Weekly Market Summary

Last week's singular strength in RUT carried through into this week. That index plus SPX and NDX all moved to new highs. The sole laggard is DJIA. The Euro 350 confirms with its new high; the All World Ex-US is at the highs of October and January. Overall, a very positive view.

Weekly Market Summary

The Short Story

The short story is this: 3 of the 4 US indices, plus Europe and EEM all closed more or less where they ended last week. The main exception was RUT.

For SPY, the line in the sand is still the 50-dma near 181. Unless that is breached, Scenario 2 is in play. For more details on what that means, please read The Two Scenarios Post and The Follow Up to the Two Scenarios Post.

Below 181 puts SPY back in the prior consolidation area (yellow) and the two attempts to break higher look to have failed. If 182 holds on a pull-back, you have the potential for a large inverted Head and Shoulders pattern to take the index higher.

Fund Managers' Current Asset Allocation - February

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 allocated in various asset classes. These managers oversee a combined $700b in assets.

Overall, while fund managers remain very bullish on risk, their enthusiasm moderated somewhat in February. In September, exposure to global equities was the second highest since the survey began in 2001. It dropped this month to levels near those in May before SPX fell to its June low; it is still nowhere near the lows seen in 2010, 2011 or 2012. What is particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013). This is longer than any period during the 2003-07 bull market.

Weekly Market Summary

Last week ended with a 6 point rip higher off the Wednesday low in SPY. This week ended with a further 5 point rip. In one week, SPY gained more than it did during 10 weeks in October to December.

As a result, SPX and NDX are above their important December levels, as are the Euro 350 and DAX. DJIA and RUT are lagging with other global markets, but they are not far off. All of these markets have bullish MACD crosses (lower panel). Most also have lower lows (marked in red) in addition to their (for the time being) lower highs.

Putting The Recent Pull-Back In Context

SPX reached an intraday peak on January 15 and a closing low 12 trading days (18 calendar days) later. The total drawdown (close to close) was 5.7%.

How does this pull-back compare to history?

If this is the largest drawdown suffered in 2014, it will be one of the smallest of the past 34 years. 85% of the time, the largest annual drawdowns are more than 6%. And even for a small pullback, half a month is short for the bottom to be found.

Let's review the data.

Since 1980, the median annual drawdown is 10.5%. Not surprisingly, then, about 50% of years have a drawdown of 5-10%. Every year, that's what investors should expect to endure during the next 12-months.

As you can see from the chart, there have only been five other years where the largest drawdown of the year was 6% or less. 85% of the time, it's been greater. In other words, what we had was a very minor pull back (chart from JP Morgan; see notes at bottom of page).

Weekly Market Summary

The low from the prior week did not look durable: many of the telltale signs of a solid bottom were not yet present. Several of those triggered on Monday and Wednesday; a good enough pitch to swing at (set up, set up, targets and CBI).

Specifically, SPX landed on the trend line from March; created a positive divergence on both the 60' and daily timeframes; completed a second major distribution day; completed a second Vix spike; and had a Trin spike over 3. All of these signals were on our watch list and were detailed over the past two weeks (post and post). 

So, was that the end of the correction? There are three possible outcomes:

1. SPY fails to make a new high (likely fails to clear 181) before retesting or exceeding the recent low. This is the most likely outcome based past behavior (2006, 2007, 2010, 2012) and some key indicators. It would be a buyable dip.
2. SPY makes a marginal new high but is stuck in a sideways channel for many months before retesting lows later in the year (2005 and 2011). This is less likely, but still quite possible. It would be a sellable rally.
3. It's still a 2013-style market, the correction is entirely over, SPY will now make new highs above 1950. This is what Wall Street expects and it is the least likely outcome. A full post on why that's unlikely is here. 

We think, net, that a second dip is the durable low and therefore buyable, and that a rally higher now is sellable. Details follow below.

Weekly Market Summary

Last week, we wrote: (1) SPY 176.5 would be key support (it was); (2) that the 50-dma would likely be back-tested (it wasn't); (3) that most of the telltale signs of a bottom were not in (and still aren't) and (4) that a larger 7-10% correction might be in store (still true). The full post is here.

The short story is this: SPY lost its 13-ema on January 23 at 182.8 (close) and hasn't been regained since. That's trend.

Here's the longer story.

The larger trend weakened further this week. In the US, the DJIA is now right on support from December; the other 3 US indices have held above. But ex-US indices all deteriorated further.