Sunday, March 29, 2015

Weekly Market Summary

Summary: The largely trend-less environment of the past four months continues. Despite the fall this week, US equities are not oversold and sentiment is still heady. This suggests that a rally early in the week would likely fail. While April is one of the best months of the year, the first half of the month has been weak. If this pattern continues this year, there would likely be a more attractive entry point mid-month.

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US indices gave back all of their prior week's gains. For the week, SPX, DJIA and RUT fell 2% and NDX lost 3%.

Europe was also down more than 2% and emerging markets lost 1.5%.

Let's review the recent market action.

In December and January, SPX lost 4-5% on four different occasions. In between, it gained the same amount. Each potential break out and breakdown was reversed.

Then in February, SPX rose three weeks in a row, gaining more than 7%, during which it never once touched its rising 13-ema. Instead of consolidating and then adding to those gains, it fell the next three weeks in a row.

But there was no follow through to the downside either. A week ago, SPX reversed and gained nearly 3%. But instead of adding to those gains, it promptly fell 4 days in a row this week.

After all of this, SPX is exactly flat from December 1st nearly four months ago. There is, in short, almost trend to speak of.

Our view a week ago was that a true test of market character had arrived. Aside from RUT, none of the other US indices were overbought. If there was upside ahead, the indices would show strength by becoming and remaining overbought. Instead, the markets fell hard. This would seem to indicate that the ranged market environment of the past four months will continue. You can read a similar assessment by Brett Steenbarger here.

So, what happens next?

First of all, recognize that this is a market that reverses hard just when it looks like it might break out higher and breakdown lower. There were no visible extremes at the end of last week, but they could present themselves within a day or two.

Of the US indices, RUT looks the healthiest; it was the only index to make a higher high. Its 50-dma is rising and its RSI is oversold, a set up for a bounce each time since early December (green lines). But the big 2% loss on Wednesday suggests it could easily drop to its 50-dma (1216) which is now at the top of the 1 year trading range (yellow). That should be solid support.

Wednesday, March 25, 2015

Interview With FX Street

We had the great pleasure of discussing the Fed, the economy, equities, currencies and Nick Leeson with Dale Pinkert today. Click the link here to listen.

Tuesday, March 24, 2015

Can Money Flows Push Equity Prices Much Higher?

The S&P rose 30% in 2013. In 2014, it was up just over 10%. Since the start of the "best six months of the year for equities" in November (nearly 5 months ago), the index is up 4%.

Any number of factors could account for the slowing rate of appreciation in stocks: valuations and financial growth, not to mention the base effect of larger numbers.  What impact might investor positioning have on price appreciation?

The story seems to be this: the strong price gains in 2013 and into 2014 coincided with households and investment funds increasing their asset allocation to equities. This period also coincided with money from corporate buybacks having a demonstrably large impact on share prices.

But funds and households now have a high level of exposure to equities; more to the point, their allocation is no longer rising. And buybacks are no longer outperforming the indices. It takes an increase in money flows to push equity prices higher, yet it's not clear from where the next huge source of additional demand for equities will come.

Let's start with a quick review of the latest Federal Reserve flow of funds data on households' current asset allocation.

US household's largest holding is in equities; these comprise about 31% of their total financial assets.  Current levels are above the 29% high at end of the last bull market in mid-2007.  It reached an all-time high of 36% at the end of the 1990s bull market.

Saturday, March 21, 2015

Weekly Market Summary

Summary: strong price and breadth suggest the uptrend from the March low has further to go. A dip early in the week is a high probability buy set up. But gains from here are likely to be short lived; nibble traders may want to sell into strong gains on the expectation of weakness over the next month.

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At the end of last week, major support levels for US equity indices had held, despite three weeks of selling. Several indicators of breadth had bottomed. March OpX and the FOMC were expected to be catalysts, and they were (post). For the week, SPX gained 2.7%, RUT gained 2.8% and NDX led, gaining 3.3%.

Foreign equities were equally strong. Europe and Japan gained nearly 2% and emerging markets gained a massive 4.7%.

It was an important week of gains. RUT and NDX both closed at new bull market highs (weekly closing basis). SPX's gain eclipsed the losses from the two prior weeks and was within 1 point of eclipsing the prior three weeks of loses. These are not signs of weakness.

Only RUT is visibly overbought on a daily basis. It has been up 7 of the last 8 days and closed Friday above its upper Bollinger. Note its RSI (top panel). A good test will be this coming week: a strong market will consolidate, giving up little and remain overbought. The early March highs (1240 area) is first support. The trend is up.

Tuesday, March 17, 2015

Fund Managers' Current Asset Allocation - March

Every month, we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal.

To this end, fund managers became very bullish in July, September, November and December, and stocks have subsequently sold off each time. Contrariwise, there were some relative bearish extremes reached in August and October to set up new rallies. We did a recap of this pattern in December (post).

Summary: In March, fund managers increased their global allocation to equities to the third highest since the bull market began. Under similar circumstances in the past, long equities has had a poor risk/reward profile over the next month. Most of the increase was to Eurozone equities, which now has the highest allocation in the survey's history. US equities fell significantly out of favor, to a 7 year low, a set up in which they should outperperform on a relative basis. EEM also fell further out of favor.

Let's review the highlights.

Fund managers decreased their cash levels slightly to 4.6%. While this is relatively high on a historical basis, note that cash levels haven't been much below 4.5% since 2013. We consider current levels to be neutral.