Every Zig Has a Zag

With SPX approaching 1800, we suggested a reaction of 4-10% was probable, allowing for an overshoot to 1820-30. This was the historical precedent at prior round numbers and it was moreover supported by other market data (post here).

Further supporting evidence is in the latest Weekly Market Summary (post here).

This post looks at the length and extent of the current rally relative to others over the past 20 years, a period which includes the late 1990's tech bubble, i.e., the strongest rally ever seen in the market.

From the November 2012 low a year ago, SPX has risen 34%. A long, strong rally, but one which is not unprecedented.

The chart below uses 1-year log-scale boxes with a 34% rise in price. In the past 20 years, there have been six other comparable rallies, four of which were in the late 1990s.

We have not included rallies off of a significant low (1994, 2003, 2009) as the start of a bull market is expected to be long and powerful.

Weekly Market Summary

Two themes continue to define the market.

First, that underestimating this bull has been the biggest mistake in 2013.

And second, that what has mattered has been trend and volatility and what has not mattered has been everything else (sentiment, valuation, breadth, seasonality).

This continues to be the case through this week, with all four indices making new highs.

We are proponents of using the 13-ema to judge trend in SPX. Two consecutive closes below is typically sufficient to make this moving average decline and provide a heads-up that a larger move to the 50-dma might be in store. The 13-ema for SPX has been rising since mid-October. This Wednesday's low nearly touched it. The trend higher remains intact for now.

Weekly Market Summary

3 of the 4 US indices made new highs this week, as did 8 of the 9 SPX sectors. Both trend and breadth are strong.

SPX closed higher for a 6th week in a row. It has closed higher on the 7th week just twice in the past 10 years (including January of this year). This kind of strength has, in the past, led to higher highs in SPX further out. The trading odds are here (via @WildcatTrader).

Coming up next for SPX is a breach of the 1800 level. In the past, centennial milestones (1400, 1500, etc) have led to anywhere from a 4% to a more than 10% reaction. We detailed this yesterday here.

Your Risk/Reward in SPX is More Than 2:1 Negative

Its very clear that US equities are in a strong uptrend. Not only are the major indices hitting new highs, but a majority of the sectors are, too (thus confirming breadth). This is not, therefore, a "this is the top" post.

SPX is approaching 1800. Over the past three years, each round number milestone (1400, 1500, etc) has been met with a negative reaction of at least 4% and at times more than 10%. On an overshoot to 1820-30, SPX has upside of 2% versus more than 4% downside, a negative profile.

Fund Managers' Current Asset Allocation - November

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.

There was very little change since October. 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. What is particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013). This is longer than any period between 2003-07.

Time to Tank Up With Oil?

Oil has a seasonal tendency to peak in September and trough in early December. The period for positive seasonality (green shading) is now close at hand (data from Stock Trader's Almanac).

Sentiment follows the same pattern. It's now at a low where crude oil prices have tended to move higher (data from Sentimentrader).

Weekly Market Summary

The Short story:

The trend is up (chart).

Placing the Current Bull Market In Perspective

The current cyclical bull market is now second largest and third longest of the last 80 years. The current gain is twice the average for a cyclical bull market, and its length is almost 2 1/2 times the average.

The bull market of the 1990s (first on the list) is clearly in a completely different league; this is a theme throughout this post (data from Ned Davis).

As the data above shows, the rate of gain in the current bull market is among the highest ever. Since the end of 2012, the slope of ascent has become even steeper. This is similar to mid-2006 to mid-2007 (arrows).

Weekly Market Summary

There's a short story and a long story.

The short story:

Trend: All the US indices made new uptrend highs this week. A wide group of cyclicals lead domestically (chart). Ex-US indices, especially Europe, are supportive (chart).

Breadth: Breadth is confirming trend. The number of stocks trading higher on the NYSE reached a new high in October. And more of the SPX is trading above its 50-dma than at any time since May.

Seasonality: Equities are entering what is traditionally its strongest 3-month stretch of the year. And when the summer has been strong (like this year), the winter has been up an even higher percentage of the time. For further discussion, read our recent post.

Volatility: Volatility is low, a set-up for higher equity prices.

Macro: Worldwide PMI data for October was good. The Chicago PMI increased by the most in 30 years. This would seem to indicate rebound in economic growth.

In summary: Taken together, this looks like a lay-up for higher prices over the next several months. For RUT, if the pattern holds (match the colors of the arrows), support should be within the next 2% (chart).