09-22-2017: December S&P 500 Index: Uncertainty About Fed Portfolio Unwinding

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calend Spread

Level Table
Other Factors





In this over-valued domestic market, it's all about future earnings. And they in turn are dependent upon tax reform. Lessons of the past insure that a major correction is coming after such a long bull run, but it cannot be stated with certainty when that will happen. Markets abhor uncertainty and there's a lot of that about. Still, even though it seems like a case of "irrational exhuberance" as Chairman Greenspan would say, the Federal Reserve will do little to cool off this market, despite the inflationary pressure may add. We believe the odds favor the investor who does not stand in the way of the irrational bull market, however, at some point such a position will get punished. The technicals are just too strong, and it would seem not earthquakes, tidal waves, hurricanes, or an irrational President can stop the charging bull. Most analysts say to ignore it, and we will go with them, but there is a big unknown on the horizon when the Federal Reserve and other central banks around the world start dumping their quantitative easing portfolios back on the market.

Intermarket Analysis

We fed the S&P 500 Index, the NASDAQ 100 Index and the U.S. Dollar Index into a neural network to get the following result:

Parabolic Chart

December S&P 500 Index:

Parabolic Chart

Nirvana Chart

December S&P 500 Index:

Initial Chart

News Analysis

Trump's speech before the U.N. prompts a slowdown in safe-haven outflows. Hurricane Maria heads toward Puero Rico as of this writing. German economic sentiment came in higher-than-expedted. These factors prompt a risk appetite form of trading. The S&p 500 Index is in a steep uptrend but is in an overbought position. Global growth prospects remain strong as investors look more toward emerging markets for value stocks. These prospects are reinforced by low interest rates and flat yield curves. Tax cuts remain a bullish force despite evidence that Congress cannot seem to get anything done.

A bitcoin bubble appears to be forming.

An upcoming Federal Reserve policy meeting Sept. 26th is awaited as the Fed begins to unwind its $4.5 trillion portfolio of government securities. Fed balance sheet normalization is scheduled to begin in October. The effect of the unwind will be unknown for a while. It may put pressure on equity valuations. Bank stocks are poised to profit from a higher yield and steeper yield curve as a result of unwinding. The Fed is expected to take baby steps in the unwind due to unknowns in an unprecedented situation. Eventually $50 billion per month in liquidity could disappear.

A falling U.S. Dollar is inflationary, and this puts pressure on the Fed to raise rates.

S&P stock buybacks have dropped 25% since the start of 2016. The reduction in buybacks isn't necessarily a signal that companies view their own shares to be overvalued. Rather companies are showing an ability to meet their earnings targets without the buyback tailwind. Companies are holding back on overseas investments awaiting the political environment in Washington to see if untaxed foreign profits of U.S. multinational stocks will be taxed. S&P stock dividends reached a record of $104 billion in quarterly payouts.

The S&P 500 has traded lower 70% of the time during the last two weeks of September since 1980. The index's average return during the last two weeks has been -1.3%. So far the S&P 500 is up 1.4% this month and current sits at a record high, breaking 2500. Book clearing in the fourth quarter, and end of summer doldrums with increase in volatility could allow the S&P to reach its average downward move as of yet.

Markets have scarcely reacted to recent terrorist attacks. But a string of news out of North Korea did catch investors' attention. The increased frequency, power, and pretentiousness exhibited by missile tests seem to indicate that North Korea is much closer to its goal of building a military arsenal than most expected.

Recent best performing sectors include utilities and telecommunications, considered defensive sectors.

The market is really sailing on tax reform optimism. House Speaker Paul Ryan and Treasury Secretary Steven Mnuchin recently insisted that a tax overhaul would take place before 2018. But these cuts could eliminate as much as $1.5 trillion in revenues over 10 years, raising the odds that their planned tax overhaul would expand the federal deficit.

Japan's exports have surged at fastest in 4 years on global demand. Booming shipments of cars and electronics add that overseas demand is strong enough to support healthy economic growth.

Benign inflation has helped to set the stage for one of the biggest bull market advances in decades. Big, diverse stocks have especially benefitted. But what matters most to stock prices is not the current rate of inflation, but expectations of future inflation. A key to evaluating market conditions is to see how inflationary expectations were reflected in stock prices compared to actual inflation rates experienced in the future. In general, highest valuations on stocks preceded stock market crashes.

Takeovers helped boost the stock indices, one of the latest being Post Holdings buying frozen meals maker Bob Evans Farms. Best Buy released a long-term earnings forecast which projected limited growth and renewed suggestions that Amazon.Com and internet commerce was hurting retail stores. Rumors about a Sprint - T-Mobile merger abound. Several earlier efforts to acquire T-Mobile met with opposition from the Federal Trade Commission, the most noteable from AT&T.

Global demand for oil is up which is boosting energy stocks. Chevron and Chesapeake saw signficant gains. Nordstrom is closing a deal to go private which apparently is boosting consumer stocks.

Apple shares fell after it unveiled its new iphone and other product updates. Dow Chemical and DuPont completed a merger earlier this year, but now plan to split into three units with an ongoing debate as to how to divide the businesses.

Huge expenses for some companies in cleanup costs are being felt in Texas, Florida and other Southern states after recent hurricanes.

As we read the news, the Fed's unwinding of its portfolio seems to be the most significant in having impact on markets. The effects of this are uncertain and the market abhors uncertainty. There appears to be a lot of uncertainty right now in multiple areas.

Still, although Schwab is not exactly one of our favorite sources, Charles Schwab & Co. released an article "How the Shift by Central Banks May Affect the Stock Market." It is accompanied mainly by charts illustrating the Federal Reserve balance sheet versus the S&P 500 Index, which tracks fairly well until the year 2015. Thereafter, the balance sheet assets remains flat but the bull market keeps on going. Other charts show earnings per share versus the central bank balance sheet assets for Japan and Europe (why Schwab picks these instead of the U.S. is unexplained) and the two variables track very well right on through 2017. The conclusion then is that earnings, not quantitative easing (increasing central bank assets) remain the key support for stock markets around the world. Here again, we have uncertainty, given the clear dependence of earnings on corporate tax reform which is in doubt as to whether or not Congress can act. Cutting corporate taxes means not having the money to pay for social programs.

Point & Figure Chart

260.0I                                                                  T  9/19
     I CME - Dec-17 S & P 500 E-Mini (50 X Idx)    Cm.=0.01  Lim.= 0.2
     I                   X
     I                   X
     I                   X
     I                   X
     I                   X
     I                   X
     I                   X
     I                   X
     I                   X
     I                   X
     I                   X
     I                   X
     I                   X
     I                   X
     I                 X X
     I                 XOX
     I                 XO
     I               X X
     I       X   X   XOX
     I       XO  XO  XOX
     I     X XO  XO  XO
     I   X XOXO  XO  X
     I   XOXOXOX XO  X
     I   XOXO OXOXO  X
     I XOX    OXOXOX X
     I XOX    OXO OXOX
     I XOX    OX  OXOX
     I XOX        O O
     I XO
     I X
     I X
      1 1111     11     11
The above chart is giving a conventional buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal up period.

Cyclicals Cyclicals Seasonals

Internal Program

Our worst-performing internal program is "Gotthelf" (meaning do the opposite of what it says.) It is giving a sell signal.

Internal Printout 1

Results of "Gotthelf" for S&P 500 Index (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $50 for the mini contract. Initial margin on a single contract is $4,950. Use of options is advised.

Historic Range

Scale traders are not a factor in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to down is imminent near a volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) S&P 500 Index E-Mini March 2600 Call and Sell (1) S&P 500 Index March mE-Mini 2575 Call @ 10.80 to the sell side or better.

o 1 o 2 o 3 0 4 o 5

Calendar Spread

What the Dec. - Jun. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. The best time to enter or leave the above spread is when it is at +0.25 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -0.30 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be headed toward the buy the near, sell the far point.

Level Table:

Level Table

The path of least resistance is up.
255.0|                                                                  R  9/19
 CME - Dec-17 S & P 500 E-Mini (50 X Idx)    Cm.=0.01  Lim.= 0.2
     |Z[   <<<
200.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.105
         1 1 1 1 1 1 1                                                
       9 0 0 1 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9           9
       2 0 1 0 1 3 1 2 1 3 1 2 1 2 1 2 1 2 0 2 0 2 0 1 0 1           1
       1 4 8 1 5 0 4 9 3 0 3 8 4 8 1 6 0 4 8 2 7 1 4 8 1 8           9

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 7/11 ).

Intraday Chart

                 Risk Versus Opportunity Report

                SPZ7    December S&P 500 Index

                      High Price:  2564
                   Current Price:  2505
                       Low Price:  2475

                            Risk:  0.024
                     Opportunity:  0.047

                    (O/R) Ratio =  1.967

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart + 1
Nirvana Chart - 1
News - 1
Point & Figure + 1
Cyclicals + 1
Seasonals + 1
Internal System 1 - 1
Internal System 2 0
Third System + 1
Historic Range - 1
Commitment of Traders + 1
Range/Volatility - 1
Level Table + 1
Other Factors + 1
Total + 4
Place 3 December S&P 500 Stock Index E-Mini on a Buy Watch with stoploss @ -2.66 below the get-in point when recent price is represented as "250.47".