After February, SPX only rose 1.9% higher (May) during the rest of the year. For 5 months (March-July), SPX traded sideways in a 10% band. Risk was therefore 5x reward during this period. In August, SPX plunged 20% (risk 10x reward). The October 2011 low, with its accompanying washout in sentiment, set up the 12% rise in SPX during 2012.
It is worth pointing how similar the current set up now, in 2013, is to early 2011. The end result may turn out differently, but the similarities are at least noteworthy.
Prior year was strong: 2010 was up 13%. 2012 was up 12%. Investors in both cases expected a good year to follow.
Strong start: Into February, 2011 SPX was up 7%. To date in 2013, SPX is up 8.3%. All the data says that strong starts to the year bode well for the rest of the year.
Fund managers all-in positioning: Like early 2011, fund managers in 2013 are positioned in equities, not in cash or bonds (read further here via BAML):
- Cash balances are now low at 3.8%, the lowest since February 2011. A complementary chart from SentimenTrader is below.
- Net 51% of funds are overweight global equities, the highest since February 2011.
- Net 47% of funds are underweight bonds, the lowest weighting since May 2011.
Unusually strong trend: SPX has been up 7 weeks in a row only twice in the past 5 years: in January 2011 and in February 2013. Read here. And both of those streaks ended with a 90% down day and (so far) no subsequent 90% up day (here). Trend exhaustion? Also read about the other long winning streaks in SPX here.
Junk bond exuberance: In 2011, junk traded at a price greater than par plus half its coupon, as they do now as well. This is highly unusual, and reflects a high tolerance for risk. Read here.
Sentiment at bullish extremes: Take your pick of NAAIM, Newletter Writers, Corporate Insiders, or any others (here). All of these are consistent with fund flows and fund manager positioning.
Emerging markets underperforming: Notably, other markets were not keeping up with the US. Through February 2011, EEM was down 5% (in 2013 it was 3%).
Gas prices: The price of gas, which impacts consumer spending, has recently spiked above key levels, just like in early 2011. Chart below.
Be aware of these factors as SPX reaches an area of strong resistance. The topping pattern has not yet triggered (read here) and maybe it won't, but, at a minimum, be on alert and know what to look for.
Investor cash balances are at their 2011 lows:
Domestic equity fund flows spiked to their highest this month since early 2011.
The price of gas, which impacts consumer spending, has recently spiked above key levels, just like in early 2011.
Be aware of these factors as SPX reaches an area of strong resistance. The topping pattern has not yet triggered (read here) and maybe it won't, but, at a minimum, be on alert and know what to look for.
2011 started just as strong as 2013. After February and until August, upside as 1.9% versus downside of 10%. Then August happened.
