Kirkpatrick's Monthly Overview

Kirkpatrick’s Monthly Overview The monthly publication of The Market Strategist march 18, 2016

Table of Contents

Long-term technical model

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

I’m now down in the Florida Keys, one of my favorite spots. The weather is windy and the seas rough, but it’s still better than Maine at this time of year. I won a 22ft Contender with a 300hp outboard and trailer in a raffle from the Recreational Fishing Alliance (cost= $25), and had to tow it down here from New Jersey.

The resulting detour was quite pleasant, and I may return home the same way. Going down the NJ Garden State Parkway in the winter has fewer trucks, and the crossing of Delaware Bay by ferry and navigating the Chesapeake Bay Bridge is an adventure away from the normal traffic of the East coast.

Meanwhile, the markets seem to be dawdling, waiting for something to happen.

While the long-term evidence is still negative, the rally has generated hope the worst has been seen. There is a remote chance that it is true, but the preponderance of evidence is still negative. The earlier intermediate-term and longterm sell signals have little chance of reversing for many months. Even over the intermediateterm sentiment is excessively optimistic and momentum overbought. The net is that portfolios should be out of the stock market completely, and investors not consider new ideas seriously. The market is too dangerous.

While bear markets are never the same as others, they always take longer to work out than expected at their beginnings. The fall being a traditional time for market lows suggests that

this estimate has merit.

Other markets seem to directionless as well. Those that have been in sustained trends, especially downward, show signs of reversing for the intermediate-term but not necessarily the longer-term. The reversals so far have only reached levels that would be normal pullback percentages in shorter-term markets. In many cases, markets haven’t even approached those normal pullback levels.

Gold even looks tired after an enthusiastic rally; crude oil is still trending upward but momentum is dying, and some commodities such as agriculturals and industrial metals have hardly rallied at all. The break down in the US Dollar exchange rate may help these other commodity areas, but there is still a question as to just how weak the dollar suddenly is. There is no question that the relationship between the long-term interest rate and the stock market is still on the edge, but momentum suggests that the decline in long-term rates is at or near its end. If so, it will be detrimental to the stock market. So, as I said before, prepare to take the summer off, sell your stocks, and wait for more substantial positive evidence.

Charlie

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THE BOND MARKET

Not much has changed in the bond market.

The upward sloping head-and-shoulders pattern has not been negated, nor had the trend reversed from the sell signal in August. The small rally in the past month or so appears to be a pennant. Pennants usually break in the direction preceding the formation of the pennant, in this case downward. The price objective from the head-and-shoulders remains in the vicinity of 21.84 in TYX.

Conclusion: The position is short long-term interest 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 (see chart on page 1), 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

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from 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 no sign of reversing upward from the DMI/ADX model. Indeed, the selling pressure is still far above the buying pressure and unlikely to cross at any time soon, and the price is close to an overhead downward trend line through previous peaks. One observation that could be considered bullish and

bolster those opinions that favor a new upward leg to new highs is the ultra-high level of KIMM. KIMM is a measure of the number of NYSE stocks in shortterm upward trends, and historically when it arrives above 1,000, it has signaled a strong overbought and subsequent short-term decline. That is the situation today where the KIMM is at 1,603. 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 positive buying pressure over selling pressure. That similarity 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.

stock selection Stock Performance

2014

2015

3/18/2016

Kirkpatrick Bargain List

- 4.5%

- 6.3%

- 9.1%

S&P 500

+13.4%

- 1.3%

- 0.6%

Value Line Geometric

+ 4.1%

- 10.7%

- 0.2%

Kirkpatrick Bargain Portfolio

- 4.5%

+ 3.5%

+ 0.0%

The Bargain List is underperforming due to its volatility, but following the market timing strategy, portfolios should not hold stocks and are thus flat for the year and just slightly ahead of the averages.

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Commodities Agricultural Prices

Agricultural prices have difficulty in fighting a long-term downward trend. A buy signal occurred on the week ending June 26, 2015, and aside from an immediate run up the following two weeks, it has generally been in a downward trend since.

Now we see an upward break of a downward trend line that began on that earlier rally peak, and could be encouraging for those still long since June. It has been confirmed by a positive crossover in the DMI and a rising ADX. Conclusion: The trend is downward, 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 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.

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Commodities (continued)

Gold

The gold price ADX formed a peak that led to a cover of the short-position on the week ending January 29. Two week later the DMI crossed and exceeded its buy requirement distance above the crossover bar high and gave a buy signal. This remains in effect.

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

.

Crude Oil

In the crude oil market several important events have occurred within the past few week in the DMI/ADX model. First the short position from November 27, 2015 was covered on the week ending March 11, 2016, and the following week a buy signal was generated. This signal maybe a little premature because it has occurred without breaking the long-term downward trend line. As a practical matter then, I would not buy crude oil until that crossover occurs.

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

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Foreign Stock Markets Foreign Stock Markets

Foreign stock markets are echoing the US market to some degree in that they move generally up and down together but not necessarily at the same pace. Foreign stock markets are also contending with a downward trend line through the tops of the previous rally peaks, and their collective DMI is in equilibrium, meaning it could go either way. The recent buy signal is weak until is shows a break above the prior high, and thus a long position should be held back until that event occurs.

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

Japanese Stock Market

Bucking the trend of most other foreign stock market, the Japanese stock market is still headed downward. There is some hope in that the ADX may be peaking, in which case it would be signaling a price bottom, but the buying pressure and selling pressure are so widely apart that a buy signal soon is unlikely. The ADX signal would suggest closing the short position.

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

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The Dollar U. S. Dollar Exchange Rate

The US dollar exchange rate received a short-sell signal last week when the DMI crossed negatively and the stock price broke below the previous low. Some have attributed the decline in commodity prices to the strength in the dollar, but if you look at the chart, you will see that the dollar really hasn’t anything since the run up over a year ago. Now that it is look as if it will decline, the logic should be that commodity prices will rise, and indeed some appear to have bottomed. Rather than worry about the “why” however, I prefer to look at the price action for clues, and presently it looks like the dollar has run its course for a while and will correct.

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

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