stock market history back to 1950, most of the market’s gains have been made from November to April and the market has generally gone sideways from May to October, says Jeffrey A. Hirsch, editor in chief at Stock Trader’s Almanac.

The November-April period produced an average gain in the Dow Jones industrial average of 7.5 percent since 1950 compared to an average gain of just 0.4 percent from May to October, Hirsch says.

This is just one more reason why I will maintain high allocations to our F Fund, as I have for much of the past 3 years, due to increasing risk and subsequent under-performance of C, I and F funds as compared to the F Fund.  The attractiveness of the F fund has mirrored the lack of increases in interest rates, relatively speaking, from multi-decade, near zero lows.  This lull in rate pressure is in spite of continuous Fed rhetoric projecting rate increases, since the end of Quantitative Easing (QE) in the 4th quarter of 2014.  A continued threat to raise rates is simply a ‘bluff’ tactic, meant to broadcast confidence to the rest of the world of our economic condition.  This is meant to continue to competitively attract capital from other world markets into our U. S. markets.  It is a very risky proposition, given the threat that higher interest rates, even from these generational low levels, can impact on our equally fragile and debt-ridden consumer, government and business purses.

For the following charts, imagine that you had half in F and half in the other fund.  When it rises, the other fund beat the F; when it fell, the F fund beat the other half.

Screen Shot 2016-05-22 at 7.30.31 PM

S&P 500/C Fund Performance compared to AGG/F Fund Over the Past Two Years

Screen Shot 2016-05-22 at 7.34.06 PM

S&P 500/C Fund Performance compared to AGG/F Fund Over the past 5 Years

Screen Shot 2016-05-22 at 7.31.26 PM

Small Cap/S Fund Performance compared to AGG/F Fund Over the past 2 Years

Screen Shot 2016-05-22 at 7.33.25 PM

Small Cap/S Fund Performance compared to AGG/F Fund Over the past 5 Years

Screen Shot 2016-05-22 at 7.31.58 PM

International/I Fund Performance compared to AGG/F Fund Over the past 2 Years

Screen Shot 2016-05-22 at 7.32.53 PM

International/I Fund Performance compared to AGG/F Fund Over the past 5 Years

Stocks

Fed officials have been preparing the groundwork for a rate hike for more than a month, having issued about a dozen warnings through the media.  Problem is, the Fed’s credibility is so badly shattered, that few traders actually believe what Fed officials are saying these days.

On April 28th, more than 80 economists polled by Reuters said that they were expecting two rate increases this year, with the first hike coming as early as June. “The Fed’s next interest rate hike will surely cause market pain, but the Fed should just get it over with as soon as possible,” former Dallas Fed chief Fisher warned on April 28th. “I would be prepared when they move, and I hope they move in June — there’ll be a settling in of the market place. There will be a correction. Suck it up. Deal with it. That’s reality,” he told listeners of the television station, -CNBC.

The weekly chart of the S&P 500 Index (SPX) is labeled as a bearish Elliot Wave 5. This fifth wave typically takes the chart subject down to a new low, after it has completed 4 waves with lower highs and lower lows.

How many bull markets have spent an entire year without making new highs? The answer is just thirteen since the 1940’s.

How many eventually did achieve new highs? Just two.

That is out of thirteen times bull markets did not reach new highs in the last sixty years.

What happened to the other eleven times stocks did not reach new highs for a year in a bull market?

You guessed it. Those eleven times ended in bear markets. So history tells us there is an 11/13 chance we are headed for a bear market. That is 85% for those with calculators.

Sounds simple, but the current market conditions are difficult. One day we are up and the next down. Rallies feel solid but never break out. Declines look like the end has arrived, but then they bounce back.

Smart investors have noted that the S&P 500 just staged a very dangerous looking move.

That move was when S&P 500’s 50-week moving average broke below its 100-week moving average. You can see this in the green circle below. We cannot rule out the high probability of a ‘waterfall decline, similar to the 4-day 12% plunge of last August.

Screen Shot 2016-05-22 at 7.45.01 PM

This move is called a “Death Cross” and for good reason. The last time it happened was in 2008, right before the entire market CRASHED. This is another case of a ‘waterfall’ decline.

The time before that was right before the Tech Bubble burst, crashing stocks.

Screen Shot 2016-05-22 at 7.45.30 PM

In short, going back over 16 years, this Death Cross formation has only hit TWICE before. Both times were when major bubbles burst and stocks Crashed.

Margin Debt

A primary fuel for market progress, margin debt, continues to show a peak over a year ago, a month before market prices also peaked.  The last SEVEN consecutive 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.

Screen Shot 2016-05-22 at 10.09.08 PM

Bonds

Notice the actual declining trend in interest rates over the past 20 years, and even in view of the so-called ‘economic recovery’ of the past decade. There is something more involved at work than these short-term ‘bullish’ economic aspects, much of it under the increasing Fed-funded burden of higher debt levels on Fed balance sheets (over $4 trillion in the past 7 years alone).  Long-term economic strength is fuel for higher rates, not lower rates.

Screen Shot 2016-05-22 at 8.19.21 PM

I’ve placed my bets on lower interest rates for the past 13 years, and, I’ve only been proven wrong for very, very short periods of time.

Precious Metals

The demand for Gold surged +21% in Q’1 of 2016, – the fastest pace on record, according to a May 12th-World Gold Council <WGC> report. WGC officials attributed the rise to 4 principal factors: 1- negative interest rates in Japan and Europe; 2- the chance of a devaluation of China’s Yuan; 3- the likelihood of a slower trajectory of Fed rate hikes – than suggested by the Fed’s “Dots Plot,” and 4- expectations of a weaker US$.

A quote from legendary trader and investor W. D. Gann sets the stage for the current state of the gold/silver/platinum/palladium markets.

“Anytime a market exceeds the largest percentage decline or the largest time period of the corrections on the way down in a bear market, it is showing that the momentum is shifting and that buying pressure is finally overcoming selling pressure.”

Screen Shot 2016-05-22 at 10.46.42 PM

Marshaling the evidence, in the gold there has never been a bear market rally which has exceeded the preceding bear market rally highs on the way down. Our advance has exceeded the previous two.

Only the 48% bear market rally in 1980 in the aftermath of the greatest bull market in history and the 27% advance in 2008 in the midst of the financial crisis have been greater in percentage terms than our 25% advance. Our DNA doesn’t match these two at all. The only conclusion we can draw is that we have a 1st leg up in a new bull market and not a bear market rally.

Screen Shot 2016-05-22 at 10.48.11 PM

Silver hit record demand in 2015, but had its third successive annual deficit, which was 60% larger than 2014. These were just a few of the findings of this year’s report. However, the report is backward looking and the silver market is much different today than it was towards the end of last year.  Erica Rannestad, precious metals demand senior analyst for Thomson Reuters GFMS, agreed in that interest for silver has shifted, which is helping to support prices this year. “First off, in the past 2-3 years, you’ve seen bargain buying. This year, you’ve seen a lot more safe-haven buying, which has been pushing prices higher,” she explained.

Oil

Screen Shot 2016-05-22 at 8.49.13 PM.png

There are a lot of tankers sitting off the coast of Singapore waiting for a price increase and refinery availability to dump their cargo (http://www.zerohedge.com/news/2016-05-20/something-stunning-taking-place-coast-singapore ). South American suppliers are trying to sell every drop to have available funds to ensure the population is fed, staving off utter collapse and revolution. India is even trading drugs for oil now. Middle Eastern suppliers are holding supply steady in an attempt to make enough money to support their lifestyles and basic requirements. International refineries are working as fast as they can to turn over supply in hopes of being able to pay their bills. All of this will have a short term cap on prices.

Longer term, as players go bankrupt and governments are overthrown, then supply will be limited into a market of relatively stable world demand. This will drive prices higher, but it is a couple of years away, at least.

In the short term, expect that every approach of WTI Crude Oil near the 50 level will be sold off.

02082016 February 8, 2016

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

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

F(bonds) – up to 75%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 2/8/16

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

-2.98, +7.92, -62.99, -77.25

======================================================

(Friday 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)

****The majority of this report was completed before the nearly 2% decline of today****

TSP

Here are images of where the respective TSP funds have positioned themselves, for the past year, with respect to the emerging appeal of ‘flight to safety’ of bond funds, and, in our case, the F fund.  Notice the rapidly rising risk of losses in any/all of the equity funds since the middle of last year (as I repeatedly used the high risk/low reward aspect).

S fund to F fund (small caps to bond fund)

FSEMX-AGG

You should only expect these aspects to remain as they are here for at least the next 4-10 quarters.   There will be no substantial, or long-term, impact from changes in Fed policy, as in the past.

I fund to F fund (international funds to bond fund)

EFA

Those techniques have run their course.  They have created a $4 trillion liability, known as the Fed balance sheet.  Even larger liabilities are either underway or already put in place in Europe and Japan.  These ‘freebie’ policies have short-term benefits and very long term consequences, which must be ‘unwound’ in some fashion that has yet to be determined.

C fund to F fund (S&P 500 to bond fund)

PEOPX-AGG

F fund proxy, AGG for comparison

AGGYEAR END SUMMARY

When the whistle blew at the close of trading Thursday, New Year’s Eve, the stock market finished a disappointing week and year, with both posting a nearly 1% loss. In light of the optimism that rang in 2015, there was little joy on Wall Street.

The annual drop was the first since 2008.  So much, too, for the traditional Santa Claus rally: Stocks fell 1.8% in December. In quiet, holiday-shortened trading in the final week, equities moved in lockstep with oil prices. Oil ended the year at $37.04 a barrel, down 3% in the final week, and off 31% for the year, not far from seven-year lows.  It’s now almost $6 per barrel lower after 6 weeks, or, -18.5% year to date, near twelve-year lows.

This is where major asset classes wound up at the end of December, end of the year, end of three years (annualized), and end of five years (annualized).

TotalReturns2015

For the week, the S&P 500 took its largest dive in a month, as investors blanched at weak economic data out of the U.S., including an uninspiring jobs report Friday. The S&P 500 tumbled 1.8% on Friday, with technology stocks leading the way down.

“The market is reacting to what it sees as rising recessionary risks,” said Jason Pride, the director of investment strategy at Glenmede.

Last week, the Dow Jones Industrial Average fell 261 points, or 1.6%, to 16,204.97, and the Standard & Poor’s 500 index dropped 60 points, or 3.1% to 1880.05. The Nasdaq tanked 251 points, or 5.4%, to 4363.14. LinkedIn (ticker: LNKD) led the index down, dropping 44% after releasing weak 2016 guidance.

Energy was “the” story in 2015, according to Jonathan Golub, chief equity strategist at RBC Capital Markets. The price of oil “significantly affected both its own sector and the rest of the market.” It’s no coincidence, he adds, that the market’s poor 2015 performance reflected weak growth in the S&P 500 index’s earnings per share.

OIL/COMMODITIES/DOLLAR/ECONOMY

We hear every day that low oil prices are good for the economy. U.S. consumers are saving billions from low gasoline prices. We also hear that low interest rates are great for the economy because it reduces borrowing costs for consumers and businesses. We have both low oil prices and low interest rates but the economy grew at only +0.7% in Q4 and jobs appear to be slowing. Why? Enquiring minds want to know.  You know the Fed is going crazy trying to figure out the answer.

Ironically, the world economy badly needs higher oil prices. The problem is that the world’s economy relies far more today on ’emerging’ countries that rely on oil sales, than 15 or 25 years ago – the last periods of ultra-low oil prices.  Most big emerging countries are heavily dependent on oil and other commodities, such as copper and iron ore. (Brazilian iron-ore miner Vale SA <VALE5.SA> said it will no longer pay a dividend to shareholders). Such economies now account for 42% of the world’s economic output, about double their share in 1990.  From Russia to Saudi Arabia, Nigeria to Brazil, economic growth is slowing down to a crawl and, in many cases, is contracting.

Citi helped spread some doom and gloom on Friday when strategist Jonathan Stubbs said the global economy seems trapped in a ‘death spiral’ that could lead to further weakness in oil prices, recession and a serious equity bear market.  He is definitely going for the scary headlines in this note.

He said the stronger dollar, weaker oil/commodity prices, weaker world trade, petrodollar liquidity, weaker emerging markets and global growth, etc, could lead to “Oilmageddon,” a significant and “synchronized” global recession and modern-day bear market.

He did say that some analysts at Citi predicted the dollar would weaken in 2016 and oil prices would likely bottom. “The death spiral is in nobody’s interest. Rational behavior, most likely will prevail.”

So, release the report with scary headlines and then end it with “rational behavior, most likely will prevail.”  Hmmmm….

He did have one point right. The lack of a world economy floating on petrodollars is a very scary place. When oil was $100 every producing country was flush with dollars and they spent that money all around the world. This kept the global economy lubricated. With global producers now living on 30% of what they received two years ago, an entirely new dynamic is in place. These countries are broke and they are being forced to cancel/remove subsidies that kept their populations happy.

Gasoline for 20 cents a gallon is now 2-3 times that. Utility subsidies that kept electricity, gas and water flowing to poor citizens have been cancelled or reduced significantly. Government wages are being slashed, jobs cut, infrastructure projects cancelled, road maintenance postponed, etc. All of this is due to the 70% decline in oil prices. Hundreds of millions of people are living in countries where the current revenue can no longer support them in the manner in which they were accustomed.

It is no surprise that the global economy is slowing. There is a shortage of petrodollars to keep it lubricated.

This is not likely to change in the near future. Oil prices will rise in Q3/Q4 but it could be years before they return to a level where governments will be able to subsidize/support the population and economic activity like they did in the past.

Occidental Petroleum (OXY) reported last week that the all in cost for oil production in the Permian Basin in Texas was $22-$23 a barrel. Producers in that area can still make a few bucks on new production. However, that is the only area of the country that is profitable. Wood Mackenzie said 3.4 mbpd of global production was cash negative at $35 per Brent barrel. That means they actually lose money on every barrel produced.

Wood Mackenzie said not to expect many producers to actually shut in production. After factoring in the cost to shut off production, the cost to restart, the lost cash flow, negative or not and the danger to future production, prices would have to go a lot lower before producers would bite the bullet and shutdown the wells. When a well is shutdown, things happen underground. Producers spend millions of dollars to get oil to flow towards the pipe so it can be extracted. As long as that oil is flowing, it remains liquid. If production stops that oil can thicken and clog up the pores in the rock and when production is restarted, it may only be a fraction of what it was when it was halted. Wells need to continue running even if they are turned down to a very low rate just to keep the flows moving.

What the stock market is fighting is more evidence of a slowing economy, and not just in the U.S.  The global economy is slowing in unison (some faster than others) and this is the first time for this to occur since the 1930s.  This, of course, fits the general thesis that says we’ve been in a secular bear market since 2000 (since 1998 by measures other than price) and that the next cyclical bear within the secular bear could be a very painful move for those who hold long positions.

Further evidence of a global slowdown in the economy is what we see happening in the currency markets. Everyone is in a race to devalue their currencies in hopes of making their products cheaper for other countries to import. But with everyone doing it the only thing that’s been accomplished is a race to the bottom and a global devaluing of fiat currencies, which has created a deflationary cycle. That of course is what the central banks are trying to fight with their quantitative easing (QE) and zero interest rate policies (ZIRP)/negative interest rate policies (NIRP ) but each is negating the efforts of the other. In the past, as in the 1930s, this currency war tends to lead to very bad things between countries.

The Chairman of the OECD’s Review Committee, William White, wrote “We’re seeing true currency wars and everybody is doing it, and I have no idea where this is going to end. The global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20% of GDP higher today. We are holding a tiger by the tail.” We all know what happens when the tiger gets tired of us yanking on his tail.

The economic slowdown obviously affects businesses and we’re seeing that show up in the slowdown in earnings, which is making it more difficult to service the massive debts that they’ve taken on. Some of the debt has been for the development of new energy sources, such as the fracking. Think that debt might be in trouble. Much of the debt has been from companies borrowing heavily to buy back stock in an effort to boost earnings per share and hide the fact that actual earnings have been slowing. Again, a slowdown is now making it more difficult for those companies to service their debt and the slowdown is going to cause a double whammy to earnings.

STOCKS

020816Snapshot(Major indexes through last week)

The Fed keeps pinning their hopes on the employment picture but that picture is a lot dimmer than their simple observations of how people are employed (it’s part of their flawed economic models). The chart below is hard to read because I had to squish it to fit but basically it’s showing the inflation-adjusted price of SPX (on top) vs. the ratio of non-farm employment to part time employment. Each time the ratio has been in decline (meaning part time employment is becoming larger than non-farm (full) employment) we’ve been in a secular bear market. (Two-thirds of the jobs announced in last Friday’s jobs report were minimum wage jobs.) The dates of the first secular bear (pink band) is 1966-1982 and the second secular bear (pink band on the right) is from 1999. You can clearly see how the employment ratio has declined from its 1999 peak and since the 2009 low it hasn’t even recovered to the 2002 low. In other words, the employment picture remains weak but the

Fed feels it was strong enough to warrant a rate increase in December.

SPXAdj55-15

The chart above shows why it can’t be used as a timing tool but it does support why we’ve been in a secular bear, regardless of the new (non-inflation adjusted) price highs for the stock market in both 2007 and 2015. And if we’re still in the secular bear, as I’ve contended for many years, the new price highs into 2015 merely made the stock market more vulnerable to a market crash. Have we started that crash? It’s too early to tell but yes, I do believe we’ve started the next (and should be final) leg of the secular bear. But for those who think it’s a good idea to just sit tight and let the market recover after the decline, I think the recovery will be far slower than the one off the 2009 low. It could take a generation before prices recover back to the December highs.

MARGIN DEBT

A primary fuel for market progress, margin debt, now shows a peak in April, a month before market prices also peaked.  The last FOUR 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.

MarginDebtDec

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

=================================================================

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

=================================================================

(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.

09252015 September 25, 2015

Posted by easterntiger in economy, financial, markets, stocks.
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Current Positions  (Changes)

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

F(bonds) – up to 75%; G (money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 09/24/15

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

4.88, -17.54,  -1.76, -72.95

(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)

It’s now a month after the largest decline in 4 years. The dust has cleared.  Any doubts about the very first Fed action after the first correction in 4 years are now in the books.

In the chart below, the biggest question, before and after last week’s Fed meeting, is which way the ‘ascending wedge’ formation would resolve – breaking upward or downward.

Bulls were certain that this was a bullish ‘consolidation’. And, with no rate increase last week, they were confident of a rebound.  That confidence proved to be incorrect.

S&P50009242015

(click for a closeup, then, back button to return)

Also leading into last week’s Fed meeting, the ‘exposure index’ from the National Association of Active Investment Managers hovered in the range near one-year lows.  Since the Fed meeting, that exposure level is now lower than in the previous two weeks, and, is now at the low for the year.  Investment managers are not interested in increasing their exposure to stocks at this time.  Prices should continue to weaken near term. HOWEVER – prices in this upcoming quarter characteristically rise from August/September/October lows and into late November to mid-December highs.  This all-too-often phony ‘advance’ back to old highs meets the needs of fund managers who do not want a negative return in their portfolios for the year.  That justifies a bonus for them in January.  Don’t count on these advances holding up into the next quarter.  Any rise that does not exceed the highs for the year, established in May and June, depending on the index, should simply be classified as ‘noise’.  Only an advance that exceeds those May/June highs should be taken seriously.  That stronger advance, past highs of the year, is highly unlikely.

In the past week, a measurement of buying interest in the various S&P components/indexes has indicated a similar pattern of low and declining buying interest, if not, outright selling interest.

S&P-PBIThe only sector with any increase in buying interest is the S&P Utility sector.  This is a bearish indication, one of a search for safety, protection and avoidance of risk.  This is a reiteration of the expectation for a further decline, or increasing risk, in stock indexes.

On Wednesday, stocks worldwide began the morning with another beating after a scandal at Volkswagen (deliberately altering emissions results on up to 11 million cars).  The impact of this scandal is far-reaching, threatening the company itself, the health of German economy, and, with ripple effects to all of Volkswagen’s inter-connected supply chains world-wide.

The expected increase in the ‘flight to quality’ trade, of increasing interest in bonds, did not fully materialize, even as stocks broke down last month.  The one obstacle to the increases that should have occurred in our F fund positions were due to the flooding of the bond market of our bonds, previously purchased from us, by the Chinese central banks, at the very time that the demand for our bonds increased, and, during the times of highest overall risk.  These high risk conditions are normally the times when bond prices rise fastest.  You can’t blame them for adding their supplies to the market (dumping!) when they knew that the demand was also present.  Everyone has to strike while the iron is hot.  If not for that event, our F fund would have received a higher rate of increase, due to the rush of money out of stocks.

TreasuryNote(click for a closeup, then, back button to return)

Therefore, I am increasing my stake in the F fund, until this bond price trend reaches a peak, or, until stocks manage to bottom or regain their footing, due to increases in exposure by investment managers, or, the strengthening in the S&P sectors buying interest.

In the grander scheme, I noticed the emergence of a pattern that has only occurred 3 other times in the past 15 years.   In the previous 3 instances, stocks continued to decline by (1) 40% from the 2000 highs, (2) 53% from the 2007 highs, and (3) 20% from the 2011 highs.  So far, we have only declined by 10%.  It is highly likely that we are only halfway, or less, down to our eventual bottom, toward -20%, or more, from the highs of the year.

$SPXQtrly(click for a closeup, then, back button to return)

Additionally, a momentum measure called ‘relative strength index’ has fallen below a critical level, one that has only been reached, on a decline, for now only the 3rd time in 15 years.  If the current decline continues into October, we will be into our 6th quarter, moving beyond 20 months, within a narrow, ‘topping’ range.  This will increase the likelihood of this meeting the classification of a major top, and increasing the likelihood of a significant decline within the next 6-8 quarters.