Many technical indicators changed overnight in unison.  First the end of the day volume was very low last night when the final numbers came in.  Then, this morning, the low today undercut yesterday’s low.  The Commodity channel fell as the Relative strength dropped significantly.  Then the S&P dropped below the massive pivot line and the Histogram maxed out.  The MAC/ D are in an upward negative trend- did not get near zero line combined with a Gap down at open this morning.  The VIX went above 20 and the McClellan oscillator went to an overbought condition quickly.

Then the Fundamentals also changed.  The Earnings numbers plunged for the year; down again and are now projected to End up lower than 2015’s $117 number if they stay on this path.  The Market is struggling to get to a 1980 level; if this continues market will not set new highs this year.  At this point the risk was too high to continue in the trade.  The equity positions were sold and portfolios are in a neutral position waiting for the next trade.  It is possible that the market has to go back down lower than the 1800 and wash itself out, before embarking on a more complete bounce.  Partial trades protect our principal while allowing trades to develop before putting the entire position on.  Option trades are still intact.  More info to come.

Market distortions from Quantitative Easing have been mostly eliminated which is allowing equity markets to function more normally.  This week, the technical indicators have repaired themselves enough to trigger a partial trade in Tactical Growth, Tactical Moderate and Hedge Fund portfolios.  Our readers should be aware from previous blogs, that we are catching a bounce in the market; we do not expect a long term upward trend in U.S. markets.  In short, the broad market defined as the S&P 500-the Large Cap companies, hit a high of 2154 mid last year.  After this high, the market has tested near the 1800 level twice; making a lower low the second time.  This is indicated in the three year chart of the S&P 500 below.  One can also view (moving right to left on the chart) additional ‘touches’  of lows-  in October of 2015 and one in February of 2015. This is a good visual of the topping process of the S&P.

Bounces are part of a normally functioning market.  They usually retest at Fibonacci points.  This bounce should be brief in nature; a usual holding period for MCS is one to three months.  The expectation for U.S. markets after the completion of the trade is a retest or break of the most recent lows, occurring this year.   Expect additional color as the trade progresses, and remember- upward movement does not happen the minute we execute a trade.  We do expect to finish the trade next week.

**These opinions are subject to change without notice. This material is for informational purposes only, and should not be considered a recommendation of any particular security, strategy, or investment product as we are a Registered Investment Advisor and monitor our positions continuously.***

Basically the Fed can continue to raise interest rates, go to negative interest rates, embark on more QE, do a combination of these or do nothing.  Fed Chair Yellen delivered her prepared statement to Congress at 10am this morning.  Initially, the U.S. market moved up since she acknowledged the negative impact the interest rate raise had on global equity markets; then it quickly reversed.  Yellen who is a classically trained Labor Economist is now the primary decision maker following inflation; she stated the Fed was still on course for another raise.  Some commentary from Axel Merk is in order today, (Merk Investments expert in macro view on bonds and currency): “For years, asset prices were rising on the backdrop of low volatility.  The low volatility was induced by highly accommodative monetary policy.  I like to refer to it as an era of ‘compressed risk premia’.  In that environment, I allege investors got over-exposed to risky assets, that’s a rational reaction to a world that is perceived to be less risky.  Whenever the Fed started to contemplate an exit, I would say the market threw a taper tantrum, then last August, the Fed suggested it really meant business….  As a result, investors may be waking up to the notion that markets are risky after all and that they must sell risky assets, (equities, junk bonds, etc.).  As a result, investors may be increasingly interested in Capital Preservation, i.e. ‘sell the rallies’ rather than ‘buy the dips’….  In practice, the selling may end when most investors have shifted towards a capital preservation mode.”

The second day of testimony comes tomorrow; expect some more intense questioning with a focus on the stability banks and Fed forward guidance.

U.S. Markets ended the day lower, as the yield curve continues to flatten.  A flattening yield curve is negative for banks, thus bank stocks are down about 30% when the broad markets are down about 15%.  QE did not and will not bring prosperity.  Markets continue to revert to the norm.  Unless something dramatic happens tomorrow, we will not post again until Friday when we will recap the week.  Expect more volatility in the next few weeks.

Did you happen to watch the Superbowl?  If you did, you had to be impressed with the Denver Bronco’s Defense.  Sure, Peyton Manning is a terrific quarterback, but the Bronco’s defense won the game by shutting down the Panthers.  Your MCS team appreciates the power of a good offense and a good defense, which allow investors and sports teams to win the game.   Investing typically focuses on offense alone.   It is easy to applaud managers who have positive years when the market is moving up steadily; but when the market moves the other way, only the managers that have a defense strategy to lock in profits ‘win’.  Everyone else watches their portfolios move back and forth and eventually down.

Here are the important events of the day:

• The Japanese Topix index closed down 5.5%. (So much for their QE program.)
• Japan witnessed their 10 year Government bond yield go negative for the first time ever. (So much for their QE program.)
• The Global bond markets are in turmoil, with $7 Trillion Dollars of Government bonds across the world now offering Negative Interest Rates. (Yes that is Trillion with a T.)
• Japan and China are in official ‘bear’ markets- down 20% or more.
• Germany’s Deutsche Bank is trying to keep investors and clients in their seats while their stock drops and liquidity concerns are present. Most European indexes are in a bear market also including Germany and France.  Germany is the index to watch in the EU.
• Oil is trying to hold the approx. $30/barrel mark, while Goldman Sachs is warning that oil prices will fall to $20/barrel.
• S. Markets are trying to hold support. The so called FANG NOSH stocks are unable to ‘hold’ up the major indexes any longer.
• Fed Chair Yellen testifies before Congress tomorrow.
• The D.C. area experienced a mini snow storm. Thank goodness we did not get hit with 30 plus inches again, although traffic is difficult.

The following information is geared to the MCS investors that received option positions.  The option position that was written yesterday added an approximate one and one half percent point gain to our portfolio.  The goal of MCS option writing is to bring in approximately 3% plus annually to portfolios.  Yesterday’s position meets half of the yearly goal alone and represents a very healthy ‘dividend’ without owning a stock that can depreciate in value or cut the dividend.  Options represent exposure to the market without the risk currently inherent in the market.   The put option is written at a strike price of 150 equating to the S&P 500 falling 350 points from today’s level.   The current volatility in markets may allow us to exceed our option goal substantially this year.  Options can be extraordinarily valuable in added profits to portfolios.  The Hedge Fund investors don’t ‘see’ positions in their accounts- (similar to a mutual fund), since Hedge Funds are a pooled vehicle.  End of the month Hedge Fund statements will reflect the value of your holdings.  Stay tuned for more market action.

Markets are regressing to the mean; this is the main reason for the drop today.  U.S. Markets have been overvalued for several years and will continue regressing until they are in line with the economic environment and the fundamentals.  The market broke through a support level this morning which it held after the sell off Friday; it is nearing another support level which is a retest of the prior low. Markets do not generally fall all at once, and will find shelves of support and experience bounces until finally bottoming in the future.  All of this was discussed at our Investment Forum last Friday.  We have narrowed our charts for the blog to illustrate our views.  These charts are examples only- from a myriad that we use on a daily basis.  We will continue to use these same charts repeatedly for reference in our blogs and Quarterly Outlooks. The chart below from Dr. Ed Yardeni was updated this morning and continues to show the disconnect between the market and the economy.  The consumer comfort index fell in January along with the market, but the market has a way to go for these two lines to meet.

Other factors that contributed to today’s market action include capitalization concerns for Deutsche bank and other European banks.  This concern has spread to the U.S. and most major banks are down 20% or so from recent highs with Deutsche experiencing a 10% drop today.  Global growth concerns continue with WTI oil dropping below the $30/barrel mark intraday.  There was a lot of action in the U.S. bond markets with the ten year closing at a yield of 1.74%.

MCS wrote a put on the SPY today in both the Hedge Fund and in Tactical Growth Portfolios.  The premium for the time duration met all of our risk criteria since the put was written 30% lower than the high for the SPY-meaning there is a serious buffer.  Our firm has already determined an exit strategy should this level be approached prior to the expiration date.

Fed Chair Yellen will also testify before Congress this week discussing the Fed Governors report on Bank Stability that we linked from the blog last week and to explain why the Fed chose to raise rates in a sub-par economy.  This should make for interesting ‘Real’ TV for those who enjoy reality shows.  CNBC and Bloomberg may carry some of the coverage on Wed. and Thurs.  The markets are closed in China for the Lunar New Year celebration this week.

We review charts everyday- usually as many as a couple of hundred, looking for different things at different times in a market cycle.   After market sell-offs, chartists look for triangle patterns, especially bullish ones.  These patterns are formed when buyers return to the market once a strong resistance level is hit.  Only the most speculative investors take a position prior to a break; cautious investors wait for confirmation to increase the confidence that this move will materialize.  MCS is in this confirmation camp; we don’t guess with our capital, we wait until a low risk move presents itself.  The market may have hit the temporary bottom for now.   Other technical indicators that increase the confidence include significantly above-average volume, and the Relative Strength increasing above a certain level.

The next two charts are useful as visuals.  The first chart, the NYSE Summation Index Ratio Adjusted, End of Day- covers most of the year 2013, all of 2014 and 2015 to present.  This chart is helpful as a visual for investors to view the distortion in the market from QE.  Normally functioning markets oscillate between oversold and overbought conditions with the NYSE not reaching an oversold condition until late 2014.   One can see that the oversold line was ‘just touched’, with the same scenario occurring in 2015.  The difference today can be viewed at the far right hand side of the chart.  The market has become extremely oversold, one of the normal conditions for a bounce.

The next chart is a 15 year chart of the NASDAQ index.  This chart illustrates the Fibonacci retracements on the downside.  The chart also shows the recent two breaches of the red channel line.  Eventually the NASDAQ will retrace each of these levels (the horizontal blue lines) as the downturn continues.

In closing, many technical analysts are predicting a short term bottom in U.S. Markets in the very near term. MCS does not only rely on the technical indicators, but incorporates fundamental and economic analysis in our strategy.  Our readers have a good handle on the economy and fundamentals.   Once the technical repair occurs, a strong bounce to the upside is expected.  After that, markets will resume their downward trend, making stops near each of the Fibonacci levels shown above prior to making a final low.  This process will play out over the next year(s).  Investors will be faced with the third down cycle in this sixteen year timeframe. Normal markets do not go vertical on sub-par economic and fundamental indicators, and it is impossible to know when that type of situation will end-until it does end.  The topping process over the last several years is confirmation that that cycle has ended.   MCS looks forward to catch multiple bounces during this next cycle and the first one is in the short term.  The market reacted yesterdsay to the poor Non-Farm payroll number combined with the 4.9% unemployment number.

Enjoy the weekend and look for updates as the situation progresses.

The economic and fundamental data which has been discussed in many previous blogs has been little changed recently.  Our analysis is now mostly directed at the technical indicators.  The data reflects MCS should be able to catch a bounce in the U.S. equity markets in the near term.  The inverted megaphone pattern, as seen in the chart below, is one of the simplest and most straightforward patterns to recognize. One can see the major two bolded blue lines in this chart are converging.  These lines rarely cross; and as the technical indicators repair themselves the squeeze will become tighter, (like a spring), squeezing the prices in a tighter range.  This pattern will resolve itself, most likely by the end of the quarter and our directional call today is to the upside.  This bounce will be short lived, (less than four months) and then the market will resume its sideways and downward trend.

Tomorrow we will present two additional charts that confirm our strong conviction on this call.

Investors attending the Investment Forum will receive an additional 15-minute chart school using this chart and several additional charts to help illustrate our excitement on the properly functioning markets in conjunction with the technical charts. Don’t forget to RSVP to Jenn if you are able to attend the Forum.

The full year schedule for our Investment Forums are:

• Friday, February 5th
• Friday, April 8th
• Friday, May 6th
• Friday, June 10th
• Friday, Sept 9th
• Friday, October 7th
• Friday, November 18^th– Holiday Party

It is difficult to play any game if one does not play both sides. When investing, it is imperative to be aware of any ‘rule changes’ during the game.   Remember investors are playing the game for the rest of our investing lives.   Many investors ask us routinely- What is going to happen in the Markets?  They know we don’t make the rules or control the markets, but they ask anyway.  Certainly the U.S. Federal Reserve is in a better position than we are to affect the rules and the game.  Thus, we are attaching the current report titled, “Supervisory Scenarios for Annual Stress Tests Required under the Dodd-Frank Act Stress Testing Rules and Capital Plan Rule“,  courtesy of the Federal Reserve Board of Governors depicting three scenarios for 2016-2017 for your reading pleasure.  This report highlights ‘hypothetical’ situations that could affect the U.S. banking system.  The report is useful because the Fed uses six economic inputs to extrapolate how the market would react.  The first scenario is the baseline, basically the economic indicators stay in the current range and the stock market is range bound near today’s level.  The second scenario has the U.S. stock market in a 25% decline on waning economic information.  The third scenario presented is a 50% drop in the stock market as the economic conditions of the U.S. drop along with the rest of the world.   Obviously these are the three best scenarios the Fed expects in the next few years.

Investors that are not playing defense, it may be a good time to reconsider your strategy.   When the Federal Reserve reports present market levels as the best case for the market, there is serious trouble on the horizon.  The cliff note reversion for those who would rather watch other people ‘play the game’ (think watching the Super bowl) and not research ‘the investing game’ is this:  The Fed states the U.S. market could fall 50% and could employ negative interest rates in the worst case scenario.   In this report, there is no mention of additional QE to prop up the equity markets.  MCS does not rule out any scenario; the Fed could try a quarterback sneak or a Hail Mary Pass should the stock market drop 50%.

So where does that leave MCS as far as entering another trade? The short answer the same as we have been reporting all year- in a great position.  Our portfolios have weathered the downturn this year with no losses and are ready to be deployed.  The following asset classes are still ripe for a play in the near term.  Oil has reversed course again and is back down under $30/barrel.  It is doubtful that oil will regain an upward trajectory with the huge oversupply in the world.  Oil could retest the lows and should the technical indicators allow, there could be a play.  Commodities are vicious animals and need to be managed accordingly; thus a play in this sector would be held for a shorter time period than our normal timeframe of a couple of months. The U.S. equity market is trying to stabilize, after falling 10-20% depending on which of the broad indexes one is looking at.   U.S. Indexes today broke through support levels once again. Should the retest of the lows of the S&P500 hold, a play on a strong bounce is in order.  The emerging market index is also down about 35% from the highs and 25% just this year.  Finally, the bond market is reacting to poor economic data, the news from Japan (negative rates), and the news from the Fed.  Yields are falling and the yield curve continues to flatten.  The yield curve went from a 202 basis point spread at the beginning of the year, to 153 basis points today- this is a shocking negative indicator for the economy.  As we have repeated many times, the bond play could be the highlight of our careers when it finally materializes.

Our CIO is delighted with the action in the market- the convergence of the economic, fundamental and technical factors over the past months is a welcome relief. At this point in time, the technical indicators for all of our investable asset classes need a little time to recover and repair themselves before a move is in order.  The market action is most encouraging.  More tomorrow.

One week ago, Japan stated they would not adopt a negative interest rate policy.  Last night according to Bloomberg, “in a surprise move, the Bank of Japan announced that it is adopting a negative interest rate strategy while maintaining the pace of its asset purchases.  The bank agreed to introduce a rate of minus 0.1 on certain excess holdings of cash, with the changes taking effect from Feb.16^th.  As expected, government bonds across the world have jumped in response to the decision, with Japanese yields falling to a new record low.  The yen is also tumbling.”   Part of the bounce today is that U.S. Markets are reacting to the news that our rates will most likely not increase again in March.  But if Japan can change its mind- so can the Fed.  Looking out longer term, this move by the BoJ will hurt the U.S. economy by strengthening the Dollar against the Yen and making our exports less competitive.

That moves us into economic news: U.S. Q4 GDP came in a 0.7%, making the 2015 yearly number thus far 1.8%.  (The final revision will come in March.)   GDP growth from 1947 to 2015 averaged 3.24%; healthy U.S. GDP on an annual basis is between 3.3-3.7%.  Consumer spending, which accounts for roughly two-thirds of GDP, is slowing.  Consumer demand was only 1.2% in the fourth quarter, when healthy numbers for consumer spending are between 2.2-2.3%.    A few positives from the GDP report: Spending on services added 0.9% which was the leading contributor to the GDP number; and spending on goods contributed 0.5% points.  Residential spending also contributed 0.3% points and government spending was slightly positive.  The factors that were negative are too long to list, but the two worst offenders were the business side companies facing foreign markets and net exports- the demand for U.S. goods was very weak.  Price data (inflation) is also not accelerating, coming in at 0.8% for the entire GDP price index.  Imports are a negative to GDP and they increased; albeit, imports are lower than they were a year ago.  To summarize, the main points of concern with the GDP print is the weakness in exports and business investment (capital expenditure).  Overall the US economy continues to limp along as it has for the last few years; nothing has changed except the stock market.  This is not an encouraging sign for 2016.  As such, the markets have voted on this fact by starting the year off with the worst January in history- even with this bounce today.  One could say that the Fed made a serious policy mistake by raising rates; and embarking on QE in the first place.  Should the Federal Reserve start QE again, that would also send a very negative signal to the marketplace.  One has to question the whole notion of why the Fed would raise rates in a slow economy when interest rates are used to cool an economy.

Today, out of the 500 companies in the S&P500, only four companies experienced new highs contrasted with five new stock lows.  On the NASDAQ (1000 companies), 8 new highs and 25 new lows were reported as of this morning.  When the individual stocks in an index make more new lows than new highs, one should be most cautious when holding an equity portfolio.

Normally functioning markets allow investors to make money and keep it.  Bounces are a normal occurrence in markets and should be expected.   When markets are not functioning properly; there is severe risk.  Markets are now reacting normally to the data; which is exactly the way it is supposed to work.  Initially the BoJ announcement and the poor GDP print were seen as supportive to U.S. Markets, since the likelihood of additional interest rate raises decreases if the U.S. economy continues at a sub-par level and the BoJ is moving to Negative Interest Rates in a state of total desperation.   The debt load of the world has increased since the last meltdown, including corporate debt.  Rate increases will stall the economy and make this ever burdensome debt load impossible for corporations to service.  U.S. Markets ended the day higher, but the month of January was brutal.  It is not surprising markets bounced today, since it is also the last day of the month, when many funds need to be fully invested and many short sellers cover.    We shall see what February will bring; meanwhile this technical chart from stockcharts.com provides an ugly glimpse of how bad the devastation has been.   The chart covers a six month timeframe.  For technical gurus the RSI is still is under 50, MACD is still negative and the 50DMA is under the 200 DMA- just for starters.  More on other asset classes next week-enjoy the weekend.