The Market Perspective

Market Takes Defensive Tone as we Pass Tax Day

Thursday April 17, 2014

I suggested bonds would come down if stocks rallied, Well stocks rallied yesterday but the Bonds, and Utilities did not come down. 

TLT a fund of 20 year government bonds is represented by the red and black bars. Note TLT is holding its high ground, with RSI still climbinb. Meanwhile the QQQ, the NASD, jumped niocely yesterday. That is not tenough to really negate the recent downtrend, but it did bounce above the February low. 

Utilities and energy also bounced. We have consistently noted Energy was the last to bounce in  2008. 

We are now in the same time frame as a year ago when gold collapsed. The cuation the market is showing toward risk is worth remembering as we near the After May Go Away Time Zone. 

More to follow. 

Attempting to Bottom

Tuesday April 15 2014 After Market Close

The market is attempting to bottom. High tech shares like AMZN FB bounced off recent lows and recovered today.

FB

FB made a slightly higher low after a $3 intra day move. I own  FB and sold May 62.5 calls against it. 

We are a good ways from the MAs turning up but this is a start. 

TLT versus SPX

TLT is over extended on its RSI at top while SPX struggles to turn up. A decisive move up in stocks will likely hve TLT correcting. 

Market Starting a Low Here?

Monday April  14 2014

I just bought 200 shares of FB for 59.80 and sold two May 17 calls for 3.35 which is

3.35 / 59.80 = 5.5% due in one month = 12 x 5.5 = 66%

Is my math right or are the options markets temporarily irrational

NOTE the strike price was 62.5

 

Also ordering  some XES on this pullback, puttin  the orders in below the market as we quickly gove overbought on the intra day chart

TLT

As I speculated this weekend, hold off on buying any TLT , you can see the recent up and down nature, it is liable to fall again if stocks rally, note short term MACD overdone in lower panel.

A Broadening Top in Stocks, Oil Rallies

Weekend April 13, 2014

One year ago over the next week gold collapsed. This year it appears more fireworks are on tap several indexes making a 'surprise low' and then possibly recovering into the traditional last hurrah of May. 

NASD

Here at TMP we have emphasized the importance of market internals. I have overlaid the NASD summation index in black over the NASD in red black bars. The two 13 and 34 week exponential moving averages are in blue and red. 

The last significant low was September 2011. the market moved from 2400 to 4400. The summation index however peaked last summer. We naively thought that was a top while the indexes powered higher. This is not doubt due to the fact that the COMPQ is heavily weighted for the large stocks mentioned in my last post, the weekly newspaper column. 

Indicator	Price Drop from top 2014	Percent Drop
Amazon	410-320	21%
Price Line	1375-1175	14%
Facebook	72-59	18%
Tesla	260-204	21%

The table indicates the recent declines, These declines we think have turned the NDX and the COMPQ to the downside. 

The Russell Small Cap 2000 has much the same look. Here is the same chart with the Russell substituted for the COMPQ.

Specifically the internals shown by the Summation INdex peaked  last summer. The index howver powered higher to this past month. The participation by the broader group of stocks was falling all the time as the summation index shows. Now the price index is playing catch up to the down side. 

IMPORTANT. The 13 week MA has not crossed the  34 week to the downside yet. That will be THE definitive sign the party is ending. 

Large CAPS The New York Stock Exchange

Now this inter market comparison, as John Murphy might say, is interesting. Compare the RUT / COMPQ one back  with the NYA just above. As the summation index peaked for the small caps last summer, the summation index, black line, for the large caps was making a low. This reflects the rotation out of the small caps and into the large caps. This is typical of the end of a large move as participants become more defensive. Here notice the two MAs are still headed up. On the small cap charts they are starting to bend over to the downside. 

All of this allows Wall Street, the distributors of stock, to proclaim this is all a normal correction which we have not had since 2011. Perhaps but

the largets IPO week since 2006

and the poor performance of the large NASD stocks suggests something else is going on

and we witnessed to the week the five year anniversary of the March 9, 2009 low.

NASD Ribbon of MAs

IN the last three years a crossover of all the MAs to the downside has never happened. That happened back in 2008 and 2009 to the upside. A final verdict awaits. But by the time that happens the market could be quite a bit lower. 

Fast and Furious

There were a couple of 10% corrections that last year on the way to the March 2000 top. Here we have had three 100 point corrections, none of which deterred the market from moving higer. With  more money concentrated here, and the seasonal high ahead in May I am expecting another big high to convince the public buy and hold is back. 

We will likely have some sort of dramatic low this week. That could possibly be followed by a violent reversal to the upside. That would set the stage for a May High. 

TLT

At this point we suggest you read the last two weekend updates specifically regarding bonds before proceeding further. We had the right idea. 

Conventional wisdom has it that the FED is tapering.  This means cutting back on the bond purchases, read injections into banks to speculate with your and my demand deposits now that Glass Stegall is gone. 

But the bond market was smarter than that. It bottomed at 100 via TLT and has been marching up since. Their have been  The new high in b bonds shown here Friday tallies with the new recent lows in stock indexes, that Sue Herrera flight to quality thing. 

 

 

Weekly

A moment of truth lies ahead. If stocks rally back into early May, it may be that bonds will pull back from that big downtrend line. RSI has climbed into bullish territory.  The longest term three MAs are still headed up. A test of rates is coming up. 

TLT Hourly

 

A series of orders beginning above 109 looks about right to position for this trade. 

Crude Oil versus SPX

The main panel is a ratio chart of crude oil versus the broad big cap stock market represented by the SPX. The ratio broke through last summer's resistance to a new high. It did this on a 

declining stock market, see multiple charts above

a weaker dollar , see green line in bottom panel. 

Is this the start of a final commodity fling to the upside ala the move to 145 in crude in 2008. Well a lot more work has to be done here for that sort of thing to happen but it bears watching. This is particularly true given that we have more oil than ever around the world. 

CRB

The CRB is certainly doing its best to suggest that a final run in commodities, reflecting the loose money Central Bank policies, is underway. 

CRB Back to 2007-2008

The CRB lifted off from its ribbon of MAs to a new high. The world then sold literally everything it owned to meet margin calls in cash. That reality is reflected in the mad dash for dollars shown in the lower panel. 

Before you brush this idea aside, consider we now have a three year break out. 

RIS at top is just starting to register a change. This is a monthly chart so things happen slowly. 

So How Am I Playing All This?

EEP TCP OKS

That is an error outlier in the data for early April for EEP I think, but all three Master Limited Partnerships are paying over 7%. They all moved up with the CRB. 

The Bottom Line

Evidence mounts that a top of some significance looms for May 2014. Market do not all top simultaneously. It is likely the more speculative stocks in the NDX, the NASD 100, may have already doen this in March 2014. Money has moved to the big caps. Interestingly John Murphy claimed in 2008 he had warned of a  2007 market top, when the selling should have taken place as he later wrote. I don't remember that 2007 warning. Now he is confident that yes this is a correction but a great buying opportunity awaits in the Fall. If so that portends a pretty good drop between now and then. 

Bonds have moved up nicely they may consolidate their recent up move between this week and a stock top in May. Don't get anxious if sotcks bounce this week bonds will likely pull back. 

The CRB is making its move. Crude oil is outpacing the SPX. Again this parallels the what happened going into 2008. 

For now the NYSE A/D LINE has not turned down. That will be a lagging indicator when and if it does. 

 

Thanks for reading The Market Perspective

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The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

 

 

Social Mood Update, BLM Stands Down, Oil Well Tax Shelters are Back

Weekend April 13 2014

If you don't have an oil well 

get one

You'll love doing business with The Western Company

Ad by Western Company in the last oil boom delivered by hot pants wearing female model

Social Mood

We have been writing for some time  about a downturn in social mood. That downturn is now on display world wide. From massive demonstrations in Caracas, Venezuela to protests in Cuba to the unrest across North Africa to the refugee campus in Lebanon and Jordan to the take over in Crimea and now potentially the Ukraine, we can add, yes the US. 

The Federal Government in the US has a horrible track record of violence against citizens when push literally comes to shove. 

Kent State Shootings 1970 Ohio National Guard

Ruby Ridge 1992 USMS and FBI

Waco Siege 1993 ATF, FBI

And then there are the failures to connect the dots

http://en.wikipedia.org/wiki/World_Trade_Center_bombing 1993

 9/11 2001 A total failure from the National Security Advisor on down

In an election year it dawned on someone in Washington DC to stop what might have been the US Tunisia moment ( a Tunisia street merchant set himself of fire literally igniting hte revolts across North Africa).

Protestors Block I 15, Government Backs Down Please read this article to get a real hand on the social mood pulse. I just read a liberal columnist dismiss the Secede bumper stickers, he or she is clearly not paying attention. This confrontation in Nevada began with the FEDS armed with Tasers, it ended with 

both sides brandishing weapons. Consider this quote from the article. 

We the people in this area have nothing to fear,” said Bundy, wearing a cowboy hat and a T-shirt bearing his family name. “We can carry our weapons if we like because we have Second Amendment rights, and those are God-given rights. Those Second Amendment rights are our rights. But, and I say ‘but,’ because we don’t have to carry them right now because we’re afraid. I’m telling you that right now. Because there’s been a lot of people who’ve been afraid, and I know that feeling. Just yesterday evening I was really afraid. … Today, we have been confirmed by our creator that we do not have to be afraid.

 

Remember the campaign comment about guns and bibles?  Well here we are...

The 1966 - 1982 era finally, jmake that quickly by  1968,  witnessed the US Capitol ringed with Marines and Machine Guns .

I bring all this up not to be on one side of the political spectrum or the other, just to re count what did and could happen in a period of negative social mood.

And now on a different note, a sure sign of the coming top of a market occurs when dentists get involved. And so we have

Oil Boom USA Own Your Own Oil Well, Tax Advantages 

The end of any mania is concurrent with the entry of amateurs entering the field. In the 1970s marginal tax rates beyond 50% resulted in all manner of 'tax shelters.'  They worked by offering a huge write off that would off set or reduce ordinary income. This is the source of my comment about dentists and other high ordinary income individuals. The tax shelter always offers some sort of write off like accelerated depreciation This is why the Tax Act of 1986 created a new no you can't and don't you dare set of depreciation tables. That act put the wooden stake thru the heart of tax shelters.

But like Freddy Kreuger, they are back. With Federal Rates at 39% and state and municipal rates, think CA and NY, pushing total taxes over 50%, the lure of write offs comes again.

The idea of a tax shelter ias that one receives an ordinary write off in the beginning for a fixed sum of money. Then the money should be recovered through lease payments or an eventual sale of the capital asset at, you guessed it, a higher price.

An oil deal works like this As they ad says, you get to deduct 85% of Intangible Drilling Costs IDC. Trust me they will find a way to spend the other 15% of your money. You now have your write off. Hopefully when the well comes in, you will experience years of fat pay checks, again somewhat offset by operating expenses. There may or may not be fat paychecks but I can promise you, there will be operating expenses.  Additional promises are usually made that one will eventually sell the asset bet it a 

railroad car

shrimp farm in Hawaii (really such things were created)

jet airliner

real estate

or in this case oil well

and experience a capital gain at lower tax rates. Get it, an oridnary write off up front in exchange for cash payments and an eventual capital gain. 

Except I never saw a tax shelter that resulted in anyone making a gain. 

But again, all the social mood extremes of the last era of 1966-1982 are coming back again.

 

Weekly News Paper Column Signs of an Impending Top

Weekend April  12 2014

Signs of an Impending Stock Market Top

Many readers no doubt joined the rush to equities this past year and its stunning 25%+ rally across various indexes. The idea of buy and hold has, well, taken hold again. Our purpose today is to warn the necessity of getting defensive, not offensive, with your hard earned money.

Markets exhibit many cycles. One is generational, all the better to invalidate one generations’ advice to the next. For example, 1982/84 to March 2000 produced  a stunning stock market rally. The  Dow Industrials soared from sub 1,000 to  11,000, one for the record books indeed. The idea that one should ‘buy and hold’ investments took hold. Never mind the 1987 crash of 20%, the market came back months later. And hey, look at John Templeton and Warren Buffet. They did not make their fortunes day trading. They are buy and hold investors. And even Warren, notes that BRK (his firm) has fallen 50% three times in its history. This ignores the difference between the average investor and Warren.  The average investor usually buys in late in the cycle. And as prices fall below cost, it is hard to be reassured one’s nest egg will recover. And what many overlook, is that Buffet does not just buy a few shares like you and I, indeed, he buys the entire company. When the firm records net profit, indeed at 50% + ownership, it is HIS profit. Finally the real money is made by investingcash at the bottom of a  cycle. More important, this allows one to be emotionally neutral, which the rest of the buy and hold crowd never is, as stocks are thrown overboard in final panic selling (think March, 2009).

The long bull cycle beginning  August, 1982 ended its eighteen-year run March, 2000. We are now in an eighteen-year cycle of stagnation. Stock prices rise and fall with many investors no better off today than they were in March 2000. Based on past such cycles (1930-1948 for example) we can expect at least three down moves. Two such moves have already occurred. That would be 2000-2003 and 2007 to 2009. In similar fashion two giant rallies (think 1932-1937) have occurred Those rallies were from 2003 to 2007 and 2009 to now. A third decline likely lies directly ahead. By that I do not mean the markets fall straight down from here, no the Bear is much more clever than that.

Here are some clues that it is looking much like 2000 and 207 again.

 

 

 

Indicator	Price Drop from top 2014	Percent Drop
Amazon	410-320	21%
Price Line	1375-1175	14%
Facebook	72-59	18%
Tesla	260-204	21%

 

Worse, the NASD One Hundred or NDX has now broken its two-year up trend to the downside. Not surprisingly the market is growing defensive. Indeed, I saw a headline this week proclaiming it was time to go back to dividend paying large caps. In Wall Street jargon, bear markets never happen, it is always time to buy and hold. Wall Street’s job is to distribute product to the public which generates fees and commissions. This is not the same as looking out for you, the client.

Seasonally it is true that money is made buying the November lows and selling at the May highs. So goes the saying, After May, Go Away. This year is shaping up to make that case once again. It is likely the big caps  (large capitalization stocks, think IBM) in the Dow Industrials and S & P will make some sort of high again in May.  Some indexes will rebound making lower highs than previously occurred this year.

Other similarities to 2008 are evident. The price of crude oil has rebounded from 98 to 104. Recall that the last market high occurring in 2008 was a soaring oil price, from 100 to 145 in about four months. That was the result of the FED’s easy money policy which led to a lot more speculation than job creation. Here we go again. This is particularly troublesome in that the run up led to a collapse from 145 to 35 by Christmas. I am not predicting that, just reminding readers of then and now.

Bond prices are already moving up as the smart money shifts out of stocks. The bottom line is that it is time to be cautious and defensive.

The Signs of an Important Top Grow Stronger

Friday April 11, 2014 6:00 AM CST

Our suggestion yesterday morning before the market openned was

It is time to be cautious. 

Which reminds me to post a time along with the date. While Thursday began quietly it quickly morphed into a massive outside reversal day. It was time to be cautious indeed. One reader asked about my position, the answer is cash with a bit of EEP and a small core position in GSB. So yesterday was no problem for me. 

A Comparison

I am writing well before the market open of Friday April 11 2014. I have meetings today as well as a newspaper column to get out before the meeting. So a quick update, much much more to follow this weekend. Above from top to bottom is the GDX Market Vectors Large Gold Miners, the Russell small cap index and the VIX Volatility INdex at bottom. 

In 2008, Gold and the miners bottomed while stocks were still headed south. It appears the same sort of thing is happening in that GDX despite all the bearishness from some sectors is making higher lows. One can see a reverse head and shoulders pattern there. Two important lows were registered in 2013. 

In the main panel the small caps are falling apart. Note the three big down days since mid march, those are the long red bars.  Small caps will lead on the way up as social mood becomes more risk averse. Then the money leaves that sector embracing blue chips, which is exctly what has happened. The SPX continued to stay above 1840. We have noted that GOOG has fallen 14% since its split. 

At bottom the volatility index is slowly making  higher lows though that is scarcely obvious looking at the chart. The point is that the VIX is rising while the SPX hits resistance and the small caps start falling apart led by what were the high fliers like AMZN with its triple digit price earnings ratio. 

As noted we are five years out from the March 2009 low. The topping has begun. Some sectors are perhaps already beginning their bear markets. Final highs may well be recorded in May, some will be lower highs to keep the crowd cinvinced that a buy and hold strategy is back and well and alive, hey its 1996 again, and wasn't that Bill Clinton in the newspaper yesterday, things must be back to 'normal.'

Things are back to normal as in a normal  18 year period of stagnation which sees massive swings in stock vlaues caused by massive shifts in social mood. 

Stay tuned,it is time to book markt TMP again. 

It's Time to Become Cautious

Thursday April 10,2014

Here are a few observations on Where We Are

The market just observed the five year anniversary of the bull beginning in March 2009. 

The tech leaders have all fallen since, GOOG, AMZN PCLN

We are in a mid year election year, every week sees another attempt at some sort of claim such as look ACA is working or we will get Immigration Reform, this will only get worse in the next  seven months

Defensive sectors are already doing better, MLPs, Utilities, and such

The Dow

The market was up 30% last year. But the bulk of the move was from January to June. After that the Dow moved sideways into a typical Fall Bottom during October November. AFter registering a new high in January, once again the Dow moves sideways. It may be that there is now enough uncertainty and frankly enough participants who went long, that we are already moving sideways again. Who is left to join the party?  The news was chock a block full of stories regarding the public wanting to get in last year after four years of advance. 

While some news stories like Hulbert this week suggest we are not nearly as over done as during the dot.com bubble, I suspect that was the seninal event kikcing off the long era of stagnation we have witnessed, the slowest recovery in decades. This past two weeks has seen the ost IPOs since 2006. 

 

Waiting for May

Wed April  9, 2014

Mark Hulbert suggest five ways the market is not as overheated as March 2000. I am not sure the markets can create another phenomenon equal to the dot.com mania. IPOs are still the strongest since 2006. 

March 209 low to March 2014 High an exact five years

William Wallace Updated

Monday April  7, 2014

Wallace was the Scottish rebel featuredin Braveheart. Now Scotland will vote for real on getting out. This is typical of a period of negative, exclusionary mood. Putin had to take Crimea by Force, the Ukraine at least the western Ukraine wants nothing to do with Russia. Across North Africa all sorts of revoutions are still underway. 

I have class but hope to be able to listen to this interview later.