Red Dot Daily Chart Sell Signals in FB, NFLX, KO, & XOM Among Others

Just a quick note this evening, March 31st, the end of the first quarter.

Daily chart sell signals have been triggered by my computer trading system over the last two days in four key stocks (among others): NetFlix (NFLX), Facebook (FB) , Coca Cola (KO), and Exxon Mobil (XOM). Please see that attached charts.

While meaningful sell signals have yet to be triggered in any major stock indexes, my strong belief right now is that the extraordinary "counter trend" rally that began on February 11, 2016 is now over. Among the major averages, only the Russell 2000 Index was able to post an intra-day reaction high today, above yesterday's intra-day reaction highs.

In the weeks and months ahead, when all major U.S. stock market averages are sharply lower from today's closing levels, the financial press will refer to the stock market high this week as the "Yellen Top". Dovish monetary comments from Federal Reserve Chair Janet Yellen on Tuesday, March 29th, served as the catalyst for one last stretch higher this past week. But the music has stopped now and all the chairs are all taken! 

Bottom Line: A major downturn in U.S. stock prices appears imminent. Dovish comments from Fed officials not with standing, the perfect storm of bearish pressures is about to unfold: (1) Weak fundamentals in the form of lower corporate earnings and growing recessionary forces, (2) renewed downward pressure on commodity prices as global deflationary factors reassert themselves, and (3) the threat of Britain's exit from the EU turns into reality (Brexit!). Is that a Black Swan circling overhead?

Russell 2000 Index Daily Chart with 200-Day Moving Average Line

GAAP vs Non-GAAP Earnings? Should Investors Care?

The S&P 500 Index has rebounded 13.2% since the February 11th intra-day low of 1,810.10. Friday's close at 2,049.58 was the first day in positive territory for the new year 2016 (+0.28%) when compared to the final closing price for 2015. A recovery in commodity prices generally and in energy specifically has contributed to the better tone for equity prices in the U.S. and globally over the last 5 weeks. Added stimulus from central banks around the world, including the U.S. Federal Reserve, has also provided a boost for stocks.

Is the "great correction" of early 2016 now over and past? The S&P 500 and the Dow Jones Industrial Average are now "plus" on the year! If "Don't Fight the Fed!" is your rallying cry, then YES, the correction is over and you should be comfortable with an "overweight" position in U.S. stocks. However, if you are old and ugly like me, then you are probably sensing that something is not quite right and that maybe share prices are about to retreat again!

In the interest of full disclosure, I am now 50% short the S&P 500 in my managed accounts. My entire short position was established on Friday, March 18 and is in one single security, the SDS "double short" ETF. For those unfamiliar with this security, when the S&P 500 falls 1%, the SDS actually rises 2%, and if the S&P 500 advances 1%, then the SDS declines 2%.

If the quality of earnings matters anymore, here are some interesting charts and tidbits about GAAP vs Non-GAAP earnings per share for companies in the S&P 500 through 2015:

According to Factset, U.S. non-GAAP "pro forma" corporate earnings for S&P 500 companies are expected to decline -8.0%  for Q1 2016. If this estimate turns into reality, then it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. It will also mark the largest year-over-year decline in earnings since Q3 2009 (-15.7%). 

According to the chart above, at year-end 2015 the S&P 500 Index was trading at 21.2 times GAAP earnings for the trailing twelve months (TTM). If GAAP earnings are down 8% in 2016, which is a likely scenario in my view, then the S&P 500 is really trading now at 23.0 times forward full-year 2016 expected earnings (NOT the widely held view of a much more favorable 15 x forward earnings). If the S&P 500 Index should be trading at 15x forward earnings, does that mean this closely watched index is 53% overvalued? Interesting questions, for sure!

And the outlook for investors may actually be even worse immediately ahead because U.S. regulators are finally looking at this GAAP vs Non-GAAP reporting issue, and they may even take some "unfriendly" action here. Wouldn't that be something!

From a Wall Street Journal report on Wednesday, March 16, 2016 and reprinted on www.marketwatch.com:

U.S. securities regulators are looking at whether it is time to restrict companies’ use of financial metrics that deviate from official accounting standards, Securities and Exchange Commission Chairwoman Mary Jo White said Wednesday. New rules may be needed to “rein in” firms’ use of bookkeeping that doesn’t comply with the generally accepted accounting standards known as GAAP, White told an industry conference in Washington. “Your investor relations folks, your CFO, they love the non-GAAP measures because they tell a better story,” White told the conference sponsored by the U.S. Chamber of Commerce. “We have urged for some time that companies take a very hard look at what you are doing with your non-GAAP measures. “We have a lot of concern in that space,” she said. The use of non-GAAP measures is legal under U.S. securities rules, but companies can’t give those figures greater prominence than official accounting results. 

Bottom Line: U.S. stocks look vulnerable to another major correction on the very near term horizon!

NY Composite Index Daily Chart with 200-Day Moving Average Line

Buyer Of Last Resort - When Will The Fed Tighten Next?

The Federal Reserve's Open Market Committee meets this coming Tuesday and Wednesday, March 15th and March 16th. Almost everyone on Wall Street expects a "quiet" Fed in terms of monetary policy. In this case, "quiet" means no rate hike for now and unchanged rhetoric from the Fed suggesting several 1/4-point rate hikes before year-end 2016. Of course, no one believed the Fed in January when it said there would be several more rate hikes between now and year-end, and no one believes them now. The Street expects only one or two 1/4-point rate hikes between now and year-end 2016. Most expect only one, and some pundits actually think there will be NONE!

My view here is that the Federal Reserve will not shock the financial markets with a 1/4-point rate hike this week (although the probability is NOT zero), but instead the Fed will change the tone of its post-meeting communique to suggest aggressively that a 1/4-point rate hike will come much sooner than Wall Street currently anticipates, perhaps as early as April 27th following the next FOMC meeting in late April.

This week's "unfriendly" rhetoric from the Fed and also in upcoming speeches from Federal Reserve officials WILL SHOCK the financial markets.

In the chart below, the NY Composite Index has rebounded an incredible 13.0% since February 11, 2016, but it is still down 10.2% from its all-time record high as posted on May 21, 2015. The current rebound is likely to find formidable resistance at its 50% retracement point (right here at Friday's closing price), a 10-month downtrend line, and its 162-day moving average line.

The price of Gold is now 5 trading days off its recent rally high, which suggests there may be short-term top in this closely watched asset that is sometimes very sensitive to market liquidity. As mentioned in my last column, I sense the early stages of a "liquidity squeeze" which will soon send U.S. stocks tumbling.

NY Composite Index Daily Chart with Trend Lines and 162-Day Moving Average Line

Great Storm Rising: The Next Major Liquidity Squeeze!

Since the intra-day lows of February 11th, with the exception of T-bond prices, almost everything else is up sharply! You name it: Gold, silver, copper, crude oil, and stock prices are all higher over the last 16 trading days. 

Mining stocks have been the star performers this year so far, with many individual mining shares posting gains of 100% or more since January 19th. The S&P 500 Index is up 10.5% since February 11th, while the Russell 2000 Index and the Nasdaq Composite are up 13.0% and 12.0% respectively.

The "tone change" from February 11th is nothing short of incredible. Many Wall Street pundits are already declaring an end to the "great correction" that chopped 15% off the S&P 500 Index from the intra-day high on November 3, 2015 to the intra-day low on February 11th, 2016. And maybe this newfound bullishness is justified? Who am I to argue with the herd?

However, an interesting sell signal was triggered by my computer trading system in most of the precious metals stocks at Friday's close, March 4th. Please see the Philadelphia Gold/Silver Mining Index (symbol XAU) daily chart below. Few would argue that this entire group has been on fire lately with most stocks doubling in a few short weeks, and maybe these hot stocks deserve a much needed rest to consolidate recent gains. Unfortunately for bulls, I suspect that there is more here than meets the eye. I think the Federal Reserve is about to make a huge mistake. While most market watchers now believe the Fed won't raise interest rates more than once over the rest of 2016, and that the next rate hike is unlikely until at least June (if then), I believe that rhetoric from Federal Reserve officials is about to become very unfriendly and that a 1/4-point rate hike could come as early as the upcoming March FOMC meeting. Wow, wouldn't that be a shocker!

Philadelphia Gold/Silver Stock Index (XAU)  Daily Chart with Computer-generated Buy & Sell Signals