The INVESTMENT STRATEGY LETTER
Looking for a Top in the Stock Market/OR/Warning Signs

It was another day in the markets that saw the markets making new highs and yet traded in a very narrow trading range. Richard Arms, well-known stock market technician, joined my ranks today when he said the market looks like it’s going through a topping process. Art Cashin on CNBC said he agreed with him. I highly respect these people and are happy to see them join my minority view. However, I’m looking for a much larger drop and they are.

Let’s take a look at some market indicators. 1) Volatility increased with the 10% market drop which was followed by a 11% gain to new highs. Now, volatility has decreased to a narrow range. I would say, this is a bearish indicator. 2) Sentiment for the Bulls is becoming very euphoric  and close to its highest levels ever. On the other hand, Bearish sentiment is at a nine-year low. That Kool-Aid flavor of euphoria sure tastes good! But this sentiment is quite bearish for the market. 3) The market appears ‘overbought’ as it has stayed above the five day moving average level for a record 19 days. This is very unusual and indicates that the market is overbought. I do not yet, have the ability to show charts in this blog. But my old reliable STRATEGY INDEX indicates that the market is overbought. 4) There appears to be liquidity worries for high-yield bonds, which in previous blogs (October 11) I called these securities ‘junk’. 5) There seems to be interest rate uncertainty as there is full employment, low energy costs, and QE buying by the Fed has stopped. This is also a bearish factor. The five areas I mentioned above are known to professional traders as the FIVE RED FLAGS.

The subject of a November 11 blog was about investing locally. When I first entered the business in 1963, there were brokerage firms on every corner. I was working at one of them, called McCormick and Company. We made markets an local stocks that normally traded below three dollars a share, in what was called the pink sheets. These stocks are now banned from ‘solicited trading’ under the guise that the SEC and FINRA are protecting the public from ‘speculative securities’. McCormick and Co. also helped regional Midwest firms  go pubic. One of those firms was Kentucky Fried Chicken. Yes the Col. in 1963 was there, all dressed in white. There wasn’t a big demand for the stock, as people were unsure as to whether franchising would work.That was considered a  new concept then.My Dad bought 1000 shares and doubled his money. My Uncle bought 1000 shares and kept it until his death. It was his largest asset. Those times are gone and probably forever. I don’t believe the regulators understand what the ruined. In my opinion, they certainly are not serving the best interests of the public. They knowingly or unknowing represent only the Big Bucks. Hot deals now go to the professionals and hedge funds. A local small business is pretty much cut off from bank loans, unless they don’t need the money.  Brokerage firms don’t help local firms go public anymore because the local firms are all gone and the current brokerage firms are now global and owned by the banks or international conglomerates, as are the mutual funds. Also, most people don’t invest in stocks anymore. Most invest in no-load mutual funds controlled by the banks, through their well-trained investment planners.

However, in an attempt to encourage more training of smaller US stocks, the SEC is now initiating a pilot program which is meant to spur trades in about 30% of publicly traded US companies, called A TRADE AT RULE. Members of the investment community have said that this is really a stealth attempt to hurt brokers that run private trading systems, which compete with the likes of the New York Stock Exchange. The title of the article in Traders Magazine, has the headline BROKERS ATTACK SEC’S PLAN AS TROJAN HORSE DESIGNED TO HURT THEM. For those interested in the article, the link is below. Have a great weekend. The battle starts again Monday morning.

http://www.tradersmagazine.com/news/brokerage/brokers-attack-secs-plan-as-trojan-horse-designed-to-hurt-them-113102-1.html?zkPrintable=true

Carl M. Birkelbach 11/14/14

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