Friday, July 25, 2014

Weekly Market Summary

Barring a 50 point drop next week, SPX will close July higher. This will the 6th month in a row that SPX has closed up.

Investors are used to higher US indices. In the past 27 months, SPX has had only 4 down months. That's an 85% win rate.

It's easy to believe, then, that this is unexceptional. Yet it is. It's not the streak itself that's so remarkable, it's the context in which it has been achieved.

Below is SPX since 1980, with every win streak of 5 months or greater marked. There have been 16 during this period.


Wednesday, July 23, 2014

Fund Managers' Current Asset Allocation - July

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.

An extreme in bullish equity sentiment has been reached.  In July, fund manager equity weightings increased to +61% overweight. This is the highest since February 2011 and the second highest since the survey began in 2001.

In the past, when near 60% overweight, the risk/reward for equities has been unfavorable over the next several months (yellow shading). In 2011, SPX rose 2% versus falling 6% over the next 6 months. This culminated in a 20% fall in August 2011. The other prior examples of excessive bullish sentiment also resulted in poor risk/reward over the following months (chart from Short Side of Long).



As we have continually noted, what has been remarkable is how long managers have been highly overweight equities (virtually since the start of 2013). This is longer than any period during the 2003-07 bull market (yellow shading). In the past, after massive overexposure like that seen in the past 18 months, a washout low would be marked by an equity weighting under +15% (green circles). By that measure, equities are highly over owned.

Friday, July 18, 2014

Weekly Market Summary

SPY (daily) remains firmly in its up channel. That's the big trend to keep firmly in mind.

That said, it's 13-ema inflected downward yesterday for the first time since mid May (bottom panel). We have noted this many times in the past: after the first inflection, there's often a bounce and then a lower low, or at least a period of sideways trading (yellow shading). Often, the 50-dma either catches up to price or price declines towards the 50-dma. In other woods, the shorter term trend is weakening.


Thursday, July 3, 2014

Weekly Market Summary

There are things to be concerned about and things to not be concerned about.

With an improvement in macro data in the past quarter, there is a concern that high interest rates are both imminent and a threat to equities. This should not be a concern.

The 10-year yield is currently 2.65%. A rise in yields from a low level like this has not, in the past, been a headwind for equity appreciation.  The chart below shows a positive correlation between rising rates from a low level and equity appreciation (top left corner; chart from JPM).


July Macro Update: Employment and Housing Brighten

In May we started a recurring monthly review of all the main economic data (prior posts are here). Our key message has so far been that (a) growth is positive but modest, in the range of 3-4% (nominal), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.

This post updates the story with the latest data from the past month. The overall message remains largely the same, with caveats: employment and housing are recent bright spots. Sustained improvement in these measures bear a close watch in the months ahead.

We'll focus on four categories: labor market, inflation, end-demand and housing.


Employment and Wages
The June non-farm payroll (288,000 new employees) was at the upper of a 10-year range. This follows prints of 84,000 in December and 217,000 in May. Moving between extremes like these is nothing new: it has been a pattern during every bull market. Since 2004, every NFP print near or over 300,000 has been followed by one near or under 100,000 (circles).



Friday, June 27, 2014

Weekly Market Summary

The second quarter ends Monday. Over the past three months, equities underperformed bonds by 180bp. Utilities and energy were the equity sector leaders. Defensive sectors mostly beat cyclicals.



This follows the pattern from the first quarter. Thus, over the first half of 2014, equities have underperformed by bonds by a massive 560bp. Utilities have outperformed SPX by nearly 3 times. Cyclicals have lagged.


Monday, June 23, 2014

Fund Managers' Current Asset Allocation - June

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.

In June, fund manager equity weightings increased in every region in the world. Exposure is now +48% overweight, the highest since January.



What has been remarkable is how long managers have been highly overweight equities (virtually since the start of 2013). This is longer than any period during the 2003-07 bull market (yellow shading). In the past, after massive overexposure like that seen in the past 18 months, a washout low would be marked by an equity weighting under +15% (green circles). By that measure, equities are still over owned.

Saturday, June 7, 2014

Weekly Market Summary

Trend, breadth and volatility are the primary tailwinds to the rally.

SPX and DJIA have both risen 10 out of the last 12 days. SPX has made nine all-time highs (ATH) in the past 11 days. DJIA, NDX, the Euro 350, and the All World Ex-US index are all at bull market highs. EEM is at an 18-month high.

Meanwhile, lagging breadth has been repaired. 88% of SPX companies are above their 50-dma, the most since May 2013. Among the nine SPX sectors, seven are at bull market highs.


Friday, June 6, 2014

June Macro Update: Still Moderate Growth

Last month we reviewed all the main economic data (post). Our key message was that (a) growth is positive but modest, in the range of 3-4% (nominal), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.

This post updates the story with the latest data from the past month. The overall message remains unchanged.

We'll focus on four categories: labor market, inflation, end-demand and housing.


Employment and Wages
The May non-farm payroll (217,000 new employees) was in the middle of a 10 year range. This follows prints of 84,000 in December and 282,000 in April. Moving between extremes like these has been a pattern during every bull market. Since 2004, every NFP print near or over 300,000 has been followed by one near or under 100,000 (circles).


Monday, June 2, 2014

Historically, A Decline In Earnings Caused P/Es to Spike Higher Than They Are Today

In a recent post, we looked at factors, including valuation, that will drive SPX returns over the next 12 months (post).

Since the late 1800s, SPX trailing 12 month (TTM) P/Es have been a median of 14.5x. In comparison, current "as reported" P/Es are 19x through 1Q14 (source).

19x is quite high. Between April 2005 and September 2007 - the heart of the prior bull market - P/Es never exceeded that level.

Yet, it's generally assumed that P/Es go higher than 19x (into the 20s) during bull markets. A look at the chart below seems to confirm this.


June 2014: What Will Drive SPX Higher in the Next 12 Months?

Last September we asked what fundamental factors could drive SPX higher in the year ahead (post). We considered three variables: sales growth, margins and valuation. Our conclusions were the following:
  • Sales growth had been about 2% since 2011 but with better overseas growth could rise to 4% in 2014. 
  • Margins were 9.5%, at 70 year highs, and were unlikely to expand further. Labor and interest costs were likely to become headwinds. 
  • Valuations were average at 15.6x and an unlikely source of substantial upside potential.

Since then, SPX has risen about 15%. What has been the source of this growth?  The short answer is valuation.
  • 70% of the gain is due to multiple expansion, which increased to 17.2x. Without this expansion, SPX would be near 1730 instead of 1910
  • Sales accounted for only 2% growth (or 10% of the gain). 
  • Margins expanded slightly, from 9.5% to 9.7%, enough to add 3% to growth (or 20% of the gain).

The question now facing investors is what will drive the market higher from here. The short answer is sales:
  • Sales are likely pace index appreciation. The consensus of 3-5% sales growth is reasonable based on recent data.
  • Margins have already flattened. Further margin expansion seems unlikely. 
  • Valuation is now well above average. Even on generous assumptions, the market is above 'fair value' of 1900 for year end 2014 already. 

Let's take each variable in turn.


Sales growth
Sales growth continues to be the bright spot for fundamentals. Unfortunately, as we discussed in September, it has the lowest leverage on future returns of the three variables. Margins and valuations both have much higher leverage.

Trailing 12-month sales growth was 2.3% in 3Q13; that has moved up to 2.8% in 1Q14. The consensus is expecting 3.4% for FY14 and 4.3% for FY14. 3-5% growth is reasonable and also fits with recent macro data (post). Current growth is, it should be stressed, much lower than during the prior bull market and the forecast is for an acceleration during the 6th year of an expansion, which is unusual.


Friday, May 30, 2014

Weekly Market Summary

The month of May ended with SPX up 2%. Treasuries once again outperformed, as did emerging markets. But the biggest winner was the Nasdaq. NDX closed at its highest level since 2000.



The lack of breadth has been a widely cited concern. New all-time highs have been met with only about 10% of SPX companies making even 52-week highs. In one respect, however, breadth is healthy: in May, every sector except utilities was higher, many by nearly an equal amount to SPX (2%).



Next week, SPX will surpass the 1995-96 record for number of consecutive days in which the index has traded above its 200-dma. These streaks normally last less than 300 days; the current one is already much longer, at 385 days (click for a list from Chad Gassaway).

It's fair to say that long streaks like these normally take place either at the beginning (1982, 1992, 2003) or end (1980, 1987, 2007) of a bull market.  This makes sense: bull markets are born in gloom and die in euphoria. 1996 and (so far) 2014 are exceptions, coming in the middle of a bull market.

Technically, the 2014 and 1996 periods are similar, a topic we covered recently (post).  Both followed years where SPX rose about 40%. And both started the year with a 3-month period of sideways trading. Should SPX continue to move higher in June, they will share yet another similarity as that is how 1996 unfolded as well.


Friday, May 23, 2014

Weekly Market Summary

Perhaps the dominant theme currently running across all markets is the fall in volatility. This week, for example, Jim Bianco noted that bond, currency and stock volatility are all at lows only seen once in the last 25 years: 2007.


Thursday, May 22, 2014

Volatility Is Now At Multi-Year Lows

One indicator that has remained consistently positive in our weekly summary table is volatility (Vix). Volatility has remained below 20 since the start of 2013, with the exception of about 5 days. This correlates with strong equity returns.


Friday, May 16, 2014

Weekly Market Summary

The big question facing investors is whether the 10% correction in RUT and NDX will spill over into the large cap indices, SPX and DJIA. 

So far, of course, large caps have not only held up, but made new all-time highs as recently as this week. SPY may only be up 1.5% so far in 2014, but it's still in a rising channel. Below 184 is a break of both this channel as well as critical support over the past 5 months.


Thursday, May 15, 2014

Up 75% In 31 Months Without A 10% Drawdown

According to Ned Davis Research:
SPX falls by 10% or more about once every 16 months. It has been 31 months since the last 10% pullback, in September 2011.
So is SPX due for a 10% pullback?


Duration
The dashed line in the chart below shows gains and losses in the SPX of greater that 10% since 1980. The current uninterrupted advance from September 2011 is highlighted in yellow to the far right.


Tuesday, May 13, 2014

Fund Managers' Current Asset Allocation - May

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 since the start of 2013). 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.

That has started to change over the past 3 months. Exposure is now +37% overweight, unchanged from March but substantially lower than at the start of the year.


Friday, May 9, 2014

Macro Review: Positive But Moderate Growth

There are two very different story lines in the market.

One is that the economy is on the threshold of a 1980's-style boom, driven by latent demand and rising wages and employment. For proponents, last Friday's NFP data, which clocked in at the highest level since January 2012, is exhibit 1. And exhibit 2 is surging equity prices.

The other story line is that the economy is teetering on the precipice. Housing demand is plummeting and gas/food inflation is eating into disposable income. For proponents, last week's GDP data, showing 1Q14 growth surprisingly weak at just 0.2%, is exhibit A. And exhibit B is falling treasury yields.

Most of the discrepancy of opinion in these story lines can be traced to volatility in month to month data. NFP is the best example: it has varied from 84,000 to 288,000 in just the past 4 months. Investors with a strong bias or a short memory ignore the underlying trend, which is positive but modest growth.

This post will look at the main economic data, using a list of priority releases from Calculated Risk (here). It's a selective, not comprehensive, review.

There are three key messages:
  1. Macro data has been sending a consistent message that growth is positive but modest, in the range of 3-4% (nominal), with a bias to the higher end of the range. 
  2. Current growth is lower than in prior periods of economic expansion. A return to 1980s or 1990s style growth does not appear to be in the cards, so expectations about equity appreciation like in those periods should be tempered. The consensus expects earnings growth of 10% in 2014 and 2015.
  3. Monthly, and even quarterly, data has been oscillating around this trend. Focus on the annual pace of growth; it provides a cleaner perspective on growth than individual 'prints.'

Why look at macro data
First, why should investors care about macro data at all? Macro growth correlates with corporate performance: better top line growth, all else being equal, translates into better earnings (chart from Yardeni).


Thursday, May 8, 2014

Risk Indices Don't Consistently Lead, or Lag, Before Corrections

The conventional wisdom is that "risk indices" lead. As long as RUT and NDX are making new intermediate-term highs, the market is considered healthy.

We should, therefore, expect them to peak before the large cap indices, SPX and DJIA. If large caps decline but RUT and NDX continue to climb, "risk is on" and the divergence is expected to resolve higher.

Is the conventional wisdom correct? Do RUT and NDX tend to peak before SPX and DJIA?

The short answer is no. The slightly longer answer is that there is absolutely no correlation between market peaks and index leadership: sometimes large caps peak first, sometimes they peak last. Even more telling, sometimes SPX and RUT will peak together and DJIA and NDX follow.

The first chart looks at greater than 20% declines over the past 25 years. The numbers indicate which index peaked first, second, third or fourth.

DJIA peaked first in 2000, SPX peaked last and the risk indices were in-between.

In 2007, RUT peaked first, NDX was last and the large cap indices were in-between.


Wednesday, May 7, 2014

Small Caps Close Below Its 200-dma

On Tuesday, RUT closed below its 200-dma for the first time in more than 360 trading days, one of the longest such streaks ever.

On Wednesday, RUT fell further, to a strong level of support extending back seven months, and then reversed.


Monday, May 5, 2014

An Update on May to October Seasonality

In a sign of how short investors' memories are, one of the newest memes is that equities are unlikely to be weak this summer because they already corrected during the first four months of the year.

Anyone remember 2010 or 2011? Both started weak and got weaker in the middle of the year.

How about 2000, 2001, 2002, 2004, 2005, 2007 or 2008? Weakness early in each of these years did not preclude a second period of weakness in summer.


Saturday, May 3, 2014

Weekly Market Summary

The biggest catalyst coming into this week was seasonality. Normally, the end of April and beginning of May is strong. There were few other extremes, except the equity put/call ratio which had spiked enough on Friday to precipitate a bounce (here).

In the event, SPX and DJIA moved up about 1%, but in most ways the bounce was weak. 80% of the gain in SPY this week came from overnight gaps higher on Monday and Tuesday. Trading during cash hours added little, indicating poor investor conviction.

More to importantly, breadth was terrible. DJIA made a new all-time closing high but here's how its 30 constituents performed: one made a new all-time high, two made a new 1-year high, only four made a new 2-month high and just 8 were at even a new one-week high.

The other indices are similar. 75% of the Nasdaq is below its 50-dma. Only 42% of the SPX is above its 50-dma even though the index is less than 1% from its all time highs. This breadth divergence is similar to July 2011 and April 2012.


Thursday, May 1, 2014

The 1996 Analogy

RUT has now closed above its 200-dma 361 days in a row. The all-time record is 364 days from 1996.

SPX has also closed above its 200-dma for longer than any time in the past 30 years, except 1996.

SPX has not touched its lower weekly Bollinger in 17 months, longer than any time, except 1996.

And SPX is up 5 quarters in a row. In the five previous times this has occurred in the past 40 years, it has only closed up for a 6th quarter once. The year: 1996.

Apparently the current period resembles 1996.

The current rally started in October 2012 and ran up some 40% to January of this year. It swooned for two weeks, then rallied 8% in February. Since then it has chopped in a range for 9 weeks and counting.


Friday, April 25, 2014

Weekly Market Summary

Most weeks have ended with a clear set up for the week ahead. That wasn't the case last week. In the event, SPY, NDX and DJIA ended only slightly lower, while RUT lost more than 1%.

Our main conclusion from last week was that risk/reward in the US indices is skewed to the downside in the months ahead until the market experiences a washout. Nothing transpired this week to change that perspective. Read the full post here.

Our main short-term tells for the indices played out to the downside this week. For SPY, the key was to hold the 187 level. It failed and is now back in a well travelled zone where it has not had a meaningful reversal until price has reached 184.5 or lower. Note the very minor positive divergence in RSI.


Thursday, April 24, 2014

Will AAPL Outperform Based Only Its Corporate Finance Activities?

What happens to Apple (AAPL) matters greatly to the market. AAPL is the largest capitalized company in the US. Its weighting in QQQ is about 12%; in SPY, it's about 3%.

After the close, AAPL announced an increase in its share buyback program (from $60b to $90b) and an 8% increase in its dividend. In response to the news, AAPL shares jumped 8% in after hours trading.

Aside from in the short term, will these non-operating actions make AAPL a better performing stock? Probably not.

To be clear, this discussion is completely independent of AAPL's operating fundamentals or valuation attractiveness. We have no view on these except to say that both are key drivers of the share price.

And that's the main point: operating fundamentals and valuation matter, corporate finance activities like these generally do not. If investor's liked AAPL before, these activities should make it no more or less attractive.

Let's take the stock split, the dividend increase and the share buyback issues separately.

First, AAPL's plan is to split it's shares 7:1, reducing the share price to $75-80.  Companies normally split their shares because they have been rapidly appreciating. In other words, companies that split their shares are doing well. And in fact, if you look at a portfolio of companies that have split their shares, it generally outperforms the SPX.


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.