Professor’s Comments November 14, 2017

Posted by OMS  at November 14th, 2017

The markets rose slightly yesterday.  The Dow was up 17 points at 23,440. The NASDAQ and SPX were up 7 and 3 points, respectively.  Volume on the NYSE was moderate, coming in at 90 percent of its 10-day average.  There were 100 new highs and 102 new lows.  The number of new lows is now higher than the new highs. This is the first time since last summer that we’ve seen this. Hmmm?

Not much changed after yesterday’s trading.  However, the DMI on the Dow finally turned negative after two consecutive days of low readings.  The last time the DMI on the Dow was negative was on 8 September, when the index was trading at 21,798.

The DMI on the NASDAQ and the two Money Flow indicators remain positive.  The Dean’s List remains neutral and The Tide is negative.  So overall, the cockpit indicators remain mixed as the Bollinger Bands on the Dow and SPX continue to narrow. The Bands on the NASDAQ are wide at this point, so I wouldn’t expect a change in direction of the large cap technology stocks until the Bands narrow a bit more.

My combination VTI-volume indicator is neutral on the Dow and SPY.  It’s still positive on the NASDAQ.  It’s negative (on a Sell Signal) for the Russell 2K.  The indicator is also on a Sell Signal for IYT, the ETF for the Transportation Sector.  BTW, IYT hit and bounced off its lower trendline near 170.22 yesterday.  I would expect it to continue to test this trendline during the next few days, before breaking lower.

CSX also broke below its lower trendline yesterday and tested its 200-day moving average at 48.79 before bouncing to close at 49.75.  The break of the lower trendline and first test of the 200 should be a warning.  Remember CSX has formed a major Head & Shoulders reversal pattern on the Weekly Charts.  My VTI-volume indicator is on Sell Signal on both the Daily and Weekly charts. Any decline below yesterday’s low (48.79) would identify the move as Major Wave 1 down in CSX.

BTW, a break of 48.79 on CSX would bring the Weekly 200 day moving average into play.  The Weekly 200 is currently near the 35 level.  The H&S pattern on CSX has a target near 40.

There was another small change in the A-D oscillator yesterday, so we need to be on the lookout for a Big Move within the next 1-2 days. 

In a recent post, I mentioned that I thought several companies were in trouble financially, and would likely have a problem paying their dividend.  Yesterday, we saw what happened to GE, a Dow component, when it cut its dividend by 50 percent.  The stock dropped 1.74 on the news to a new low of 18.75.  It recovered slightly during the day to finish at 19.02.

GE has been in a steady down trend since making a high of 32.38 last December.  It’s a good example of what’s been happening with portions of this market.  As the Dow has pushed higher (the Dow was at 19,975 on 12/20, the day GE made its high), GE started its down trend.  So, while the Dow was gaining 3,465 points, GE dropped 58 percent.  

What attracted many investors to GE, especially seniors, was its large dividend.  But that dividend was not supported by the company’s available cash on hand.  The payout ratio was extremely high compared to its competitors, making it hard for the company to grow.  And without growth, the dividend was in danger.  So yesterday, when GE finally realized they had to do something to improve its finances for the future, they cut the dividend.  It caused the stock price to drop 8 percent in one day.

Students should examine the chart of GE for future reference.  The DMI on GE turned negative on 30 December 2016 and has remained negative for most of 2017. It was telling you that something was basically wrong with the company.  And when there’s something wrong for so long, it must impact the company’s ability to pay its dividend. So, the next time you look at a chart and see the price falling with a negative DMI, recognize two things: (1) it’s an indication that something is wrong with the company, and (2) it’s only a matter of time before the dividend gets cut.  In the case of GE, investors not only lost 57 percent of the stock’s value, they saw their dividend (income) cut by 50 percent.  This is something my senior students MUST be aware of, especially when they are buying stocks for income.  NEVER buy a stock in a down trend with a negative DMI, just because it has a high dividend.  NEVER!  It’s a recipe for disaster.

Monday’s Sector Ratio showed a slight increase in the Sector Ratio.  It now stands at a neutral 12-12.  The Strong Sectors were led by Semis, Energy, Cap Equipment, Real Estate, and Computers. The Weak Sectors were led by Service, Telecoms, Consumer Products, Household Products, and Foods.  Continue to stay in stocks and ETFs in the strong sectors and avoid or short those in the weak sectors.  Continue to watch for changes in the Sector Ratio. 

Please be careful now. We’re going into a Holiday/end of year time period that ususally has a positive bias. However, the indicators are starting to turn. The positive seasonality bias could keep the indexes afloat until early next year. However students should realize that the markets are extremely vulnerable to a bad news event, which could send them reeling. In my WSR, I mentioned that most European markets are on VTI-volume Sell Signals. Yesterday, the German and French ETF, EWG and EWQ, were down again. With Europe on Sell Signals, the bad news event that starts the decline won’t have to come from the U.S.

That’s what I’m doing,

h

Market Signals for

11-14-2017

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