By Chris Ciovacco
Transportation Average – A Big Concern For Stock Bulls?
Weakness In Transports In 2015
If you follow the markets, you have probably heard about the “non-confirmation” warning being flashed by the fact the Dow Transportation Average has failed to post a new high simultaneously with the Dow Jones Industrial Average.
Dow Theory Is Useful
We have written about Dow Theory many times in the past; a July 2014 article explains the economic rationale behind the theory. We believe Dow Theory is useful, but it is one of many sources of information.
Continue reading Transports – Big Concern?
By Tom McCellan
Eurodollar COT’s Leading Indication
May 08, 2015
The second half of 2015 could be a problematic time for the US stock market, if this week’s chart is correct. I introduced this relationship to Chart In Focus readers back in 2011, and it has been a regular feature in our twice monthly McClellan Market Report and our Daily Edition since 2010.
The basic idea is that I take data from the weekly Commitment of Traders (COT) Report on the commercial traders’ net position in eurodollar futures, and then use that as a leading indication for the SP500. In this case, the term “eurodollar” (ED) refers not to a currency relationship, but rather to dollar-denominated time deposits in European banks. So it is an interest rate futures product.
Continue reading Eurodollar CoT Indication
The China short (via the leveraged YANG) is now covered (ref. May 5 post) not because I think it is not going to go up more, but because I am a chicken. I have never claimed to be anything other than a cash valuing risk manager. The heroic shorting is for others until I can get new longer-term trends. China’s trend, along with the US and others, is still up. Not talking about secular trends, but rather intermediate ones, defined here as multi-month.
In reviewing the chart of FXI, I see something similar to the European Euro hedged ETF and several other items (incl. a favored Japanese machine tool and robotics manufacturer that NFTRH subscribers know about) that may make good cases for re-buying, not shorting, eventually. There is some of this going on in US stocks as well. Think healthcare/biotech.
I don’t think the corrections are over with, but I am not ready to become a bear because I don’t see an intermediate term reason to yet. So it’s swing trading and cash defaulting for this chicken until trends change.
Back on the China 25 ETF above, it is not over sold yet but down the road, pending the view on the broad global markets, I am watching the area from which we charted the breakout in NFTRH. That would be around 42-44.
Every time the market twitches the wrong way MarketWatch puts up bearish headlines. The author of this article, Michael Sincere has been the most prolific…
He takes us by the hand and guides us through the particulars of the different kinds of bear markets. This kind of stuff has gone hand in hand with the bull market, which just eats it for breakfast. Still, there is one bearish thing here and that is the comments from readers.
Here are the most recent. One component that needs to be in place for a bear market is for people to have long-since tuned out the perma-bears, and instead to be mocking them.
Thanks to reader Mary, an excellent article at Forbes by John Tobey…
I found it interesting for several reasons. One is the use of log scale charts and their value in viewing percentage based prices over very long (a Century in this case) periods. I use mostly linear charts because I usually deal in 1 week to 10 year time frames. But Mr. Tobey’s assertion that long-term investors should be interested in percentage performance is a good one.
Secondly, adjustments are made to the market (in this case, the Dow) for ‘inflation’ and ‘deflation’ using the CPI as the denominator. CPI is noisy (e.g. faulty) on shorter time frames (it is not inflation, it is inflation’s effects), but over a century it is what it is after inflation and deflation have long since shaken out into the picture.
Here is his chart of the adjusted Dow. But read the article. It’s quick and to the point.
Often the mainstream media serve up almost insultingly lame stock market commentary (bullish and bearish). But Mark Hulbert, writing at MarketWatch highlights some data from Ned Davis Research that debunks the talk about all that cash on the sidelines just waiting to buy stocks. You hear that one in every bull market; how hated the market is and how an army of sidelined Nervous Nellies will finally buy in and propel the market higher still.
For reference, WSJ had an article that was presented as supportive of stocks because bull markets only end when the last hold out and the remainder of all that sidelined cash is sucked in…
So NDR went scouting for the cash pile. From Hulbert…
Davis looked for this cash in four areas. In each case, current levels are some of the lowest in history:
- Money market funds. This is the most obvious place where cash would be stored. But as a share of the total market cap of the entire stock market, current money market fund assets are very low by historical standards: 11.3%. Before the 2007 market top, the lowest this share got was 12.7%. Davis calculates that the current percentage is in the historical zone associated with annualized stock market returns of only 0.4%.
- Households’ free liquidity. Davis next focused on non-equity liquid assets, net of liabilities. As a percentage of the stock market’s total market cap, this free liquidity stands at 39.8%. That’s not only lower than what was registered at the 2007 top, it’s the lowest in 60 years with only one exception: the top of the Internet bubble. According to Davis, the current percentage is in the historical zone associated with minus 0.2% annualized returns.
- M2 money supply. Davis expanded his net even more broadly. As a percentage of total market cap, however, M2 money supply also is lower than at any time since the 1920s — again with just one exception: the top of the Internet bubble. It’s currently in the historical zone associated with 0.8% annualized returns.
- Credit balances in brokerage accounts. There was $285.6 billion of such balances at the end of March, which certainly looks like a big number. But Davis reminds us that there also is a record amount of margin debt in those same brokerage accounts — $476.4 billion. The net number is the lowest in history, according to Davis.
Final word from Hulbert…
What, then, are the 52% of households who are not in the stock market doing with their spare cash? One obvious answer is that many of them don’t have any spare cash. As Davis reminds us, “real median household income has plunged since around 2000.”
The bottom line? The data on sideline cash paint a far different picture than the headlines would otherwise lead you to believe. Far from supporting the bulls, that data actually back the bears.