Weekly Market Summary

Summary: The largely trend-less environment of the past four months continues. Despite the fall this week, US equities are not oversold and sentiment is still heady. This suggests that a rally early in the week would likely fail. While April is one of the best months of the year, the first half of the month has been weak. If this pattern continues this year, there would likely be a more attractive entry point mid-month.

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US indices gave back all of their prior week's gains. For the week, SPX, DJIA and RUT fell 2% and NDX lost 3%.

Europe was also down more than 2% and emerging markets lost 1.5%.

Let's review the recent market action.

In December and January, SPX lost 4-5% on four different occasions. In between, it gained the same amount. Each potential break out and breakdown was reversed.

Then in February, SPX rose three weeks in a row, gaining more than 7%, during which it never once touched its rising 13-ema. Instead of consolidating and then adding to those gains, it fell the next three weeks in a row.

But there was no follow through to the downside either. A week ago, SPX reversed and gained nearly 3%. But instead of adding to those gains, it promptly fell 4 days in a row this week.

After all of this, SPX is exactly flat from December 1st nearly four months ago. There is, in short, almost trend to speak of.

Our view a week ago was that a true test of market character had arrived. Aside from RUT, none of the other US indices were overbought. If there was upside ahead, the indices would show strength by becoming and remaining overbought. Instead, the markets fell hard. This would seem to indicate that the ranged market environment of the past four months will continue. You can read a similar assessment by Brett Steenbarger here.

So, what happens next?

First of all, recognize that this is a market that reverses hard just when it looks like it might break out higher and breakdown lower. There were no visible extremes at the end of last week, but they could present themselves within a day or two.

Of the US indices, RUT looks the healthiest; it was the only index to make a higher high. Its 50-dma is rising and its RSI is oversold, a set up for a bounce each time since early December (green lines). But the big 2% loss on Wednesday suggests it could easily drop to its 50-dma (1216) which is now at the top of the 1 year trading range (yellow). That should be solid support.

Interview With FX Street

We had the great pleasure of discussing the Fed, the economy, equities, currencies and Nick Leeson with Dale Pinkert today. Click the link here to listen.

Can Money Flows Push Equity Prices Much Higher?

The S&P rose 30% in 2013. In 2014, it was up just over 10%. Since the start of the "best six months of the year for equities" in November (nearly 5 months ago), the index is up 4%.

Any number of factors could account for the slowing rate of appreciation in stocks: valuations and financial growth, not to mention the base effect of larger numbers.  What impact might investor positioning have on price appreciation?

The story seems to be this: the strong price gains in 2013 and into 2014 coincided with households and investment funds increasing their asset allocation to equities. This period also coincided with money from corporate buybacks having a demonstrably large impact on share prices.

But funds and households now have a high level of exposure to equities; more to the point, their allocation is no longer rising. And buybacks are no longer outperforming the indices. It takes an increase in money flows to push equity prices higher, yet it's not clear from where the next huge source of additional demand for equities will come.

Let's start with a quick review of the latest Federal Reserve flow of funds data on households' current asset allocation.

US household's largest holding is in equities; these comprise about 31% of their total financial assets.  Current levels are above the 29% high at end of the last bull market in mid-2007.  It reached an all-time high of 36% at the end of the 1990s bull market.

Weekly Market Summary

Summary: strong price and breadth suggest the uptrend from the March low has further to go. A dip early in the week is a high probability buy set up. But gains from here are likely to be short lived; nibble traders may want to sell into strong gains on the expectation of weakness over the next month.

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At the end of last week, major support levels for US equity indices had held, despite three weeks of selling. Several indicators of breadth had bottomed. March OpX and the FOMC were expected to be catalysts, and they were (post). For the week, SPX gained 2.7%, RUT gained 2.8% and NDX led, gaining 3.3%.

Foreign equities were equally strong. Europe and Japan gained nearly 2% and emerging markets gained a massive 4.7%.

It was an important week of gains. RUT and NDX both closed at new bull market highs (weekly closing basis). SPX's gain eclipsed the losses from the two prior weeks and was within 1 point of eclipsing the prior three weeks of loses. These are not signs of weakness.

Only RUT is visibly overbought on a daily basis. It has been up 7 of the last 8 days and closed Friday above its upper Bollinger. Note its RSI (top panel). A good test will be this coming week: a strong market will consolidate, giving up little and remain overbought. The early March highs (1240 area) is first support. The trend is up.

Fund Managers' Current Asset Allocation - March

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 $600b in assets.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal.

To this end, fund managers became very bullish in July, September, November and December, and stocks have subsequently sold off each time. Contrariwise, there were some relative bearish extremes reached in August and October to set up new rallies. We did a recap of this pattern in December (post).

Summary: In March, fund managers increased their global allocation to equities to the third highest since the bull market began. Under similar circumstances in the past, long equities has had a poor risk/reward profile over the next month. Most of the increase was to Eurozone equities, which now has the highest allocation in the survey's history. US equities fell significantly out of favor, to a 7 year low, a set up in which they should outperperform on a relative basis. EEM also fell further out of favor.

Let's review the highlights.

Fund managers decreased their cash levels slightly to 4.6%. While this is relatively high on a historical basis, note that cash levels haven't been much below 4.5% since 2013. We consider current levels to be neutral. 

Why "Missed Expectations" Are Not What They Seem

Question: What do the following have in common: falling inflation, soaring bond prices, disastrous corporate earnings, plunging retail sales and "the worst US macro relative to expectations since 2009"?

Answer: The price of oil.

Crude oil prices have dropped 60% since June. This single event has wrecked havoc across a number economic and financial barometers. As a result, many are saying the US is headed into a recession.

Weekly Market Summary

SPX fell 1.5% Tuesday and then rose almost 1.5% on Thursday before closing lower again on Friday. In the process, it crisscrossed its 50-dma three times in four days.

The indices were highly mixed for the week: SPX was down 0.8%, NDX was down 1.9%, but RUT was up 1.2%.

Driving the fall in NDX was its largest component. Apple fell 2.4%. Recall that Apple had risen 25% since the start of the year into the end of February. It has since fallen 8%. Here is the set up we shared at its recent high.

What A Rising (or Falling) Dollar Means to the S&P

Attention is gravitating to the Dollar, and for good reason.

In the past year, the Dollar index is up 25%.  Since 1980, the Dollar has only risen that quickly in one year once before: the period leading to February 1985. That turned out to be the Dollar's high, unsurpassed since.

Weekly Market Summary

On Monday, all 4 US indices closed at new bull market highs. They all moved lower the remainder of the week. For the week, SPX and DJIA lost 1.5% while NDX lost 0.9%.

Almost all of the week's losses occurred on Friday following the monthly payroll release. The indices were generally down 1.5% on that day alone. Volume on SPY was 180m shares, the highest since the January 30 low.

Our overall view continues to be that 2015 will not be like 2013 or 2014. This is a year where fundamentals improve while equity prices mark time, allowing sentiment and valuation to fall back inline. This is a common pattern: large parts of 1994, 1996, 1998, 1999, 2004 and 2005 were similar. That November and December were the first back to back down months in 3 years bears out the change in character.

March Macro Update: Consistently Better Growth

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

At the time, the consensus view was that growth in wages and employment were accelerating and that this would soon lead to a meaningful increase in inflation above the Fed's 2% target. Our monthly review of the data has consistently shown this expectation to be premature.

This post updates the story with the data from the past month. We are now starting to see consistently better growth. Highlights:

• In the past 12 months, the average monthly gain in employment has been 275,000, the highest since 1994
• Despite improving employment, there hasn't been any notable sustained acceleration in wages
• Real personal consumption (70% of GDP) grew 3.4% in January, the highest rate of growth in 8 years. Real retail sales grew 3.5%
• The manufacturing component of industrial production grew 6.0% in January, the highest rates in 4 years  
• New home sales were the highest in 7 years for the second month in a row
• However, the inflation rate continues to decelerate. It has fallen to its lowest level since 2009  

Our key message has so far been that (a) growth is positive but modest, in the range of ~3-4% (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, profit expansion and valuation levels.

Let's review each of these points in turn. We'll focus on four categories: labor market, inflation, end-demand and housing.


Employment and Wages
The February non-farm payroll (295,000 new employees) followed the incredible 423,000 in November. NFP has been above 200,000 every month for 12 months in a row. It hasn't been above 200,000 that many months in a row since 1993-95.

In the past 12 months, the average gain in employment was 275,000, the highest since 1994.

What is noteworthy is that monthly NFP prints are normally volatile. Since 2004, NFP prints near 300,000 have been followed by ones near or under 200,000 (circles). That has been a pattern during every bull market.  The consistent strength in monthly NFP recently is simply remarkable.

An Employment Surprise Is Overdue

Tomorrow, the BLS releases its monthly report on labor, commonly referred to by its acronym, NFP (non-farm payroll).

This is the single most followed statistic about the state of the economy, giving onlookers a regular view into employment and wage growth.

 There are three things to know about the NFP data.

First: The most important is that the annual trend in growth has been very consistent. In the past three years, the rate has varied from 1.5% to 2%. In the past three months, that has started to exceed 2% for the first time in 15 years; the rate of growth in January was 2.3%, the highest since June 2000.