Weekly Market Summary

The storyline last week was this: the trend in US indices and sectors was up but showing fatigue, with cyclicals lagging; the trend in ex-US indices, currencies and key commodities was lower and a concern, and treasuries were confirming these concerns; breadth was signaling distribution; volatility was picking up; and macro expectations were headed lower. All of this, with overhead resistance about 3% higher, and, bottom-line, the risk/reward did not seem even close to being 1:1.

This week, for the first time in 2013, three positives took place, and they are reflected in the summary chart below (see arrows). First, treasuries were pummeled. Second, Europe and EEM began a move up off of support. Third, macro data exceeded expectations.

All things equal, headwinds seem to have been reduced and perhaps, therefore, downside (risk) is now lower.

It is not clear, however, that upside (reward) has improved: the monthly and weekly charts suggest SPX is reaching (within 1.5% of) a prior area of strong resistance just when its upward momentum typically begins to fade (more here and here).

Moreover, the current rally is hitting the average for length of time and gain of all rallies over the past 10 years (explained here).

There are a remarkable number of similarities between the current set up in SPX and the one that existed at the same time in 2011, a year which started up 7% and ended the year dead flat (read here). To which we can now add that in February 2011, $TLT hit a new low for the year, just as it did again this week, and SPX dropped 7% over the next month.

Trend is the most important factor; it has been green all of 2013 and continues to be so. And, as we have said, there is no topping pattern yet visible in the daily charts. Also on the positive side are low volatility, favorable seasonality (March and April are excellent months) and strong Fed pomo flows.

Negatives: The trend in Euro and Aussie currencies as well as copper and oil is lower, and a concern. Breadth, whether measured by the percent of SPX companies above their 50-dma or by Summation Index, is diverging downwards. And while there have been two 90% distribution days, there has not been a counteracting 90% accumulation day. Nearly ever indicator of sentiment is in an unattractive pattern. Finally, with over 99% of SPX companies reporting, 4Q12 EPS is lower over the prior quarter for the second time in a row and year over year growth is just 0.4%. Nearly 80% of the SPX that provided forward guidance provided lower guidance for 2013. 1Q13 EPS growth is expected to be 0.6% lower again (read here).

Over the past two weeks, SPX has moved down 2% and then move up 2%. Over this period of time, risk/reward is 1. SPX may very well move several percent higher in the next weeks; but, on balance, risk/reward does not appear favorable.

Mr Market does not make anything easy.