Leaders Index 12-30-16

The market opened weaker yesterday and spent the rest of the session working its way lower. The COMPQ finished the day with a decline of .90% while the SPX lost .46%. All the major averages closed at their intraday trading lows, a sign that market participants were not interested in buying stocks. Volume was higher across the board, but still below average, continuing the pattern we have seen in recent days. This was enough to produce a fresh distribution day on all the major averages. The charts of the major averages are starting to look worse as they are breaking below their short term moving averages. The next level of support the averages will face is their 50dma’s. If they break below this important support it will be very negative. Leading stocks were lower as well with the leaders index falling 1.18% on lower but still above average volume. The index tried to break into new high ground earlier this week, but that effort has failed, at least for now. The index is still stuck in the trading range it has been in for several weeks and the relative strength line id the index is looking weak. 2016 saw a continuation of what we have seen lately. The cycle that began in March of 2009 continues in what is one of if not the longest cycle on record. We have been in a situation where the actions of the world’s largest central banks have distorted normal action of markets around the world with massive amounts of printed money and zero or negative interest rates. The year began with a solid sell off and it looked like we might get the long awaited end of the current bull cycle. Then Europe and Japan went to negative interest rates and once again the markets turned higher and ran into new high ground. It is difficult to get a real correction, much less a bear market, under these circumstances. The distortion caused by these policies have made tried and true indicators misfire. The most recent being the monthly Coppock. This is the best indicator I have found to determine the start of new cyclical bull markets. It last gave a very good signal in March and April of 2009 when the current cyclical bull began. The monthly Coppock gave a buy signal on the Dow in March and on the S&P and Nasdaq Composite in July. I was and remain skeptical of this signal. I have been in many first years of new bull markets after this signal and they are explosive. There are an abundance of attractive stocks and many produce large gains. Making substantial progress in a portfolio is easy. This year has not followed that model, although the signals did come at the same time as the best intermediate rally we have seen in two or three years. The number of attractive stocks has been small this year and it has not been easy to make a lot of money. There have been some big winners, such as NVDA and ACIA, but they have been more the exception than the rule. Despite the Coppock signal this doesn’t have the feel of a new bull market. We are in uncharted territory and have been for a long time. The actions of the central banks have made standard yardsticks almost useless. At some point they must withdraw the liquidity they have pumped into the system and allow interest rates to normalize. It is possible that they will be able to do this without causing economic dislocations and a severe bear market in many asset classes, but history would argue against it. There are no guidebooks or road maps to tell us what will happen in 2017, and those out there are little more than someone’s opinion. The best way to handle this situation that I know is a method called the three road scenario developed by my friend Ian Woodward. You come up with three possible outcomes called the high road, the middle road and the low road. Come up with what you think should happen if the market is in a bull scenario and do the same for the other two. Then you watch and let the market tell you which it is going to be. The worst thing you can do is become locked into one path in your head and ignore what the market is saying. Let the market tell you what it is going to do. Personally I think there is a real bear market out there, only I don’t know when it will happen. But I remain flexible and will participate if the market continues higher, although with a degree of caution. At some point the central banks will either reverse policy or they will lose control and the markets will correct regardless of what they do. No one knows when that will happen, but the secular bull market that bonds have been in for over thirty years is showing a lot of signs of peaking. I really hope that we get that bear market in 2017, but I don’t know if it will happen. All you can do is watch and let the market tell you what it is going to do. I will be away for a few days, so the updates will resume Thursday of next week. I hope everyone has a happy new year and that next year will be profitable. Jerry