Weekly Market Summary

The surprise non-taper by the FOMC on Wednesday pushed all the indices and a majority of sectors to new highs. This created a large number of extremes that we noted at the close was likely to cause near term weakness (post). Indeed, by Friday, the Dow had given up all of its FOMC gains.

But, overall, most of the sectors, US indices and ex-US indices are holding their break outs and remain above rising 20 and 50-day moving averages (chart and chart). In particular, EEM continues to outperform domestic equities over the past 3 months, a good sign (post and chart).

Treasuries, which have been trading in tandem with equities recently, diverged higher. For the week, they handily outperformed equities and since August 2, performance between treasuries and SPX is near even (chart).  Out of favor bonds (chart and chart) look like they might have put in a bottom for now (post and chart).

Looking ahead, our biggest concern is an apparent loss in momentum.

Breadth is indicating a loss of momentum. Although indices have formed higher highs between May, August and September, cumulative breadth and the percentage of companies over their 50-dma has formed lower lows (chart).

This divergence in breadth indicates waning momentum as fewer stocks participate in the market's upside. That pattern of momentum loss is easily seen in the weekly Dow (here) and SPX (below) charts (note both RSI and MACD). As a guide as to what has happened previously under similar circumstances, this pattern in the Dow (here) continues to track.

Weakening momentum will be encouraged by two other factors.


First, when gains on an FOMC announcement have been this strong in the past, equities have significantly faltered in the weeks ahead (chart and chart). To make that pattern worse, next week is historically the weakest one of the year (chart and chart).

The second factor is investors' positioning. Fund managers now have the highest allocation to equities in the past 5 and 1/2 years, and the second highest of the past 12 years (post).  What is most telling is this: in the past 4 months, both All World Ex-US Index and the SPX are almost net flat, but fund managers have increased their equity overweight by 17 percentage points. In other words, for all the buying funds have done, indices have barely budged. It takes new capital to push prices higher, but the problem is this: when funds have been this overweight equities in the past, upward progress has been limited without some downward movement coming first (chart).