Kirkpatrick's Monthly Overview

Kirkpatrick’s Monthly Overview The monthly publication of The Market Strategist february 11, 2016

Long-term technical model

Table of Contents The Bond Market...............................................2 The Stock Market..............................................2 Commodities.....................................................4 Foreign Stock Markets......................................6 The Dollar..........................................................7

The long-term evidence in the stock market is still negative. By looking at the chart to the right, you can see that the time from the DMI/ADX model sell signal in 2008 that occurred on the failed rally in April-May could be equated with the recent failed rally in November 2015. In the present instance, the sell signal occurred early compared to then, but the configuration is similar. The high month then was May 2008, and the final low was in March 2009, a time difference of 10 months. While bear markets are never the same as others, they always take longer to work out than expected at their beginnings. 10 months from November 2015 is September 2016. The fall being a traditional time for market lows suggests that this estimate has merit.

Of course, we will never invest on such a basis and especially on a supposition supported by no actual positive signals, but it does give us a rough estimate of how long we may have to wait to put money to work again. It appears that we should take the summer of 2016 off for a change, and sit on the beach or on our boat while the politicians wrestle with each other until this fall. You can’t fight a declining market regardless of how bored you become, and to attempt to find stocks that will rise against the market tide, is statistically impossible.

It does appear that some of the weak commodity markets have reached a bottom.

While no positive signals have yet occurred to

suggest purchasing oil or gold, their price charts show some developing strength to suggest that short positions in them should be covered. In most cases, the damage done over the past several months will required some base-building, at least, and certainly more tests of earlier lows. This does not indicate that the decline is necessarily over either because it is just as plausible that the earlier price declines begin again.

Being a temporary resting point, though, with little evidence either way, it is a good time to pull out money from existing short positions and go play until more definitive evidence of a trend beginning appears. As I say, because so much damage has occurred, the odds of a rapid upward recovery is slight until more consolidation has occurred and thus the prospects of big gains from any advance right away are unlikely while the prospects of continued decline are still present. Again, another reason to become liquid and go to the beach, or if you live in Maine, as I do, go south.

Charlie

www.charleskirkpatrick.com • kirkco@capecod.net • © 2016 Kirkpatrick & Company. Inc. All Rights Reserved • February 11, 2016 • Page 1

THE BOND MARKET

The Treasury Bond Interest Rate was re optimized this month with an updated system model and shows a different picture than before. This should be the last update for a while. The chart itself has shown a rising trend line since January 2015 with a breakdown this past January. The DMI/ADX system model gave a sell signal in August with no immediate confirmation until the trend line break down last month. The picture is that of a sloped head-andshoulders pattern with the neckline upward trending, and as measured from the head peak to that trend line projected from when the trend line was broken recently gives us a projection of 21.84 in the TYX.

Conclusion: The position is now short rates and long bonds.

The Stock Market Long-term, Major Market, Stock Market Cycle (@ 40 months) Last Cycle low: November 2012 Next Cycle Low: September 2016

The monthly bar chart of the DJIA on the front page of this letter shows the sell signal in the long-term stock market in July-August. It occurred coincident with the sell signal in the weekly DMI/ ADX system chart as well. More recently, the monthly, dual, filtered, moving-average, crossover system signaled the end of the bull market (November 2015).

Ideally, if a portfolio is to follow a market timing strategy with respect to stock holdings, all stocks should have been sold at these times or at least their sell stops should have been tightened to reduce any further risk. By now, most should have been sold.

From a market-timing perspective we now wait for a buy signal of a similar magnitude. With the DMI diverging, that buy signal is unlikely to occur until this summer at the earliest and more likely next fall.

Conclusion: The major market cycle is now headed downward with a potential objective around 10,000 DJIA sometime next year. If the broadening pattern is legitimate (shown in the monthly bar chart on the from page), the objective is around 6,000 DJIA.

www.charleskirkpatrick.com • kirkco@capecod.net • © 2016 Kirkpatrick & Company. Inc. All Rights Reserved • February 11, 2016 • Page 2

Intermediate-term Stock Market Cycle (@ 64 weeks) Last Cycle low: May 2015 (peak) Next Cycle Low: July 2016

The 64-week cycle inverted in May by reaching a top within a week of the expected cycle low. This is not unusual but does screw up cycle analysis until the inversion is proven with a later low. The next

cycle low is due in July, and that may be the final one because the four-year cycle has long been expected to reach a low in 2016 around the summer or fall. If the low turns out to not be the four-year variety, then we will have to wait until a half-cycle low in September or as late as 2017. 2017 being a little unrealistic, my bet is that the current decline will be over this year but at much lower levels and in either July or September.

stock selection

In 2015, the majority of indexes failed to produce profits. The only positive in the portfolio performance here is in the Bargain Portfolio that includes market timing. So far, in 2016, the same general relationship between market averages and the Bargain Portfolio exist with the portfolio in cash and flat while the other averages are succumbing to the market decline.

Stock Performance

2014

2015

2/6/2016

Kirkpatrick Bargain List

- 4.5%

- 6.3%

- 14.9%

S&P 500

+13.4%

- 1.3%

- 8.8%

Value Line Geometric

+ 4.1%

- 10.7%

- 11.6%

Kirkpatrick Bargain Portfolio

- 4.5%

+ 3.5%

+ 0.0%

www.charleskirkpatrick.com • kirkco@capecod.net • © 2016 Kirkpatrick & Company. Inc. All Rights Reserved • February 11, 2016 • Page 3

Commodities Agricultural Prices

Agricultural prices received a sell signal during the week of October 30 but nothing developed in the price to indicate a directional entry. The price remained flat and formed a descending triangle. Then, during the week of January 8, the price broke down from the triangle pattern, and a DMI/ADX sell signal occurred. At the same time and confirming the sell, the ADX began to turn upward, indicating an increase in downward acceleration.

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

Industrial Metals

The sell signal in industrial metals occurred in December 2014 when the DMI turned negative. Since then the trend has been steadily downward until now. The DMI/ADX model gave a buy-to-cover signal last week on the small rally in metals prices.

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

www.charleskirkpatrick.com • kirkco@capecod.net • © 2016 Kirkpatrick & Company. Inc. All Rights Reserved • February 11, 2016 • Page 4

Commodities (continued)

Gold

It is likely too early to get excited about an upward reversal in the gold price, but the price action recently has penetrated through old highs, and the sell signal in October has been negated by a protective stop in the DMI/ADX model. The DMI itself is getting close to a positive crossover as well.

The unfortunate aspect of gold prices is that shorter-term trends tend to be erratic, and we have to wait for strong confirmation of a trend reversal before committing to a new trend. The current rise in the ADX may be bolstering the possibility of a buy signal soon because it shows increased acceleration on the upside as it rises with the shortterm price trend.

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

Crude Oil

The decline in oil prices appears to have ended, at least for a while. Whether this will spark a rally in the stock market is conjectural, but at least the downward trend is being contained. The DMI/ADX model showed a peak in the ADX which is the signal to cover all shorts in oil. It has not signaled a buy, however. That will come when and if the DMI turns positive and confirms a positive crossover with an upward break of the crossover bar. For now we can be pleased to have profited from oil’s malady.

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

www.charleskirkpatrick.com • kirkco@capecod.net • © 2016 Kirkpatrick & Company. Inc. All Rights Reserved • February 11, 2016 • Page 5

Foreign Stock Markets Foreign Stock Markets

The large swings in foreign stock markets have made trading hazardous throughout the recent decline. Things began to fall apart when the index suddenly declined in mid-December and closed the long position for a loss. The sell signal in mid-January is still valid even though it was threatened by the recent rally, and selling pressure in the DMI is still rising. Like many other markets, the ADX is high and could easily peak, giving us a buy-to-cover signal, but until that occurs, the basic configuration of the charts is still negative.

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

Japanese Stock Market

The DMI/ADX model in the Japanese stock market gave a whipsaw swing that could easily have caused many short positions to be covered. Indeed, the upward swing may have been caused by others covering their shorts, but now the downward trend has reestablished itself. One observation is that when the price breaks above its forward line during a decline, the position could safely be covered until either it breaks back down or a reversal signal occurs.

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

www.charleskirkpatrick.com • kirkco@capecod.net • © 2016 Kirkpatrick & Company. Inc. All Rights Reserved • February 11, 2016 • Page 6

The Dollar U. S. Dollar Exchange Rate

The DMI/ADX has not done well since the sell signal last May. The number of whipsaw has been large, and while many of the losses have been small, the overall model is not working well. You will notice that the CAGR is only 2.61%, and while this beats T-bills, it is not impressive, especially with the maximum adverse excursion (MAE), and a MAR ratio well below 1.00.

Just as I say this, however, the chart is finally looking weak with the recent breakdown.

A previous low has been broken, and the DMI had a negative crossover and is only waiting for the price confirmation below the crossover bar low. This may be building a decent downward trend that when signaled could reverse the poor performance of the model.

Conclusion: The trend is flat, and the position is in cash awaiting a definitive directional breakout.

www.charleskirkpatrick.com • kirkco@capecod.net • © 2016 Kirkpatrick & Company. Inc. All Rights Reserved • February 11, 2016 • Page 7