Weekly Market Summary

The 2Q earnings season is over. Per Fact Set, earnings grew at 7.7% yoy and sales grew 4.5%. These are the strongest results in several years and, remarkably, they are coming when the bull market is already more than 5 years old.

The sales growth rate was particularly strong. Analysts had expected 3.7% in 2Q. The consensus forecast for 3Q and for the full-year are still for 3.7%; so, some moderation is expected.

The recent macro data supports growth of 3.5% to 4.5% in sales. But it shows a curious lack of accelerating growth after the winter slump.

Real personal consumption (PCE), which comprises about 70% of GDP, grew at annual rate of just 2% in July. There had been a post-winter pop to 2.5% in March, but the rate of growth has declined every month since then.

These figures are inflation-adjusted. Adding a 1.6-2% deflator yields a roughly 4% annual growth rate in nominal terms, equivalent to the sales growth rate expected for SPX in 2014.

Crossing SPX 1000 in 1998 vs SPX 2000 Today

The S&P crossed above 2000 for the first time Monday.

This brings to mind 1998, the year the S&P crossed above the 1000 milestone.

The 1990s are wrongly remembered as a period in the market where volatility was uniformly low and double digit annual gains came in easy succession. The crossing of the 1000 milestone is a case in point.

SPX first came within 2% of 1000 in early October of 1997. In the month before, it had risen over 9%. After attempting to close higher for 3 weeks, SPX instead dropped over 10% in late October. So much for low volatility.

It was back near 1000 by early December, 1997. It again failed to close higher and dropped 6% by the end of the month.

Weekly Market Summary

US indices have risen 8 of the past 11 days. SPX, NDX and DJIA have all gained about 5%. NDX and SPX made new all-time highs and DJIA is close to doing so.

This was an incredibly quick fall and recovery to a new high. Recall that in July, fund managers had their second highest equity overweight since 2001. After every similar situation, SPX typically fell 8% over 4 weeks and then took another 6 weeks to regain all of its losses. This time: a 4% fall in 10 days with a full recovery 10 days later.

This type of strength, as we have seen before, is usually followed by further gains. Two studies follow that demonstrate this tendency well.

A Short Term Watch Out For High RSI and Low Trin

In our weekend post (here), we specifically warned how a break back above the 50-dma for SPX has been a momentum kick off in the past. This has been when the long win-streaks have taken place (yellow). This remains the big picture view for SPX.

SPX has since risen 4 days in a row. There are two studies indicating that short-term (1-2 days) weakness is ahead, followed by at least one higher high.

What a Gallup Poll Tells Us About Equities

A lot of attention is being given to a Gallup poll showing that the general population is unaware of the bull market in stocks.  Only 24% knew the stock market had risen more than 20% last year. 30% said stocks were flat to lower last year.

Is their lack of stock market knowledge surprising?

It would be easy to poke holes at Gallup who famously called the comfortable victory for President Romney in 2012. But the Gallup poll on stocks is probably fairly accurate.

When polled, here are other things a third or so of Americans didn't know:

1. The name of the world's largest ocean, to the west of California.
2. The year 9/11 took place.
3. The name of the country the American Revolution was fought against.

And a third or so believe:

1. The earth is the center of the universe.
2. Ford Foundation, Rockefeller Foundation and Monsanto are trying to shrink the world's population using GMO foods.
3. Someone they know has been abducted by aliens.

Weekly Market Summary

The first half of 3Q is done. So far, it's been a mess for equities worldwide. Europe and RUT are down 5-6% and SPX and DJIA are negative. Only Nasdaq and emerging markets show gains.

In the US, only technology and health care have advanced; all the other sectors are in the red.

Surely the biggest surprise has been treasuries. After outperforming SPX by 680 bp in the first half of the year, treasuries (using TLT) have taken another 600 bp in just the past 6 weeks (purple bar, above).

A Primer on Fund Flows

You might have seen a chart that looks like the one below (original link is here). It shows "net new cash flow" for domestic equity funds. And the message from the chart seems to be that domestic equity funds are seeing large outflows. In other words, this is a bull market in which Main Street America is not participating.

The subtext is that once mom and pop decide to get back into the market, it will really take off.

Fund Managers' Current Asset Allocation - August

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.

An extreme in bullish equity sentiment was reached in July, with fund manager equity weightings at +61% overweight, the second highest since the survey began in 2001. This was a clearly identified risk to near term equity performance (post). Since then, the Euro 350 has dropped 8% and SPX has dropped 5%.

In response, equity allocations have fallen to +44% overweight in August. There's good news and bad news in this.

The bad news first. Is this a washout? No. As we have continually noted, what has been remarkable is how long managers have been highly overweight equities (virtually since the start of 2013). This is longer than any period during the 2003-07 bull market (yellow shading). In the past, after overexposure like that seen in the past 18 months, a washout low would be marked by an equity weighting under +20% (green circles). By that measure, equities are highly over owned.

Now the good news. The current bull market is nothing if not persistent. Equities have not been less than +36% overweight since early 2013. If this is buy support again, then weakness in August will likely mark a low in the next month like those in February and April.

Are Investors Fighting the Trend Higher in Equities?

Investors have been fighting the trend higher in equities. 

This has been a regularly repeated theme among many pundits over the past year. Is this assertion supported by data?

Below is the Federal Reserve's most recent report (1Q14) on equity holdings as a percentage of household financial assets (chart from Short Side of Long).

Separating Signal From Noise: What Does Sentiment Suggest for Future Returns

On July 24, SPY made its all time high. That same day, the number of AAII bulls in their weekly survey of retail investors was only 30%. In fact, this was a large drop from 45% bulls in mid-June and at nearly a 3 month low.

For many, this was a signal that further gains lay immediately ahead for equities. Markets don't topple when so few are bullish, went the dominant line of reasoning. The chart below was posted on a popular blog at the same time. Note the author's headline (click for a larger version).

A Sign of Possible Capitulation: Trin Closes Over 2.0

Trin (also called the Arms Index) closed above 2.0 today. This is usually a positive for equities, at least over the short-term.

Trin is a breadth indicator. It is derived by dividing the advance-decline ratio for issues by that for volume. A close over 2 means that down-volume was twice down-issues; in other words, stocks fell on relatively high volume.

At a minimum, stocks have very often been higher the next day and also higher 5 days later. This is particularly true when the spike higher in Trin has occurred after several days of selling, like now. In the chart below, the vertical lines are Trin spikes over 2 during the past 2 years.

Many of these Trin spikes, especially in the past year, have also come at important lows: September, February and April, for example. In June 2013, the Trin spike was 3 days before the low after the market had been falling for 4 weeks. In other words, a spike in Trin can mark capitulation.

The biggest failures in a Trin spike coinciding with a relative low in equities usually occur when the spike comes after stocks have been on the rise. In October and November 2012 and in February and June 2013, the spike in Trin occurred when SPX  was within a day of a 5 or 10-day high. It signaled a change in direction. That’s not the case here.

There are never guarantees, but we are likely to see SPX move higher in the next 1-5 days. That has been the pattern in the past. That doesn’t necessarily mean the end of the 2 week downtrend. The Trin spike in March this year was followed by higher prices but also preceded the eventual low a month later, in April.

Signs Of A Washout In Utilities

The utilities ETF, $XLU, is now off more than 10% from it’s high.  Among the nine SPX sectors, its performance in the past 2 months has been the worst.

The main part of the (initial) fall is likely to be over.

Zero companies in the XLU are now above their respective 50-dma. In the past 4 years, this level of ‘breadth’ has been very close to a low in the sector’s price (red circles). It's not always the exact low, but close. A scenario like that in 2010 - a bounce followed by a lower low - is possible over the medium term

Weekly Market Summary

Despite the large fall this week, the longer term technical picture for SPX is positive. We will discuss the shorter term perspective in a moment, but for traders with a long time horizon, a return to the recent highs is odds-on.

July ended a streak of 5 positive months in a row. Since 1982, that type of strength has never marked a long term top.  The worst outcome was a sideways market for several months (2004 and 2005). When the market fell, it was short and the losses were reversed. For investors fearing a crash, that would be out of character with prior tops. If a top is being put in, price will oscillate positive and negative over the next several months. A retest of the recent high is more likely to happen first.

August Macro Update: Trend Growth of 2%

In May we started a recurring monthly review of all the main economic data (prior posts are here).

Our key message has so far been that (a) growth is positive but modest, in the range of ~4% (nominal), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely. This is germane to equity markets in that macro growth drives corporate revenue and profit expansion and valuation levels.

This post updates the story with the latest data from the past month. The overall message remains largely the same. Employment is growing at less than 2%, inflation is less than 2%, wages are growing at less than 2% and most measures of demand are growing at roughly 2% (real). None of these has seen a meaningful and sustained acceleration in the past 2 years.

We'll focus on four categories: labor market, inflation, end-demand and housing.


Employment and Wages
The July non-farm payroll (209,000 new employees) was in the middle of a 10-year range. This follows prints of 84,000 in December and 288,000 in June. Moving between extremes like these is nothing new: it has been a pattern during every bull market. Since 2004, every NFP print near or over 300,000 has been followed by one near or under 100,000 (circles).