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Market Update - October 16, 2017

Economic Comment

We saw a loss of 33k jobs reported on October 6th for the Government employment data for the month of September. Although the drop in jobs was expected due to, the flooding in Texas and the Florida Hurricane, the revision of August and July payrolls down by 38k was unexpected with no severe weather impact in those months. (Bloomberg Website). The equity markets are seemingly unaffected by anything, however it is time to check our indicators.

Bullish Percent’s, (Data source: Dorsey Wright, see definitions at the end of this report.)

10 Week- Bullish Percent (Short-term): As the equity markets roll higher into the month of October, we are observing this short-term indicator become more and more overbought, currently, at 76%, just below the January 2017 peak of 80%. Typically, this overbought status tends to foreshadow some type of pullback or correction.

Optionable-Stock Bullish Percent (Intermediate term): Now on OFFENSE. As of September 29th, this intermediate indicator has flipped to OFFENSE. However, field position is not great at 60%, only slightly below the peak in January of 64%.

NYSE Bullish Percent (NYSEBP) (Longer-term): Now on OFFENSE at 62%. The strength of the financials in this index gave enough point and figure buy signals to flip this longer-term indicator back on OFFENSE. However, once again field position is not great. (Source: Dorsey Wright)

Point and Figure Charts (Source: Dorsey Wright)

S&P 500: The new highs in September have been followed by new highs in October. Tough to talk about support levels when the S&P 500 continues going up. 2,500 could be a pullback level. (Source: Dorsey Wright Website)

S&P 500 

SP500 10.16.2017

Horizontal Axis: Time (numbers represent months, for example, 1=January 2=February and so on, when you reach October, months are represented as letters, A= October, B= November & C= December).
Vertical Axis: Price


Although the NASDAQ seemed to be struggling in the month of September, October has been much better with new highs. Looks like first support may be 6,460. (Source: Dorsey Wright Website)


NASDAQ 10.16.2017

Horizontal Axis: Time (numbers represent months, for example, 1=January 2=February and so on, when you reach October, months are represented as letters, A= October, B= November & C= December).
Vertical Axis: Price

US 10- Year Treasury note: We saw the 10-year treasury rates peak in July, along with the equity markets, but this trend didn’t follow suit in September with the equity markets peaking, and the 10 year not. For October, as the equity markets continue to rise, the 10-year is at 2.4% (just barely over its July peak of 2.37%). There has been a quick pullback to 2.3% . It looks like for the intermediate term, rates are in a zone from 2.2% to 2.4%. (Source: Dorsey Wright Website)

10-year Treasury

10YearTreasury 10.16.2017

Horizontal Axis: Time (numbers represent months, for example, 1=January 2=February and so on, when you reach October, months are represented as letters, A= October, B= November & C= December).
Vertical Axis: Price

Relative Strength: International Equities are closing the gap on US Equities for the #1 spot. The last two weeks have seen a big jump from a distant second place to a close second place. Domestic Equities are #1; International Equities #2; Fixed Income #3; Cash #4; Commodities #5; and Currencies #6. (Source: Dorsey Wright Website)


For the first two weeks, October is really bucking the trend of being a seasonally poor month for equity investors. Once again, bullish Investor sentiment seems to be disregarding stretched equity valuations, no repeal of the affordable care act, no new tax plan and no promise of repatriation of cash held by US companies overseas. Even though our indicators flipped to Offense, they did so from poor field position. After eight consecutive quarters of positive stock market returns, (S&P 500 website), nothing seems to be able to stop the US and Global equity markets. We continue to be concerned about the lack of selling in these markets. When investors do begin to take profits, the positive sentiment could quickly change.

Remember, it wasn’t raining when Noah built the ark.
We prefer to remain cautious at these levels.

Have a great rest of the week!

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Bullish Percent Definitions

NYSE Bullish Percent: This is a major market indicator, which tells us whether to be on the offense or defense. It is calculated by dividing the number of NYSE stocks trading on point and figure buy signals by the total listed on the Exchange. The percent of stocks on buy signals in is then plotted on a grid from 0% to 100%, where each box equals 2%. Levels above 70% are generally considered overbought, and below 30% are considered oversold. The best buy signals come when the NYSE Bullish Percent goes below 30% and then reverses up (must reverse 6%). The best sell signals come when the indicator moves above 70% and then reverses below 70%. The most important concept to keep in mind is field position and what team is on the field. When the NYSE Bullish Percent is in X's, the offensive team is on the field and wealth accumulation strategies are the focus. Conversely, when the NYSE Bullish Percent is in O's, the defensive team is on the field and wealth preservation strategies are the focus.

The Bullish Percent can also be calculated on various indices, for example, the 10-week BP is a short-term indicator and is calculated on 10 weeks’ worth of NYSE price data. The optionable stock bullish percent is calculated off the index of all optionable stocks on the NYSE.

Asset Indexes

An index is unmanaged and not available for direct investment.
Dow Jones Industrial Average is a price-weighted average of 30 U.S. stocks traded on the New York Stock Exchange and NASDAQ.
Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
S&P 500 Index is a capitalization-weighted index calculated on a total-return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation and financial companies.
A 10-year treasury note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

The NYSE Composite (^NYA) is a stock market index covering all common stock listed on the New York Stock Exchange, including American depositary receipts, real estate investment trusts, tracking stocks, and foreign listings.

Historical Futures Prices: Crude Oil Futures, Continuous Contract #1. Non-adjusted price based on spot-month continuous contract calculations. Raw data from CME. For more on the roll algorithm used please see this page: https://ww.quandl.com/collections/futures/continuous.


Relative Strength Calculation Explained: Tactical decisions are made utilizing the research and evaluation techniques of Dorsey, Wright & Associates who has extensive expertise in a technique known as Point & Figure charting. This type of analysis attempts to evaluate the supply and demand forces of particular asset classes and ranks the asset classes from strongest to weakest based upon relative strength (RS). We feel asset classes can be ranked similar to the way one might rank sports teams. If you think about your favorite sport, they rank teams based upon how well they perform against their opponents. The more games, matches or races won, the higher in ranking the team will go. We believe the same thing can be done in the investment markets. In the financial markets, a “game” is played each day and it consists of comparing the daily performance of one asset class to another. Each day we compare asset classes to one another to determine which asset classes are the strongest or weakest compared to one another. The ranking process is comprised of the following 4 steps and represents DWA's Tactical Portfolio Research strategy ("the strategy").


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