The big picture story remains the same. The V-bounce off the June lows was likely to fail and retest the lows (post). That process is still underway for SPX.
After a two week decline, SPX was higher this week. Recall that entering the week, SPX was on its 50-dma, daily RSI (2) was at the lowest level of 2013 and NYMO was -80: this is a clear set-up for an oversold rally.
Over the past two years, with each successive 52-week high, the same pattern has played out: a two week decline (A; red arrows), followed by a rise (B) and then further down into the correction low (C). This is a typical correction pattern. SPX should be in the B (up) portion now with the C (down) portion ahead.
On twitter, we have posted Fibonacci and supply resistance is likely between 1665-80 on the ES (chart), an area that corresponds to its downsloping 13-ema and 20-dma. A measured move from there targets 1600. Weakness into September would also conform with the seasonal pattern.
The one caveat is that the Dow has retraced more than 62% of the June/July uptrend (chart). Large caps have led the move lower and weakness here could pull SPX closer to its 1560 June low. A bit lower, two important trend lines meet close to 1540 (red arrow on chart).
For the Dow specifically, it has now been down 3 weeks in a row. Since 2009, every time its been down 3 weeks in a row it has gone on to make a lower low before moving into a new uptrend (boxes, chart below). A move up in the week ahead is odds on (chart) but would also build a possible right shoulder of a bearish H&S partern (chart).
The selling over the prior two weeks has some believing the low is in. Indeed, both AAII and Investors Intelligence surveys are showing fewer bulls, as one would expect. We published an extensive post on why this was unlikely to be the washout low; please read it here. Also, neither AAII (chart and chart) nor Investors Intelligence (chart) have reached a bearish extreme after reaching their recent bullish extremes. The post above has a set of reference points for tracking this correction.
While macro has been surprising to the upside (chart), SPX company financial results show sluggish growth. With 97% having reported, 2Q EPS growth is tracking 2.1%, the third lowest rate in the past 4 years. For comparison, EPS was expected to grow 4.5% on March 30. 3Q EPS is now expected to be 3.7% (it was 7% in June). While consensus is 6% for FY13 and 11% for FY14, we continue to use 4% for both years. On this basis, SPX is trading at 15.2x (forward) versus the 10-year average of 14.2x. Low growth makes this valuation premium seem rich.
If growth and inflation remain subdued, as SPX results seem to indicate, then the big move in bond yields is likely over. Bonds are slightly outperforming SPX so far in August and while funds are near record overweight equities, they are near record underweight bonds. Please read the post we published this week on the bond market dynamics here.