Tuesday, February 5, 2013

Low Vix Means 5% Corrections Are Few And Far Between

In the past 20 years, there have been two long periods where $VIX was mainly below 20. During both of these periods, 5% corrections were few and far between. The chart below shows only changes in direction of >5%. Some observations:
  1. Uncorrected uptrends during these times can last 4-12 months. 1995 went a full year. There are several lasting more than a full quarter. Low volatility has meant higher prices, long bull runs and shallow corrections.
  2. The two periods ran from 1993-97 and 2003-07. A third period may be starting now, in 2013. Is this a 10-year cycle, lasting 4 years?
  3. 1993 and 2003 came after economic recessions that corrected the market. We are now already in the 4th year of an uptrend. The starting point for this third era is very different.

Monday, February 4, 2013

Duration of Uptrends Since March 2009

Since the March 2009 low, there have been 8 discrete and completed uptrends. Some features:
  1. Median length of 12 weeks, mean duration of 12.4 weeks, minimum duration of 10 weeks, maximum duration of 16 weeks.
  2. 4 up weeks in a row is common. 6 has been a typical maximum. One was 7 weeks (2011). The current uptrend has completed 6 weeks.
  3. Within an uptrend, it is common to have 2-4 red weeks. Overall, about 70-80% are up weeks.
Importantly, after a long uptrend up more than 5 weeks, the down week is usually minor (within the low of the prior week) and there is always a higher high ahead. Strong trends do not end after a long streak of up weeks.

Graham-Shiller PE10 At 85th Percentile

Doug Short (link) has a valuable post on the cyclically adjusted price-earnings (CAPE) of $SPX. Using smoothed earnings (average of the past 10 years) and smoothed price (average over the past month), $SPX is valued at 22 times versus a long term average of 16.4. This is in the top 85th percentile of all periods since 1871. In other words, its overvalued on this methodology. See the charts below the break.

The purpose of using 10 years of earnings is to reduce the volatility of a trailing PE due to the cyclicality of earnings. Because of this, however, over- and under-valued can persist for years. So, this is back pocket material and not useful for timing except, perhaps, at enormous extremes.

You can get a daily update here

Sunday, February 3, 2013

Typical Topping Pattern: Not There Yet

Take a look at recent topping patterns as they are fairly typical. There's two steps to each:
  1. Green arrows: After a long run, momentum starts to weaken and price tests a key trend line or moving average (here, its the Bollinger mid-band). 
  2. Yellow area: Price pushes higher, falters, tries a third time and makes a double top (or lower high).
Look at where $SPY is now. It has not even tested a key moving average yet (part1). When it does, buy the dip and expect price to move higher before making a discernible topping pattern. If nothing else, look for an actual lower low before expecting a top to develop.

Saturday, February 2, 2013

Update on Nasdaq and Newsletter Sentiment: They're High

Two more extremes in sentiment published today.
  1. SentimenTrader and Hulbert measure Nasdaq investor bullishness at the highest level in 8 years. 
  2. MarketVane measure newsletter bullishness at the same extreme as prior peaks in $SPX in March and September 2012, as well as the peak in June 2007.

Friday, February 1, 2013

Nasdaq Negative in February Every Post-Election Year Since 1985

Stock Trader's Almanac has this to say about February:
  1. Since 1950, January $SPX gains of 2% or more corrected or consolidated in February 67.9% of the time. 
  2. In the 19 years that $SPX gained 4% or more in January, 68.4% of the time it declined or finished flat (less than 1% gain) in February. 
  3. February’s post-election year performance since 1950 is miserable, ranking dead last for DJIA, $SPX, NASDAQ, Russell 1000 and Russell 2000. 
  4. NASDAQ has not posted a post-election year February gain since 1985.

Sentiment is Heady and Out of Sync With Macro

National Association of Active Investment Managers (NAAIM) went 104% long equities this week. This is the highest percentage long in the 7 year history of their survey.

Over 80% is generally overly bullish and above 90% was last seen run to the 2007 SPX top. Moreover, the most bearish manager in the survey is now 60% net long equities, the most bullish position in the history of the survey for the most bearish manager. 

What happens next? Most likely is a pause or pullback. Not a major top. Yet. You should notice with all sentiment surveys that bullish (or bearish) extremes lead price. They normally begin to decline as price heads higher (divergence). A decline in sentiment as price heads higher should be a watch out. For now, note one more sign of exuberance.

Weekly Market Summary

Our overall market view remains positive. There were no changes in our model this week: trend and breadth remain strong while sentiment and macro expectations remain headwinds. As we have said, trend and breadth are the main drivers; the others are headwinds, tailwinds and tea leaves.

Trend: the 10th week out of the last 11, a majority of sectors and indices close >13ema. This week: all 4 indices and 9 of 9 sectors.

Thursday, January 31, 2013

February Fed Purchases of $44 billion Planned

The Fed Pomo Schedule is out (link). A strong and steady inflow of $44 billion is planned (versus $45 billion in January). This is a liquidity tailwind for the market that should support the trend, all other things being equal.

February Has Tended to Be Flat for $DJIA

The strongest 6 months are from October to April. Within this period, the strongest three month stretch is November-January; the stretch we just finished. February tends to be the pause month - flat on average - before better seasonality in March and April.

AAII Bullish Declines From 52% - Watch the Divergence

American Association of Individual Investors (AAII) bulls hit 52% a week ago (January 25). Today, the number has declined to 48%. The main point is to say that this is now a headwind for prices, not necessarily an imminent turning point. Two other points:

Tuesday, January 29, 2013

Risk/Reward in $SPX Based on Citi Economic Surprise Index


According to JPM, the last 7 times that the Citigroup Economic Surprise Index (CESI) went negative, over the next 3 months, the $SPX had average upside of just 1% versus an average downside of 8%. In other words, based on that indicator alone, your risk/reward here is 8:1 down. Note that CESI went negative last week (January 25). 


Monday, January 28, 2013

1 Year Forward PE Ratio, 2003-Present

Since 2005, the $SPX has "comfortably" traded between a 12 month forward PE of 12-15 times. Below 12 has been an extreme reached in early 2009, mid-2010 and October 2011. Above 15 times marked the top in 2007 and April 2010. Over the last 10 years, the average has been 14.2.

Keep an eye on this. At SPX 1500 and assuming consensus $112 in FY13 EPS, the $SPX is trading at 13.3 times.

Saturday, January 26, 2013

Weekly Market Summary

Our overall market view remains positive. Trend and breadth remain solid - this is the key. For the 9th week out of the last 10, a majority of indices/sectors closed >13ema. This week: all 4 indices and 8 of 9 sectors. Notably <13ema are technology and $EEM, which is now negative for 2013.

Sentiment, downgraded last week, and macro expectations (defined by the Citigroup Economic Surprise Index (CESI), which turned negative this week, are the main headwinds going forward.

VIX during 2004-2007

While a $VIX under is associated with excellent returns in $SPX, it is not accurate to say that intermediate periods of time will not see solid sell-offs. 

For example, $VIX was sub-20 from 2004-07. 2004 was a dog year for $SPX, the other years were very good. Note, however, that $VIX would occasionally 'burp' 50-80% higher during that period, and $SPX would decline more 4-7% for 1-4 months. The notion that this was a period of consistent low volatility is wrong

CSFB "Fear Barometer" Hits a Peak

CSFB "Fear Barometer" hit a peak this week. In the past, this has been a good indicator of potential small percentage pullback in equity markets. Whether markets shrug this off and push remains to be seen.

This chart is via the excellent site, SentimenTrader. I recommend bookmarking it.

Friday, January 25, 2013

Winning Streak Hits 8 Days - A Higher High Ahead

$SPX has just completed an 8 day streak of up days. This is a considerable sign of strength and demand. After a pause, empirically, the market should continue to make new highs. In other words, winning streaks do not end with a notable top.

Friday, January 18, 2013

Weekly Market Summary

Our overall view remains positive. There is no apparent weakness in either trend or breadth, and we are still in a seasonally bullish time period. For the 8th week out of the last 9, a majority of indices/sectors closed >13ema. This week: all 4 indices and 9 of 9 sectors

Sentiment changed this week, from neutral to negative; fund manager cash balances are at the low end of the range and equity weightings are high. Other sentiment readings are not extreme, however

Thursday, January 17, 2013

Wall Street Sell Side Indicator is Mega Bullish

BAML's survey of Wall Street consensus equity allocations indicates significant bearishness. This is a contrarian indicator, and the current low levels suggests equities will rise 26% in the next 12 months.  The indicator is 47; when its below 50, returns the next year have been positive 100% of the time since 1985.

Tuesday, January 15, 2013

Fund Managers' Current Asset Allocation - January

There was a notable increase in bullish fund manager behavior over the past month. The highlights from the January BAML fund manager survey are as follows:
  1. Cash balances have dipped to a very low 3.8% (4.1% in December 2012), lowest since February 2011. The typical range is 3.5-5%.
  2. Equity allocations: a net 51% of fund managers are overweight equities (highest since February 2011). Just 35% overweight in December

Friday, January 11, 2013

Summation Index Climbs Higher


One of the main reasons to remain optimistic on the market is that breadth continues to expand.  Today, $NYSI (the McClellan Summation Index) closed above 700. As the chart below shows, when summation becomes oversold (below -500) and then climbs back above 500, market indices usually continue to climb higher. That is the current situation.

Investors Intelligence: Not Yet Hot

Investor Intelligence survey for this week shows increasing bullishness. The bulls minus bears (lower panel) is approaching 30, an area of two prior peaks in $SPX. Over 35 would be a cause for increased concern. Not yet.

Weekly Market Summary

This is the first post of a new weekly market summary.

Our overall view remains positive. Trend and breadth, the two most important factors, remain bullish. For the 7th week out of the last 8, a majority of indices and sectors closed week >13ema. This week: all 4 indices and 9 of 9 sectors as well $EEM, Euro 350, All World ex-US. Conversely, $TLT <13ema the last 7 weeks.

The main concern is sentiment; it's not hot, but getting warm.