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I have been investing for over 40 years, evolving from investor to trader. The bear part comes from my degree from Cal: Go Bears! From 1982 to 2000, I managed a 17% return trading mutual funds on the basis of relative strength. This success was, of course, helped by an historic bull market, but... More
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  • ETF Blog For 8/31: The Bottom Is Fragile; Volatility Will Continue

    Market Moving News (Summary of 20 Articles)

    Spending is slow.Redbook continues to report very low rates of same-store year-on-year sales growth, at 1.7% in the August 22 week. August is shaping up well compared to July with Redbook calling for a 0.3% month-to-month gain.

    Manufacturing is getting weaker. The national activity index rose to a stronger-than-expected plus 0.34 from June's contractionary reading of minus 0.07 (revised). July is the first gain for the index this year. The 3-month average is soft, at zero vs. June's minus 0.08.Production was July's strongest component, employment was steady at a constructive plus 0.11, and, orders & inventories slipped to 0.01.

    The Richmond fed reported disappointing zero. Orders are flat at only 1 vs. 17 and 10 in the prior two reports, and backlogs are in deep contraction at minus 15. Shipments are also negative at minus 4 and capacity utilization is at minus 5.

    Factory activity in the Kansas City Fed's region remains in deep contraction, at minus 9 in August vs minus 7 in July. These are deeply depressed readings that point to a long run of weak activity in the months ahead. The region is getting hit by the oil-led fall in commodity prices.

    In the industrial production report for July, exports didn't hold down durables, as new orders rose 2.0% in the month. Excluding transportation, orders rose 0.6%. Non-defense ex-aircraft orders were up 2.2% following June's 1.2% gain.

    Housing is strong, but prices are weakening. FHFA's home price index rose only 0.2% in June, below the low-end forecast for 0.3%. Year-on-year, price growth slipped 1 tenth to 5.6%. Sales rates are tracking at roughly double the pace of price growth, a mismatch that points ahead to price acceleration.

    Case-Shiller and FHFA are pointing to a surprising flat spot for home-price appreciation. Case-Shiller's 20-city adjusted index fell 0.1% in June. Year-on-year, 20-city prices, whether adjusted or unadjusted, are unchanged at plus 5.0%.

    New home sales rose solidly in July from a downdraft in June, up 5.4% to a 507,000 annual pace. Year-on-year, sales have surged, up 26%. The strength in sales has thinned an already tight market where supply is at 5.2 months, down from 5.3 months in June and compared with 6.1 months a year ago.

    Purchase applications, which have been flat in recent weeks, rose 2% in the latest week and are up a very strong 18% year on year. Refinancing applications fell 1%. The average rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.08% from 4.11%.

    Pending home sales came in at the low end of expectations, up however a still respectable 0.5%.

    Jobs are strong. Unemployment remains very low with initial claims down 6,000 in the August 22 week to 271,000. The 4-week average rose slightly in the week to 272,500 but is still slightly lower than the month-ago comparison. Continuing claims rose 13,000 to 2.269 million which is just about where the 4-week average is, at 2.265 million for a 1,000 decline.
    Economy

    Service-sector growth is holding solid this month, well over breakeven 50 at 55.2 for the August flash. A negative is a marked slowing in new orders, but hiring remains steady and expansion efforts are underway to increase capacity. The 12-month business outlook improved in the month but is still among the weakest over the past 3 years.

    The second-quarter GDP delivered a big bounce, up an annualized growth rate of 3.7%. Consumer demand was strong with personal consumption expenditures at a 3.1% rate led by an 8.2% rate for durables, a gain that was tied to vehicle spending. Residential investment was very strong, at plus 7.8%, as was nonresidential fixed investment which, boosted by an upward revision to structures, came in at plus 3.2%.

    Corporate profits in the second quarter came in at $1.824 trillion, up a year-on-year 7.3%. Profits are after tax without inventory valuation or capital consumption adjustments.

    The international trade deficit in goods narrowed to $59.1 billion in July from June's $62.3 billion. Advance exports of goods were $127.1 billion, up 0.5% from June, while advance imports of goods were $186.3 billion, down 1.4%. This report, like personal income and outlays also released this morning, is a positive start to third-quarter GDP.

    The July personal income and outlays report inflation readings are very quiet. Core PCE prices rose only 0.1% in the month and the year-on-year rate moved plus 1.2%. Total prices are at plus 0.1% for the monthly and at only plus 0.3% for the year.

    Personal income rose 0.4%, including a 0.5% rise in wages & salaries, is the largest since November last year. Spending rose 0.3% led by a 1.1 gain in durables tied to vehicle sales. The savings rate is also healthy, up 2 tenths to 4.9%.

    Sentiment metrics are impacted by China

    Enormous improvement in the assessment of the current labor market drove the consumer confidence index well beyond expectations, to 101.5 in August for a more than 10 point surge from July. There was a rare 6.5%age point drop to 21.9% in those describing jobs as currently hard to get.
    Buying plans, however, are downbeat with fewer planning to buy vehicles and, many fewer planning to buy a house. Inflation expectations are dormant, down 2 tenths to only 4.9% which is very low for this reading.

    Reflecting concerns over China, investor confidence eased in August to 108.7 from July's revised 113.2. The dip reflects weakness in Europe where the index, at 93.5, is below 100 for the first time since August 2013 to indicate demand for safety vs risk. Asia rose slightly but is also under 100 at 93.0 while North America, little changed at 119.1, continues to stand out.

    The global markets aren't holding down the consumer comfort index, which is up for a second straight week, 9 tenths higher to 42.0.

    The consumer sentiment index came in well below expectations, at 91.9 for the final August reading. Current conditions, the immediate impact of market events is most felt, slipped only 2 points over the last two weeks to 105.1. The expectations component is marginally lower, at 83.4. Expectations for inflation are flat.

    The VIX

    (click to enlarge)

    The VIX chart is marked by my informal categories of levels. Catastrophe is defined as a breakdown of market institutions, similar to what happened in 2008. The brief spike above 50 coincided with breakdown of trading systems. For a while the net asset values of ETF's were not tracking their market prices, and there were trading halts. The panic subsided on Wednesday when the market seemed to find a bottom. The VIX can remain high for extended periods of time, and I expect to remain in the concern area at least until the Fed September decision.

    The Market

    (click to enlarge)

    S&P500 broke through support at 204 late in the previous week, and through 195 on Monday, setting off a crisis in confidence-mostly blamed on china-leading to the huge VIX spike on Monday. A sharp rally on Wednesday established weak support at 180 that is likely to hold, because institutions realized that the Chinese economy is not likely to bring down a relatively strong U.S. economy.

    Small Caps

    (click to enlarge)

    With extreme volatility in big stocks, the small caps, along with the VIX are probably the best indicators to establish the price and strength of a market volume. The IWM bottomed at 108 and is in a nascent uptrend. If strength remains, it could quickly move to resistance at the 120 area. There is no confirmation of the bounce, however, and IWM could easily drop below 108.

    IWM is a bit less volatile that SPX, and is probably a good indicator for finding a bottom in the market. To qualify as an uptrend, the price needs to 1) break resistance at 119, break the trend at 120, and fall to and recover from a higher low.

    Core Sector Relative Strength

    (click to enlarge)

    The core sector chart tells us almost nothing this week. I want out 41 days to a previous high. Real estate (NYSEARCA:IYR) and transportation (NYSEARCA:IYT) fell the least. Energy (NYSEARCA:XLE) and emerging markets (NYSEARCA:EEM) recovered from very large dips. I don't expect energy to become a leader without a strong rebound in oil prices.

    Best Relative Strength

    (click to enlarge)

    The best relative strength chart shows ETF's that outperformed the Nasdaq 100 (QQQ, in red). Two leaders are internet (NYSEARCA:FDN) and utilities (NYSEARCA:XLU); however, we need to see where this bounce goes before selecting a leading fund.

    Trades Last Week

    Holding: HACK

    Bought and sold: QQQ

    QQQ was too volatile to survive my stop.

    Conclusion and Action

    Last week, I concluded that there was no bottom, and Monday proved the case, as the S&P500 dropped to October 2014 levels of a sharp dip in October 2014. The VIX is likely to stay high until the 9/17 Fed decision, and I doubt if a major uptrend will form before then.

    The evidence of low inflation, a fall-off in manufacturing, and unstable world markets make a strong case for holding off on an interest rate raise, but the U.S. economy could be strong enough in services, jobs, and housing to support one.

    Like last week, there is still is no bottom. I am out until I see one, in the IWM and the SPX, evidenced by VIX below 20-22, at least "two-strike" trend reversals in the SPX and IWM. I may look at short-term rallies in individual stocks or QQQ.

    Have a great week!

    Aug 30 4:30 PM | Link | Comment!
  • ETF Blog For 8/24: Watch For A SPY Trend Reversal And The VIX For A Bottom

    Market Moving News (Summary of 14 Articles)

    Spending is steady.

    Growth in e-commerce retail sales was up 4.2% in the second quarter vs. the first quarter and up 14.1% annualized. The total retail sales quarter-to-quarter gain rose 1.6% with the year-on-year rate up weak 1.0%. E-commerce now makes up a record 7.2% of total retail sales, up from 7.0% in the first quarter. Redbook reports soft rates of same-store sales growth, at only 1.6% year-on-year in the August 15 week.

    Manufacturing is weaker.

    The Empire State index has plunged to minus 14.92 in August vs plus 3.86 in July, the weakest reading since April 2009. New orders fell from July's minus 3.50 to minus 15.70 for the weakest reading since November 2010. Backlog orders came in at minus 4.55 from minus 7.45. Shipments fell to minus 13.79 from positive 7.99.

    The Philly Fed's index, which is very closely watched, posted a gain for August vs. the plunge in the Empire State Index. General business conditions came in at a stronger-than-expected 8.3 vs July's 5.7. Shipments lead the report at a strong plus 16.7. Order data fell to 5.8 in August vs 7.1 in July.

    Monthly growth in Markit's manufacturing PMI is the slowest since October 2013, 52.9 for August. A slowing in production growth pulled the index down as did moderation in what is still described, however, as solid growth in new orders. But export sales remain subdued and capital spending in the energy sector remains weak. Growth in hiring is the weakest since July last year.

    Housing continues strong.

    The housing market index rose 1 point to a strong 61 in August with the future sales component leading the way at 70. Current sales are at 66. Traffic continues at 45, which was a 2 point gain in the month.

    Building permits fell 16% in July to a 1.119 million annual rate with the Northeast down 60% due to a legal change. Starts, inched 0.2% higher to a 1.206 million rate. Housing completions came in at a 987,000 pace in the month, up 2.4% from June.

    Home refinancing demand was up 7% in the latest week, but failed to give much lift to purchase applications which fell 1.0%, but is up 19% from a year ago. The average rate for 30-year conforming loans ($417,000 or less) fell 2 basis points in the week to 4.11%.

    Existing home sales were up a stronger-than-expected 2.0% in July to a 5.59 million annual rate. Demand is well ahead of supply at 4.8 months at the current sales rate vs 4.9 last month and 5.6 months in July last year. Sales are up 10.3% year-on-year, well ahead of the median price which, at $234,000, is up 5.6%.

    Claims are low.

    Initial claims came in at 277,000 in the August 15 week, up 4,000 from the prior week. The 4-week average, tells a different story, at 271,500 vs 278,500. Continuing claims fell 24,000 in data for the August 8 week to 2.254 million. The 4-week average is 9,000 higher at 2.265 million.

    Economy: Inflation is low; the FOMC is likely to postpone.

    The consumer price index rose only 0.1% in July as did the core, both under expectations. Overall inflation is up 0.2%, which is very low but up from 0.1% in the prior month and the second positive reading of the year. The core is steady at plus 1.8% which is just under the Fed's 2% target.

    In July, almost all FOMC voters agreed that greater employment growth and stronger inflation readings were needed to justify its pending rate liftoff. But one hawk was ready to hike right away and others believed the necessary conditions for liftoff would be met shortly.

    [See Conclusions for a more recent Fed assessment]

    Sentiment metrics are a little weaker.

    The consumer comfort index, after falling for four straight weeks including 1.9 points last week, is up 4 tenths at 41.1. Leading indicators point to a flat outlook for the economy six months from now.

    The VIX

    (click to enlarge)

    According to my personal VIX gauge, the indicator moved from the recent "complacent" level at 14 through "concern," and touched the "panic" level on Friday. I have lived through the crashes of '87, 2000, and 2008, and the VIX is not (yet) near levels that would indicate a much lower market. (The VIX record is near 80, notched in 2008.) The VIX is a measure of prices of options associated with the S&P500 Index (SPX), a major instrument used by institutions for hedging portfolios, particularly against a catastrophe. The spike to 28 is the result of panic buying. An early indication that the market is finding a bottom will be a sharp drop back to "concern" and "complacent levels.

    The Market

    (click to enlarge)

    To understand where we are, we have to go to a 1-year chart, where there is support for the SPX at 197. If this level breaks, the market could move much further technically. The break of 204 was undoubtedly the trigger of the VIX spike, probably initiated by program trades to protect portfolios.

    Small Caps

    (click to enlarge)

    Small caps (NYSEARCA:IWM) continued their weakness, but interestingly broke lower and then stated a modest recovery on Friday. Investors are probably looking for bargains among stocks that held up during the sell-off.

    Core Sector Relative Strength

    (click to enlarge)

    As has recently been the case, real estate (NYSEARCA:IYR) is stronger, followed by financials (NYSEARCA:XLF) and healthcare (NYSEARCA:XLV). The only sectors weaker than the Russell 2000 are emerging markets (NYSEARCA:EEM) and energy .

    Best Relative Strength

    (click to enlarge)

    SPY was the strongest of the three major indices, so it is the base of the best relative strength comparison among the 36 ETF's we follow. As is usually the case in a sell-off, utilities (NYSEARCA:XLU) fall the least. Real estate is beating most by falling "only" 2.6% on Friday. Homebuilders (NYSEARCA:XHB) is reflecting the good news in the housing sector.

    Trades Last Week

    Sold: SMH

    Holding: HACK

    Conclusion and Action

    Unless you've been exploring a cave all weekend, you have noticed that the media have noticed the market. When the evening news trots out the pundits to tell the public not to sell their 401K's, you know people are scared. This is also when you should be watching for the bottom and planning to buy.

    The major shortcoming in my analysis is the absence of financial statistics of the type I report from Econoday via the Nasdaq. I don't have a source for statistics on China. Last week I focused on the FOMC, but indicated that "new uncertainty has come from China." Anecdotal media reports suggest that he market has become frightened by the recent drop in Chinese economic statistics.

    The FOMC is still far enough off that we could get a short-term recovery, and if traders develop a consensus that they will not raise we might get through the September 17 meeting without going to a new bottom.

    For now, there is no bottom, and I am out until I see one. Here's how I will know: Next week, I will watch for the VIX to make a sharp break below 22, and for a "two-strike" trend reversal in the SPX. The three strikes, plotted on a 3-month chart are a trend reversal, a resistance level break, and a higher low. Usually the higher low takes place last and confirms the uptrend; however these events can happen in any order.

    Last week, my stop on SMH triggered. My position in HACK is very small, and I'm comfortable with whatever loss it takes. Cybersecurity companies are not going out of business very soon. ETF's to purchase may include real estate, but not insurance or anything foreign. Leaders could be GOOG, AAPL, or AMZN. These world-wide stocks are large-cap leaders with recent strong earnings; if they rally, we will have an indication that China anxiety is fading. If tech follows, I might buy XLK. I think XLV could also recover early.

    Have a great week!

    Aug 23 8:48 PM | Link | Comment!
  • ETF Blog For 8/17: Possible Sector Leaders Next Week

    Market Moving News

    Spending is steady: Back-to-school tax holidays in 13 states helped give store sales a lift based on Redbook's same-store sales tally which rose 2 tenths in the latest week to a year-on-year rate of plus 1.9%. Retail sales rose 0.6% in July. Vehicle sales jumped 1.4%. Excluding vehicles and gasoline, retail sales rose 0.4%, again another solid reading.

    Manufacturing has ticked up: A 10.6% surge in motor vehicle production gave a significant lift to industrial production which rose 0.6% in July. The manufacturing component, which has been flat all year, jumped 0.8%. Excluding vehicles, however, manufacturing rose only 0.1%. Capacity utilization rose 3 tenths to 78.0%; manufacturing utilization rose 5 tenths to 76.2%.

    Housing is steady: Mortgage purchase applications fell 4.0% in the August 7 week but remain 20% higher than a year ago, up. Refinance applications rose 3% to their highest level since May. The average 30-year fixed mortgage for conforming loans ($417,000 or less) unchanged at 4.13%.

    Jobs data are slightly weaker: The labor market conditions index for July came in slightly below expectations at 1.1 vs a revised 1.4 in June. The index, based on a broad set of 19 components, has been hovering near zero all year, well off its 5.4 average of last year. The 2015 trend for this index is the weakest of the recovery. Job openings contracted in June to 5.249 million from 5.357 million in May; the hiring rate rose 1 tenth to 3.7%, but the layoff rate up 1 tenth to 1.3%.

    Jobless claims were at 274,000 in the August 8 week. The 4-week average is down 1,750 to 266,250 and is nearly 15,000 below the month-ago comparison in what is a positive indication for the August employment report. Continuing claims rose 15,000 to 2.273 million. The 4-week average is up 14,000 to a 2.254 million.

    Productivity up, inflation down: Second-quarter productivity rose 1.3% quarter-to-quarter vs a decline of 1.1% in the first quarter. Unit labor costs rose 0.5% vs 2.3% in the first quarter. Output rose 2.8% vs a depressed 0.5% previously. Compensation rose 1.8%, while hours worked were little changed, up 1.5% vs 1.6%. Year-on-year growth in productivity is only plus 0.3%, as costs are up 2.1%.

    Twelve-month inflation expectations fell back in August, to 1.8% vs the year's peak in July at 2.0%. Current costs are also down, at a year-on-year rate of only plus 1.3% in August vs July's 1.5%. With commodity prices falling once again, led by oil, and with wage growth soft, inflation increasingly looks like it's not moving to the Fed's 2% goal.

    July Import prices fell 0.9% and export prices dropped 0.2%. Petroleum, down 5.9% in the month, pulled down import prices; prices excluding petroleum were still weak, down 0.3%. Year-on-year, this reading is down 2.8%. Export prices fell 0.2%.

    The PPI-FD rose 0.2% with the year-on-year a little bit deeper in the negative column at minus 0.8%. Excluding food & energy, prices rose 0.3%

    Sentiment is positive overall

    The TD Ameritrade investor movement index rose to 5.39 in July from 5.32 in June, extending its positive trend at an historically high level in an indication of investor appetite for risk. TD Ameritrade clients were strong net buyers of equities in the month though widely held names did see volatility. Small business optimism improved in July, up 1.3 points to a better-than-expected 95.4. Employment appears to be tight with one in four small businesses saying they have job openings that are hard to fill.The Consumer Comfort Index rose to 40.7 for the weekly for a 4 tenths gain from the prior week. Consumer sentiment is little changed so far this month, at 92.9 for the mid-month August reading vs 93.1 for final July. The current conditions component is nearly unchanged, at 107.1 vs July's 107.2.

    The VIX

    (click to enlarge)

    After a China-induced spike, the VIX settled into a "normal" range. It is not indicating expectations of a major market drop.

    The Market

    (click to enlarge)

    The S&P500 is in a tightening wedge, with no indication of direction from rather steady volume. It is still within a 4% channel. The Bollinger bands are tightening; if they continue to narrow, we could see a breakout up or down.

    Small Caps

    (click to enlarge)

    Small caps are in a secondary downtrend as the chart has made a lower high and has broken the 200-day MA, often seen as a reversal level. Volume is much higher on down-days vs. up-days. This pattern will have to change if the overall market is to resume an uptrend.

    Core Sector Relative Strength

    (click to enlarge)

    I chose a 39 day period for the chart above because it is the beginning of the sell-off in IWM. The chart shows which ETF's have fallen the least. The Russell 2000 (red) is quite weak. Real estate (NYSEARCA:IYR) is moving sideways, which makes it a "leader", followed by finance (NYSEARCA:XLF) and a tie between healthcare (NYSEARCA:XLV) and technology (NYSEARCA:XLK). XLK is heavily influenced by AAPL.

    Best Relative Strength

    (click to enlarge)

    The strongest index over the 39 day period is the QQQ, so it is the reference in the above chart. Internet (NYSEARCA:FDN) is the leader, followed by medical devices (NYSEARCA:IHI) and real estate .

    Trades Last Week

    Holding: HACK

    Bought: SMH

    Conclusion and Action

    My guess is that the market will continue stressing over the next FOMC announcement, scheduled for Thursday, September 17. New uncertainty has come from China, contributing to last week's volatility as government actions attempt to moderate the falling currency and stabilize their stock markets. Inflation remains low in the latest reports.

    With earnings mostly over, some sectors are falling less than others and could be leaders if the market flattens out. These include Internet, real estate, medical devices, homebuilders, financials, and software. The patterns of real estate and housing may be starting uptrends and I will buy small amounts if the market rallies next week.

    Potential buy candidates are FDN > 73, IYR if up, IHI > 127, XHB if up, XLF > 25.5, and IGV > 104.

    Have a great week!

    Aug 16 12:43 PM | Link | Comment!
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