Friday, April 18, 2014

Weekly Market Summary

The set-up coming into this past week was clean: SPX and NDX exhibited breadth extremes from which they usually bounce and April Opex is a seasonally strong week (post).

In the event, SPX rose nearly 3%. In the process it exhibited a familiar pattern: overnight gaps in the past 4 days accounted 60% of the week's gain. Cash hours, when liquidity is greatest, was not where the meat of the gains took place. That was even more true for RUT and NDX which only posted cash hour gains during two of the four days.

After a sharp drop and a strong bounce, where does that leave the markets? Let's run through each of our market indicators.

Trend
Long-story short: trend is a mess. There is still a 1-year uptrend but there is also a 6-week downtrend.

Start with NDX. The positives are that it is still in a larger uptrend channel and its MACD and 13-ema are setting up for bullish cross on further strength. The negatives are that it was the only one of the US indices to trade below its February low, it hasn't made any net progress in four months, its under its 50-dma and there is a potential head and shoulders top being created.


Thursday, April 17, 2014

Fund Managers' Current Asset Allocation - April

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 $700b in assets.

What has been particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013 and so far in 2014). This is longer than any period during the 2003-07 bull market (yellow shading). In September, exposure to global equities was the second highest since the survey began in 2001. In the past, after a massive overexposure, a washout low would be marked by an equity weighting under +10%.

In April, despite an 8% fall in Nasdaq and small caps, global equity allocations actually increased to +45% overweight.



In March, equity exposure appeared to fall substantially, but this was misleading. Allocations to Europe, the US and EMs were virtually unchanged. The exception was Japan, where fund managers halved their substantial exposure to a 12-month low. This accounted for all of the month over month decline in equity allocations in March. Japanese allocations fell further in April.

Saturday, April 12, 2014

Weekly Market Summary

Last week ended with a failed break-out higher in SPY and with RUT and NDX plumbing below their 50-dma. This was our conclusion: "Often, having failed to break out higher, an index will test the bottom of the range (183), also the area of its 50-dma" (post).

In the event, SPY tested its 50-dma, bounced for two days and then closed lower. RUT and NDX are now off more than 7% from their highs in March. Both of those indices are now at interesting junctures. 

RUT is now right on its 200-dma for the first time since November 2012. Look back earlier and you'll see an initial bounce on the 200-dma two different time before heading lower. That's a likely set up here as well.



Saturday, April 5, 2014

Weekly Market Summary

This is the market you are trading right now:

First, since March 20 (the day after the FOMC meeting), SPY has gapped up 10 out of 11 days. The index is actually down during this time but the stunning fact is that the sum of the overnight gaps account for a gain of $6.80. In comparison, the cash hours of the market account for a loss of $7.40. The overnight gaps have given sellers room to unload their shares during cash hours when liquidity is superior without tanking the market.

Second, with the SPX at a new high this week, the 500 individual stocks in the index are down an average of 7% from their 52-week highs (from Bespoke). Just 22% of the index was at a 20-day high and only 10% at a 1-year high on the day of the index's all time high.

Third, year to date, SPX is up 1.8% and NDX is negative. But treasuries are up 7%. Equity traders celebrating the new highs this week appear to be missing the simple fact they are underperforming a bond portfolio by more than 500 bp.


Thursday, April 3, 2014

Pivot Points, Tick and Vwap in Day Trading

This blog is about inter-day swing trading. To shake things up, this post will instead be about day trading. A version of this post appeared on the excellent See-It-Market site (here).

Experienced swing traders are familiar with support and resistance lines drawn from prior lows and highs on a chart. Price is attracted to these levels; when it closes higher than a prior resistance level, that level becomes support and price normally looks to the next higher resistance level as a target.

As an example, Monday March 10th's low was on support level from the top on February 28.  That level was previously resistance. If that level is broken in subsequent trading, it becomes resistance once again.



There is a simple way to use this same principle in day trading. Simple is essential, because timeframes are short and decisions have to be made quickly. There are a lot of ways to day trade; this post is about just one of those.

We can do everything with just three tools: pivot points, tick and vwap. We will briefly explain each of these below.

Friday, March 28, 2014

Weekly Market Summary

Expectations were for weakness post-Opex and during the last week of the month (post). In the event, RUT dropped more than 3%, NDX more than 2% and SPX more than 0.5% this week.

Equities made no progress in March. SPX was flat while RUT and NDX lost 3% or more. In comparison, treasuries, despite contrary comments by the Fed Chair, rose 1%. Given the torrid rise of equities in February, to say that March's lackluster performance was out of the consensus is a substantial understatement.

Entering 2014, analysts and pundits were expecting a repeat of 2013 (post). Things haven't turned out the way they expected.

Investors have been massively underweight both commodities (far right, red) and fixed income (purple), both of which have massively outperformed; and they are overweight equities, especially technology (third bar) and small caps (fourth bar), which have declined.



Saturday, March 22, 2014

Weekly Market Summary

The recent story is this: two weeks ago, the US indices pushed to new highs, but the vicious bounce over the prior month had reached the point of exhaustion and a retrace was therefore due (post).

The following week, the indices declined, most ending last Friday right on their January pivot highs. There was an attractive set-up for a bounce into the current week (post). In the event, indices rose over 1%.

Which brings us to today. On Friday, SPX made a new all-time high in the morning. The other US indices were not far behind. Those gains were lost in the afternoon. Still, the trend in the US remains mostly positive.


Wednesday, March 19, 2014

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 $700b in assets.

What has been particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013 and so far in 2014). This is longer than any period during the 2003-07 bull market (yellow shading). In September, exposure to global equities was the second highest since the survey began in 2001.


On the surface, equity exposure fell substantially in March, but this is misleading. Allocations to Europe, the US and EMs were virtually unchanged. The exception is Japan, where fund managers halved their substantial exposure to a 12-month low (Japan has recently been the second most overweighted market). This accounts for all of the month over month decline in equity allocations in March. 

Friday, March 14, 2014

Weekly Market Summary

Last week, trend remained bullish but there were a number of signs that the torrid pace over the prior month had reached the point of exhaustion. These studies indicated a month, or longer, of sideways/negative activity was likely to follow (read).

Thus, it was not a big surprise that US indices fell this week. For the most part, they are holding above the January highs, the Dow being the exception.

But ex-US markets have again become a mess, characterized by sideways choppiness over the past 6 months or longer. The Dax ended the week at a 4-month low; the FTSE and Nikkei are even worse.



Tuesday, March 11, 2014

How @Twitter Traded the Bull Market

On the 5 year anniversary of the generational low, we present a reminder of how @twitter traders navigated the bull market. #timestamp


Saturday, March 8, 2014

Weekly Market Summary

Short Term Outlook

The Russian situation caused SPY to drop hard on Monday and test its rising 13-ema for the first time in nearly a month. As discussed last week, this was a reliable buy signal (here and here).

The test held and SPX, NDX and RUT went on and to make new bull market highs this week. The laggard, DJIA, is now getting very close to also making a new bull market high.


Ex-US markets are gaining strength. The Euro Top 350 made a new high this week. EEM, the global laggard, is now above its 50-dma for the first time in 2014. All of this is positive.

Wednesday, March 5, 2014

Assessing Market Health Through Breadth

Breadth measures the number (or percentage) of stocks trending higher or lower. The conventional wisdom is that expanding breadth is bullish. Is this true? The short answer is no.

And what are breadth measures saying about the health of today's market? The short answer is to be cautious.

Let's start with NYSE advance-decline issues (NYAD) which measures advancing issues minus declining issues. It recently made new highs. The chart below looks at prior new highs in NYAD versus drops in NYSE of over 10%.



Friday, February 28, 2014

Weekly Market Summary

Last week's singular strength in RUT carried through into this week. That index plus SPX and NDX all moved to new highs. The sole laggard is DJIA. The Euro 350 confirms with its new high; the All World Ex-US is at the highs of October and January. Overall, a very positive view.



Saturday, February 22, 2014

Weekly Market Summary

The Short Story

The short story is this: 3 of the 4 US indices, plus Europe and EEM all closed more or less where they ended last week. The main exception was RUT.

For SPY, the line in the sand is still the 50-dma near 181. Unless that is breached, Scenario 2 is in play. For more details on what that means, please read The Two Scenarios Post and The Follow Up to the Two Scenarios Post.

Below 181 puts SPY back in the prior consolidation area (yellow) and the two attempts to break higher look to have failed. If 182 holds on a pull-back, you have the potential for a large inverted Head and Shoulders pattern to take the index higher.



Tuesday, February 18, 2014

Fund Managers' Current Asset Allocation - February

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 $700b in assets.

Overall, while fund managers remain very bullish on risk, their enthusiasm moderated somewhat in February. In September, exposure to global equities was the second highest since the survey began in 2001. It dropped this month to levels near those in May before SPX fell to its June low; it is still nowhere near the lows seen in 2010, 2011 or 2012. What is particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013). This is longer than any period during the 2003-07 bull market.


Friday, February 14, 2014

Weekly Market Summary

Last week ended with a 6 point rip higher off the Wednesday low in SPY. This week ended with a further 5 point rip. In one week, SPY gained more than it did during 10 weeks in October to December.

As a result, SPX and NDX are above their important December levels, as are the Euro 350 and DAX. DJIA and RUT are lagging with other global markets, but they are not far off. All of these markets have bullish MACD crosses (lower panel). Most also have lower lows (marked in red) in addition to their (for the time being) lower highs.



Thursday, February 13, 2014

Putting The Recent Pull-Back In Context

SPX reached an intraday peak on January 15 and a closing low 12 trading days (18 calendar days) later. The total drawdown (close to close) was 5.7%.

How does this pull-back compare to history?

If this is the largest drawdown suffered in 2014, it will be one of the smallest of the past 34 years. 85% of the time, the largest annual drawdowns are more than 6%. And even for a small pullback, half a month is short for the bottom to be found.

Let's review the data.

Since 1980, the median annual drawdown is 10.5%. Not surprisingly, then, about 50% of years have a drawdown of 5-10%. Every year, that's what investors should expect to endure during the next 12-months.

As you can see from the chart, there have only been five other years where the largest drawdown of the year was 6% or less. 85% of the time, it's been greater. In other words, what we had was a very minor pull back (chart from JP Morgan; see notes at bottom of page).


Saturday, February 8, 2014

Weekly Market Summary

The low from the prior week did not look durable: many of the telltale signs of a solid bottom were not yet present. Several of those triggered on Monday and Wednesday; a good enough pitch to swing at (set upset up, targets and CBI).

Specifically, SPX landed on the trend line from March; created a positive divergence on both the 60' and daily timeframes; completed a second major distribution day; completed a second Vix spike; and had a Trin spike over 3. All of these signals were on our watch list and were detailed over the past two weeks (post and post). 

So, was that the end of the correction? There are three possible outcomes:
  1. SPY fails to make a new high (likely fails to clear 181) before retesting or exceeding the recent low. This is the most likely outcome based past behavior (2006, 2007, 2010, 2012) and some key indicators. It would be a buyable dip.
  2. SPY makes a marginal new high but is stuck in a sideways channel for many months before retesting lows later in the year (2005 and 2011). This is less likely, but still quite possible. It would be a sellable rally.
  3. It's still a 2013-style market, the correction is entirely over, SPY will now make new highs above 1950. This is what Wall Street expects and it is the least likely outcome. A full post on why that's unlikely is here
We think, net, that a second dip is the durable low and therefore buyable, and that a rally higher now is sellable. Details follow below.

Saturday, February 1, 2014

Weekly Market Summary

Last week, we wrote: (1) SPY 176.5 would be key support (it was); (2) that the 50-dma would likely be back-tested (it wasn't); (3) that most of the telltale signs of a bottom were not in (and still aren't) and (4) that a larger 7-10% correction might be in store (still true). The full post is here.

The short story is this: SPY lost its 13-ema on January 23 at 182.8 (close) and hasn't been regained since. That's trend.

Here's the longer story.

The larger trend weakened further this week. In the US, the DJIA is now right on support from December; the other 3 US indices have held above. But ex-US indices all deteriorated further.



Sunday, January 26, 2014

Weekly Market Summary

After opening Tuesday within $0.20 of its all-time high, SPY closed down 3% for the week, eviscerating the prior 10 weeks of gains (back to November 14).

So what's next? Here are our conclusions, with the details following below:

  1. Most importantly, as bad as the fall this week was, there's no lower low yet, in either the indices or sectors. Underestimating the strength of the uptrend was a mistake for most in 2013. The December lows (176.5 in SPY) are key to the uptrend. 
  2. The indices ended the week 'oversold'. Typically, a back test of at least the 50-dma follows after the first break below in more than a month. That seems likely. A second break below the 50-dma obviously signals more downside ahead. 
  3. A majority of the telltale signs of a durable bottom are not yet present. This suggests that any immediate bounce is sellable. 
  4. There is reason to suspect that a larger 7-10% correction is in store, to at least 165 to 171. That would match the corrections in April and September 2012 and May 2013. If that is the case, SPY will not see a new high for at least 3 months and probably more than 6 months.

Tuesday, January 21, 2014

Fund Managers' Current Asset Allocation - January

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 positioned in various asset classes. These managers oversee a combined $700b in assets.

Overall, fund managers remain very bullish on risk. In September, exposure to global equities was the second highest since the survey began in 2001; it is only marginally lower now and it has increased every month since October. What is particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013). This is longer than any period during the 2003-07 bull market.


Friday, January 17, 2014

Weekly Market Summary

SPY finished the week almost exactly where it opened. That has been the pattern over the past four weeks: the average open/close range has been just 0.8.

The week finished with all four US indices above their respective 20-d and 50-d averages. At the sector level, 2/3s are above their 20-d and 50-d, a slight deterioration from last week. The trend is up, but it's flattening. Respect the trend.



Friday, January 10, 2014

Weekly Market Summary

When we closed down The Fat Pitch for the holidays, SPY was at 182.4. Today, three full weeks later, it's just over a dollar higher.  If you've been away, you didn't miss much.

All the US indices and most sectors are above both their short term (20-d) and longer term (50-d) averages. The same is true for ex-US indices with the exception of those in emerging markets. A break of the 13-ema will be our first clue that the trend up is at risk. A break of the late-November pivots (colored boxes) is a more critical watch out.



Saturday, January 4, 2014

Popular Memes That Are Partially or Completely BS

As the US markets head higher, contrary evidence is being explained away in one fashion or another. This is part of a larger issue: popular memes persist despite evidence that correlations don't (or do) exist.

Not all stories are neat; the current bull market is no exception. Evidence that support different conclusions are always present. Better to acknowledge those differences in order to better understand how solid the foundation for the current market really is.

Below are just a few memes that have recently been popular that are partially or completely BS.


The late-1990s are a useful benchmark. 




Friday, December 27, 2013

Weekly Market Summary

A short holiday update.

Trend: The trend in US indices remains strong, following through on the strength that began last week. None of the indices or any of the 9 SPX sectors closed below even their 5-dma. This will be the first warning that weakness is afoot.



Friday, December 20, 2013

Weekly Market Summary

US markets end the week back in an uptrend, led, interestingly, by SPX and the Dow, with NDX and RUT lagging. A majority of sectors regained their rising 20-dma (short term) and 50-dma (long term) trend.



SPX is back above a rising 13-ema (yellow circles). With this week's new high, it fulfills the pattern we described two weeks ago - that 8 week streaks of higher closes do not end an uptrend, a higher closing high is high odds (post).

Tuesday, December 17, 2013

A Breadth Warning From NYSI and NYMO

2013 is the year breadth divergences appeared to be irrelevant. There have been seven major distribution days (90% down volume) and only one major accumulation day. The summation index declined from January until May without much impact on equities. And since May, the percentage of SPX stocks trading over their 200-dma has been in decline.

Today comes a new warning from the McClellan oscillators, NYSI and NYMO. NYMO measures the momentum in breadth and NYSI sums those values daily. A string of negative NYMO readings therefore causes NYSI to go negative. For more details, read here.

Aside from a few days, NYMO has been negative since October. As a result, Summation went negative at today's close.

Since 2000, NYSI (bottom panel) has been negative 20 separate times (yellow shading). Every time it has done so, SPX has not formed a durable bottom until NYMO (middle panel) has capitulated, meaning it closes at minus 75 or lower. The lowest close in NYMO so far has been minus 53. Today, it closed at minus 18.



Monday, December 16, 2013

Fund Managers' Current Asset Allocation - December

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 positioned in various asset classes. These managers oversee a combined $700b in assets.

Overall, fund managers remain very bullish on risk. In September, exposure to global equities was the second highest since the survey began in 2001; it is only marginally lower now. What is particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013). This is longer than any period during the 2003-07 bull market.

Saturday, December 14, 2013

Weekly Market Summary

SPX has now gone 82 weeks without a 3-week losing streak. This is the second longest in the past 40 years. It's a relevant milestone, as SPX has now closed lower two weeks in a row. Will the streak end this coming week?

This week, SPY crossed above and then back below it's 13-ema (circles). This has been a pattern in 2013 (discussed last week) and it played out again this week. It came in conjunction with a second spike in the Vix Wednesday. The short term trend in SPY is down until the slope of the 13-ema reverses.



Friday, December 13, 2013

Is Wall Street Overly Bullish on 2014?

According to Business Insider, Wall Street consensus expects the SPX to rise another 10% in 2014, to 1950 (the mean as well as the median estimate). Read the article here.

Here are their YE 2014 forecasts (EPS in parentheses):


Barron's ran a similar survey this weekend. The consensus among ten strategists was a rise to SPX 1980 (+12%). See their picks here.

Is this realistic? The short answer is probably not.

Some background first.


Secular Bull Markets

In the last 115 years, there have been three 'secular' bull markets. Secular bull markets are generational in length. The most recent ran 18 years, from 1982 until the 2000 tech bubble burst. The post-war bull market ran 17 years. The major lows were in 1915, 1942 and 1974.



Many believe that 2009 was also a generational low. It fits the pattern. If this is the case, there is a long secular bull market ahead. These have gained over 500%, so there is likely a lot of gains ahead.



Friday, December 6, 2013

Weekly Market Summary

After a 5 day sell off, SPX closed higher Friday, nearly engulfing the entire week to date. It closed the week with a very small loss.

SPX had closed higher the prior 8 weeks in a row, the second longest streak in the past 10 years. The only longer one was in 2004 (9 weeks).

The main upshot is that long winning streaks like these do not mark market peaks. There is a high probability of a higher high on a weekly closing basis ahead. Ryan Detrick posted the SPX results for the weeks ahead (here).

The only caveat is this: the 2004 streak was also the prelude to the weak 2004 market year, when the indices took almost a year-long break, trading sideways and down before the uptrend resumed. More on this theme below.


Monday, December 2, 2013

A Volatility Set Up For Trading SPX Into Year End

Volatility as measured by Vix spiked higher today for the first time in two months. There is a useful trade set up that is therefore worth noting.

One of the least interesting but most useful indicators in 2013 has been volatility.

Throughout 2013, Vix has been telling investors to stay long. When Vix is under 20, average monthly returns in SPX are 1.5% and returns are positive 77% of the time. In comparison, when Vix is 25-30, average monthly returns in SPX fall to just 0.2% and returns are positive only 52% of the time. The higher the Vix, the worse the returns. Details are here (post).

There were two prior periods like today when Vix was consistently below 20. Both lasted 4 years and are notable for having infrequent and shallow (5%) corrections.  Coincidentally, the prior periods were 1993-1997 and 2003-2007. Is this a 10 year cycle starting with years ending in '3'? Details are here (post).

A more frequently useful way to use Vix is to trade long equities when a volatility spike fades. Specifically, the set up is note when Vix has closed above its upper Bollinger Band and then to go long SPX after Vix has closed back below its Bollinger Band in the coming days.

We are noting this because today Vix closed above its upper Bollinger Band for the first time in almost two months.

Below are examples of this set up from 2012: the top panel is SPX, the middle panel is Vix and the bottom panel tracks closes above and below the upper Bollinger Band. The vertical green lines are signals to go long.



Tuesday, November 26, 2013

Every Zig Has a Zag

With SPX approaching 1800, we suggested a reaction of 4-10% was probable, allowing for an overshoot to 1820-30. This was the historical precedent at prior round numbers and it was moreover supported by other market data (post here).

Further supporting evidence is in the latest Weekly Market Summary (post here).

This post looks at the length and extent of the current rally relative to others over the past 20 years, a period which includes the late 1990's tech bubble, i.e., the strongest rally ever seen in the market.

From the November 2012 low a year ago, SPX has risen 34%. A long, strong rally, but one which is not unprecedented.

The chart below uses 1-year log-scale boxes with a 34% rise in price. In the past 20 years, there have been six other comparable rallies, four of which were in the late 1990s.



We have not included rallies off of a significant low (1994, 2003, 2009) as the start of a bull market is expected to be long and powerful.

Saturday, November 23, 2013

Weekly Market Summary

Two themes continue to define the market.

First, that underestimating this bull has been the biggest mistake in 2013.

And second, that what has mattered has been trend and volatility and what has not mattered has been everything else (sentiment, valuation, breadth, seasonality).

This continues to be the case through this week, with all four indices making new highs.



We are proponents of using the 13-ema to judge trend in SPX. Two consecutive closes below is typically sufficient to make this moving average decline and provide a heads-up that a larger move to the 50-dma might be in store. The 13-ema for SPX has been rising since mid-October. This Wednesday's low nearly touched it. The trend higher remains intact for now.



Friday, November 15, 2013

Weekly Market Summary

3 of the 4 US indices made new highs this week, as did 8 of the 9 SPX sectors. Both trend and breadth are strong.

SPX closed higher for a 6th week in a row. It has closed higher on the 7th week just twice in the past 10 years (including January of this year). This kind of strength has, in the past, led to higher highs in SPX further out. The trading odds are here (via @WildcatTrader).

Coming up next for SPX is a breach of the 1800 level. In the past, centennial milestones (1400, 1500, etc) have led to anywhere from a 4% to a more than 10% reaction. We detailed this yesterday here.




Thursday, November 14, 2013

Your Risk/Reward in SPX is More Than 2:1 Negative

Its very clear that US equities are in a strong uptrend. Not only are the major indices hitting new highs, but a majority of the sectors are, too (thus confirming breadth). This is not, therefore, a "this is the top" post.

SPX is approaching 1800. Over the past three years, each round number milestone (1400, 1500, etc) has been met with a negative reaction of at least 4% and at times more than 10%. On an overshoot to 1820-30, SPX has upside of 2% versus more than 4% downside, a negative profile.


Wednesday, November 13, 2013

Fund Managers' Current Asset Allocation - November

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 positioned in various asset classes. These managers oversee a combined $700b in assets.

There was very little change since October. Overall, fund managers remain very bullish on risk. In September, exposure to global equities was the second highest since the survey began in 2001; it is only marginally lower now. What is particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013). This is longer than any period between 2003-07.


Monday, November 11, 2013

Time to Tank Up With Oil?

Oil has a seasonal tendency to peak in September and trough in early December. The period for positive seasonality (green shading) is now close at hand (data from Stock Trader's Almanac).



Sentiment follows the same pattern. It's now at a low where crude oil prices have tended to move higher (data from Sentimentrader).


Thursday, November 7, 2013

Placing the Current Bull Market In Perspective

The current cyclical bull market is now second largest and third longest of the last 80 years. The current gain is twice the average for a cyclical bull market, and its length is almost 2 1/2 times the average.

The bull market of the 1990s (first on the list) is clearly in a completely different league; this is a theme throughout this post (data from Ned Davis).



As the data above shows, the rate of gain in the current bull market is among the highest ever. Since the end of 2012, the slope of ascent has become even steeper. This is similar to mid-2006 to mid-2007 (arrows).



Saturday, November 2, 2013

Weekly Market Summary

There's a short story and a long story.

The short story:

Trend: All the US indices made new uptrend highs this week. A wide group of cyclicals lead domestically (chart). Ex-US indices, especially Europe, are supportive (chart).

Breadth: Breadth is confirming trend. The number of stocks trading higher on the NYSE reached a new high in October. And more of the SPX is trading above its 50-dma than at any time since May.

Seasonality: Equities are entering what is traditionally its strongest 3-month stretch of the year. And when the summer has been strong (like this year), the winter has been up an even higher percentage of the time. For further discussion, read our recent post.

Volatility: Volatility is low, a set-up for higher equity prices.

Macro: Worldwide PMI data for October was good. The Chicago PMI increased by the most in 30 years. This would seem to indicate rebound in economic growth.

In summary: Taken together, this looks like a lay-up for higher prices over the next several months. For RUT, if the pattern holds (match the colors of the arrows), support should be within the next 2% (chart).



Thursday, October 31, 2013

The Best Six Months Start Now

The end of the "worst 6 months" in the stock market is upon us. Tomorrow is November 1, when seasonality turns positive.

We last wrote about seasonality in April. Our bottom-line was this: May to October is less bad than you think (post). Median returns since 1970 on SPX are 8% during winter (November to April) and 4% during summer (May to October). "You might sell in May and buy back higher in November."

This summer was exceptionally strong: since May 1, SPX is up almost 11%. This puts it in the top 17% over the past > 40 years.

Below are the SPX returns by season since 1970. Summers are red and winters are blue. The arrows show returns in the summer of over 10%.



What to expect in the month's ahead? Normally, a very good return.

Friday, October 18, 2013

Weekly Market Summary

Trend, Breadth, Volatility and Seasonality Are All Positives

10 days ago, the market's experienced a momentum kick-off. The indices, which have been traveling in 5-month channels, hit their bottom rail.  Put/call spiked to an extreme, indicating fear. This was followed by a plummet in volatility and the year's first 90% up volume day (chart). That combination of events has been a set-up for a new leg higher in the market in the past, and it appears to have been one this time as well (post).

Since then, SPX has been up 7 of the last 8 trading days.  On Friday, it closed back at the top of its channel.



How violent has this move been? Consider that at the low, SPX, NDX, RUT and 7 of 9 SPX sectors closed below their lower Bollinger band. Today, all of those closed above their upper Bollinger band for a second day in a row. That's an extreme swing.

What is particularly remarkable is the breadth of this rally. Today, the cumulative breadth of the NYSE exceeded its May high for the first time. Technicians regard this as confirmation of the uptrend (i.e., price and breadth agreement), as leadership is broad (chart). This is a positive, long-term development.

With the exception of utilities, all the SPX sectors are at or above prior highs (chart). The same is true for 3 of the 4 indices (Dow being the exception). Ex-US markets, especially Europe, are also breaking higher and confirming the US market (chart). All of this is also very positive for the long term.

So, to be clear, trend and breadth both appear strong. Add in low volatility and the start of the strongest 3-months of the stock calendar (November-January; also, 4Q up 83% of time after a strong September, here), and investors have a feel-good story.  Josh Brown summed it up well here.

Against this, we would continue to strongly caution against excessive bullish sentiment. Like the fund managers surveyed by BAML, a poll by Barron's finds bulls outnumbering bears by more than 8:1 (here).  In both surveys, fund managers are long growth/beta.

Wednesday, October 16, 2013

Fund Manager's Current Asset Allocation - October


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 positioned in various asset classes. These managers oversee a combined $700b in assets.

Overall, fund managers remain very bullish on risk (or, as BAML puts it, "steadfastly optimistic, undisturbed by events in DC"). In September, exposure to global equities was the second highest since the survey began in 2001, while exposure to fixed income was at the second lowest ever.


Friday, October 11, 2013

Weekly Market Summary

Coming into this week, SPX and the Dow were near the bottom of their long term (read: strong) channels, with a majority of sectors and ex-US indices holding up well and breadth signaling the market was oversold (post).  "Assume they (the channels) hold and these indices move higher."

By Wednesday's close, SPX, NDX, RUT and 7 of 9 SPX sectors were below their lower Bollinger. This is extreme, indicating that investors were selling indiscriminately (post). Moreover, put/call, which has been indicating complacency, jumped to a rare level of panic (first chart). And Vix spiked higher and made a double close below its upper Bollinger within a few days, a reliable bounce pattern in the past (post; second chart). Combined with the touch of the channel bottoms, these were reasons to expect the indices to change direction and move higher (post).





Thursday's action was remarkable. For the first time in 2013, breadth volume was more than 90% positive (post). In the past, this has often been a momentum kick off for the next leg higher in the market. Friday followed through.



The correction in SPX from the September top was 5%. That matches the correction in August and is shy of the 8% drop in June.

So, is that it for the correction? It might be.