Kirkpatrick's Monthly Overview

www.charleskirkpatrick.com • [email protected] • © 2016 Kirkpatrick & Company. Inc. All Rights Reserved • April 29, 2016 •

April 29, 2016

KirKpatricK’s Monthly overviewThe monthly publication of The Market Strategist

Table of Contents

The Bond Market ..............................................2

The Stock Market .............................................2

Commodities.....................................................4

Foreign Stock Markets .....................................6

The Dollar .........................................................7

Long-term technicaL modeL

i’m now back from my two months in the Florida Keys and getting used to the 40-de-gree temperatures in Maine. The indolence developed from warm weather, sunshine, and humidity has long worn off, leaving me with a new spark of enthusiasm for analyzing the mar-kets. May is the time of year for market tops on a seasonal basis, and my strong suspicion is that this May will be no different than the historic norm of “buy in the Fall and sell in the Spring.” Of course, evidence must be stronger than a stock-market, bumper-sticker slogan. And it is. indeed, it is always remarkable to me how at market tops, first, that they take so long, and second, that they escape the notice of so many investors, even when the fundamentals are screaming warnings. i read in the WSJ today about the corpo-rate buy-backs and takeovers financed by low interest rates, a process now called “financial engineering.” The theory is that borrowed money at low rates can finance expansion or buy-backs that increase the reported earnings per share without producing any more product. Of course, the eventual end comes when the interest rate rises or the stock market declines and debt becomes a costly burden without substantial collateral or production to work out of it. The oil companies have just experienced this financial contraction from an assumed intractable price going sour. The last time a

similar financial fad occurred it supposed that rather than is-suing stock that pays nondeductible dividends, a corporation should borrow in the bond market to finance new business (takeovers) because the interest paid on the obligation is deductible. The ultimate absurdity was that theoretically an unlimited amount of debt could be assumed without risk, thus confusing financial risk with default risk. A fad is an interesting phenomenon. its antithesis is a trend, which is desirable in investing and trading, whereas a fad is not. A fad invariably begins with a sharp rise and ends in a devastating fall. If the current “financial engineer-ing” is a fad, it will inevitably end like all others, and will thus likely be the cause and result of the stock market’s demise. like all investment prognostications, however, the proof is in the market reaction. Currently, the evidence in the market is that a large decline is overdue. All we need is the confirmation from the market. It will begin slowly and end quickly. Charlie


THE BOND MARKET in the U.S. Treasury Bond interest rate (TYX) the small rally last month that had the initial appearance of a pennant turned out not to act clas-sically. A pennant pattern is usually about halfway through a directional move and the second leg be-comes evident once the breakout occurs. in this case, the breakout occurred, but the price did not continue downward to the midpoint objective. Generally this is positive action and appears similar to a double bot-tom pattern. Backing this interpretation is the rise in the buying pressure (blue line) in the DMi to a point where a positive crossover could occur soon. if a positive crossover setup does occur, a rise of 0.4% above the crossover bar high will be the buy signal.

Conclusion: The position is short long-term interest rates and long bonds.

THE STOcK MARKETLong-term, major market, Stock market cycle

(@ 40 months)

Last cycle low: november 2012next cycle Low: September 2016

This past week, the filtered, dual, moving-average crossover system gave a buy signal. Before you get excited, however, you must understand that for a true change of heart and investment in an antici-pated bull market, i need two of the three long-term models to turn positive. The other two are the trend of the ratio of long-term bond yields to the S&p and the DMi/ADX model, neither of which can possibly signal a buy for several months, at least. Thus, the current signal in the moving average system is likely an aberration and will be corrected soon. Notice in the chart that the sell moving average is close to a sell signal. in short, you should still be in cash for the long-term because the prospects for the stock market are less than favorable at present.

Conclusion: The major market cycle is headed down-

ward with a potential objective around 10,000 DJiA sometime next year. If the broadening pattern is le-gitimate (shown in the monthly bar chart on the front page), the objective is around 6,000 DJiA.


Intermediate-term Stock Market cycle(@ 64 weeks)

last Cycle low: May 2015 (peak)Next Cycle Low: July 2016

The intermediate-term cycle in the stock market shows little sign of reversing upward from the dmi/adX model. despite the buy signal in the filtered, dual, moving-average crossover system this past week, the selling pressure in the dmi is still far above the buying pressure and unlikely to cross at any time soon. one observation that could be considered

Stock Performance 2014 2015 4/29/2016

Kirkpatrick Bargain List - 4.5% - 6.3% - 9.3%

S&P 500 +13.4% - 1.3% + 1.1%

Value Line geometric + 4.1% - 10.7% + 3.3%

Kirkpatrick Bargain Portfolio - 4.5% + 3.5% + 0.0%

STOcK SElEcTION

bullish and bolster those opinions that favor a new up-ward leg to new highs is the ultra-high level of Kimm. Kimm is a measure of the number of nYSe stocks in short-term upward trends, and historically when it ar-rives above 1,000, it has signaled a strong overbought and subsequent short-term decline. That is the situ-ation today where the Kimm is at 1,601. however, rarely the Kimm reaches ultra-highs when the market is in the initial stage of a sustained advance such as in January 2013 when the Kimm was 1,983 and the dJia ran from 14,000 to 18,000 by 2015. at that time the high Kimm occurred on the upward breakout from a 6-months consolidation, and the dmi showed a posi-tive buying pressure over selling pressure. That simi-larity thus fails for the present instance, and it instead appears that the Kimm is telling us that the market is severely overbought and likely to reverse downward soon.

The Bargain list is underper-forming due to its volatility, but following the market timing strategy, portfolios should not hold stocks and are thus flat for the year, with considerably less anguish.


cOMMODITIESAgricultural Prices

Finally, the buy signal in June has taken hold of agricultural prices just in the past several weeks. The upward break of the downward sloping trend line was the confirmation signal, and it was accompanied by another positive crossover in the DMi and rise in the ADX.

Conclusion: The trend is now upward, and the position is long.

Industrial Metals The short-sale signal during the week of December 14, 2014 was finally closed during the week of February 5 due to a peak in the ADX. No buy signal has occurred yet, but the buying pressure is rapidly approaching the selling pressure in the DMi, giving some hope for a buy signal in the future.

Conclusion: The trend is down, and the position is in cash.


Commodities (continued)

Gold The gold price, after a short inter-lude, is now at a relatively new high for the past six months. The consolidation during the period February through most of April is likely the midpoint of the current rise, suggesting that a reasonable target is around 1380.

Conclusion: The trend is upward, and the position is long

.

crude Oil The signals in the crude oil mar-ket have been irregular. The long position signaled with buy in the week ending March 18 was closed the following week. Since then the price has broken above its down-ward trend line but has not been confirmed by a positive crossover in the DMi, and its ADX is declining, suggesting a lack of aggression in the rally. The current cash position is best until a sell signal occurs.

Conclusion: The trend is downward and the position is in cash.


FOREIGN STOcK MARKETS

Foreign Stock Markets

Foreign stock markets have rallied along with the U.S. market but with less enthusiasm. For this reason last month i suggested ignoring the buy signal that oc-curred then, and today the price is at the same level without having progressed at all. At that time i suggested that a new high at least above the November peak would be necessary for a confident long position.

Conclusion: The trend is downward, and the position is in cash.

Japanese Stock Market

Bucking the trend of most other for-eign stock market, the Japanese stock market is still headed downward. The ADX peaked a week ago, but the price has to rise above the ADX reversal bar high. This has yet to occur, and the position is thus still short.

Conclusion: The trend is down, and the position is short.


U. S. Dollar Exchange Rate

The U.S. Dollar Exchange Rate Index (DXY) is in a downward trend and has broken enough prior lows to have been confirmed as an intermediate-term decline. The selling pressure is rising, and the ADX is also showing increased enthusiasm for the downward trend.

Conclusion: The trend is down, and the position is short.

The DOllAr

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