Weekly Market Summary

Summary: Equities fell for the first time in six weeks. The intermediate-term uptrend remains healthy, but some minor short-term weakness has crept in. SPY could be setting up within a trading range between 200 and 206: fading extremes at these levels is probably the set up going forward.

Equities are entering a buyback blackout period, but these have had no consistent bias (positive or negative) in the past. April starts Friday: over the past 10 and 20 years, April has been one of the most consistently positive months of the year for stocks.

* * *

Equities fell this week for the first time since the February low. They had risen each of the prior 5 weeks. SPY lost 0.6% and NDX lost a scant 0.1%. Leading the downside were small caps, with RUT losing 2% for the week. Emerging markets also lost 2%.

Safe havens - treasuries and gold - which had been in high demand during the sell off in equities, were mixed. Treasuries gained 0.4% this week but gold dropped 3%.

Oil and equities had risen together the prior 5 weeks. Not surprisingly, oil also fell this week, by nearly 4%. What happens next for equities is largely contingent on oil: if the rally in oil is over, it is very likely equities will sell off more (enlarge any chart by clicking on it).

Current Investor Concerns

The US economy is stuck in one of the most sluggish recoveries in history. Growth is just 2% and it will remain slow as consumers and companies work off vast amounts of debt. The country has gotten off track and neither political party has any answers.

These sentiments were written in Time in 1992, the year one of the biggest growth eras in American history began. But these same words are often used to describe the current economic environment.

Weekly Market Summary

Summary: Equities rose for a fifth week in a row. In many important ways, the current uptrend does not fit the profile of a bear market rally. That means that further gains lie ahead and a return to the February low is unlikely. On a shorter timeframe, there are several compelling reasons to expect a retracement of recent gains in the days ahead.

* * *

Equities continued to rally for the fifth week in a row. SPY has risen 11 of the past 14 days. SPY, NDX and RUT all gained over 1% for the week. Emerging markets gained 3%.

Safe havens - treasuries and gold - which had been in high demand during the sell off in equities, also gained. Treasuries had sold off the past 4 weeks in a row but gained just over 1% this week. Gold was up just 0.3%.

Oil has been leading to the upside every week since the bottom on February 11. This week it was up another 6%. Equities have gained 12% off the bottom; oil is up more than 40%.

The rally in equities is, for now, contingent on oil continuing to move higher. Should the rally in oil fail, it is very likely equities will sell off (enlarge any chart by clicking on it).

Fund Managers' Current Asset Allocation - March

Summary: At the panic low in equities in February, fund managers' cash was at the highest level since 2001, higher than at any time during the 2008-09 bear market. Global allocations to equities had fallen from 40% overweight to only 5% in just two months. Since 2009, allocations had only been lower in mid-2011 and mid-2012, periods which were notable lows for equity prices during this bull market.

Since then, equities around the world have risen an average of 12%. Despite this, investors remain defensive: cash balances remain high and allocations to equities have increased only slightly. This supports higher equity prices in the month(s) ahead.

Allocations to US equities remain near an 8-year low, a level from which the US should continue to outperform, as it has during the past 11 months. Europe remains very overweight. Emerging markets remain underweighted but allocations have jumped significantly in the past two months.

In February, the dollar was considered to be the most overvalued in the past 9 years. Under similar conditions, the dollar has fallen in value. In the past month, the dollar index has fallen 5%.

* * *

Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better 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. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Cash: Fund managers cash levels in February were 5.6%, the highest since the post-9/11 panic in November 2001, and lower than at any time during the 2008-09 bear market. This was an extreme that has normally been very bullish for equities. Cash in March declined to 5.1%. This is still high and supportive of further gains in equities.

Weekly Market Summary

Summary: Equities rose the fourth week in a row, led by continued strength in oil. SPY has now rallied 11% and is back above a key support level and its 200-dma. Breadth momentum during this rebound has been stronger than nearly every bear market rally in the past 16 years. Moreover, despite the large gains, investors remain mostly skeptical. Turbulence during the upcoming March OpX week would be normal, but this week is seasonally bullish. Below, we outline what to look for before assuming the rally has come to an end.

* * *

Equities continued to rally for the fourth week in a row. SPY gained 1% while NDX and RUT gained 0.8% and 0.5%, respectively. Emerging markets also gained 1%.

Safe havens - treasuries and gold - which had been in high demand during the sell off in equities, were lower, each losing about 1%. Treasuries have sold off the past 4 weeks in a row.

Oil gained another 6% this week. It's leading to the upside.

The rally in oil has coincided perfectly with the rally in equities: both bottomed on February 11, the same day high-yield bonds and treasury yields also bottomed, and both have risen the last 4 weeks in a row. The rally in equities is, for now, contingent on oil continuing to move higher. Should the rally in oil fail, it is very likely equities will sell off (enlarge any chart by clicking on it).

Where SPY Will Go Next According to Twitter Finance

Summary: Despite a 10% rally, investors on Twitter Finance have not turned more bullish, even when given a strong disincentive to be bearish. From a pure sentiment basis, this implies that the current rally probably has further upside ahead.

* * *

The day after the February low, we posted a survey on Twitter Finance: would SPY rise $15 or fall $15. From a price of $185, these were symmetrical outcomes.

The result of the survey was a bit surprising: a small majority foresaw a further fall. At the time, SPY had already fallen by about 14% and investors sentiment was extremely bearish. A good hypothesis would have been that many more on Twitter Finance would be bearish than the survey showed.

This week, we posted a second survey: would SPY rise $10 or fall $30. Instead of a symmetrical outcome like in the first survey, we made it much easier to choose the bullish option. The survey also came after SPY had risen 10% in three weeks. A good hypothesis would have been that many more on Twitter Finance would have turned bullish. Instead, there was no change from the first survey.

Despite the strong rally over the past month, flows into equity funds have continued to be negative. Sentiment surveys from a number of sources have shown only a small uptick in bulls (click here for an example). An interesting study by Brett Steenbarger shows that shares in SPY have been redeemed on a net basis over the past several weeks, meaning: "Investors have not believed in this rally and, if history holds, that's one indication that the rise could continue" (click here for his article).

In the same way, our Twitter Finance surveys showed no increase in bulls even after a 10% rally and the addition of a low bull hurdle/high bear hurdle as an incentive to choose the bullish option. From a pure sentiment basis, this implies that the current rally probably has further upside ahead.

If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.

Weekly Market Summary

Summary: Equities rose 3% for their third weekly gain in a row, led by small caps and further gains in oil. SPY has now rallied 10%, back to a level that was major support throughout most of 2015. It would be easy to say that the rally ends here, but strong breadth, persistent investor pessimism and strength in other asset classes suggest that further upside ultimately lies ahead. That said, by the end of the week, the advance showed several signs of being overextended; weakness early next week would be normal. In fact, if equities continue with an uncorrected rally, those gains are likely to be given back in the weeks ahead.

* * *

Equities continued to rally for the third week in a row. For the week, SPY gained 2.7% and NDX gained 2.2%. RUT again led to the upside, gaining 4.3%, making this a broad-based rally.

Safe havens - treasuries and gold - which had been in high demand during the sell off in equities, were split: treasuries lost 1% for its third weekly loss in a row, while gold rose 3% after falling the prior two weeks.

Oil gained another 10% this week. It's leading to the upside.

It's easy to forget, but the correlation between asset classes remains very high, with the common denominator being the price of oil. Oil bottomed on February 11, the exact same day equities, high-yield bonds and treasury yields all bottomed. Until Thursday, that day also marked the high point for gold.

The implication is that for the rally in equities to continue, the price of oil has to also rise, or at least stabilize.  We'll review other indictors, but it's likely these will make little difference if oil starts to fall. It's the single biggest wild card facing all of these markets in the weeks ahead (enlarge any chart by clicking on it).

March Macro Update: Recession Risk Remains Remote

Summary: The macro data from the past month continues to point to positive but sluggish growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The main positives are in employment, consumption growth and housing:

• Employment growth is close to the best since the 1990s, with an average monthly gain of 222,000 during the past year.  Full-time employment is soaring.
• Recent compensation growth is the highest in more than 6 years: 2.7% in December, dropping to 2.2% yoy in February.
• Most measures of demand show 3-4% nominal growth. Real personal consumption growth in January was 2.9%.  
• New housing sales, starts and permits remain near an 8 year high. 
• The core inflation rate ticked up above 2% and to the highest rate since May 2012.

The main negatives are concentrated in the manufacturing sector (which accounts for just 10% of GDP):

• Core durable goods growth fell 2% yoy in January. It was weak during the winter of 2015 and it has not rebounded since. 
• Industrial production has also been weak, falling -0.7% yoy due to weakness in mining (oil).

Prior macro posts from the past year are here.

* * *

Our key message over the past 2 years has been that (a) growth is positive but slow, 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.

Modest growth should not be a surprise. This is the typical pattern in the years following a financial crisis like the one experienced in 2008-09.

This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels. The saying that "the stock market is not the economy" is true on a day to day or even month to month basis, but over time these two move together. When they diverge, it is normally a function of emotion, whether measured in valuation premiums/discounts or sentiment extremes.

A valuable post on using macro data to improve trend following investment strategies can be found here.

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


Employment and Wages

The February non-farm payroll was 242,000 new employees plus 30,000 in revisions. In the past 12 months, the average gain in employment was 222,000. Gains since 2014 have been the highest since the 1990s.

Monthly NFP prints are normally volatile. Since 2004, NFP prints near 300,000 have been followed by ones near or under 100,000. That has been a pattern during every bull market; NFP was negative in 1993, 1995, 1996 and 1997. The low print of 84,000 in March, as well as the 'disappointingly weak' print in September, fit the historical pattern. This is normal, not unusual or unexpected.

McClellan Oscillator Hits 91

The McClellan Oscillator (NYMO) closed at 91 today. This is the first spike over 80 in NYMO since last October.

NYMO is a momentum indicator for breadth. When NYMO is positive and gaining, breadth momentum is increasing. This is generally good for the indices.

But breadth momentum can reach an extreme, and when it does, indices can fall in the next few days. That is the current situation.

The charts below look at all NYMO readings over 80 since 2009. Some conclusions:

Indices were generally weak in the following days. In most cases, indices traded at least 1% lower. In several cases, indices lost more than 3%. 

If the indices continued higher in the next day or two, it was by less than 1%, followed by a drop below the date of the high NYMO. 

The first spike higher in NYMO in several months (like now) didn't end the rally. The longest span before a "higher high" was one month (in September 2013).  

Let's review each case. In the charts below, SPY is shown in the upper panel and NYMO in the lower panel.

In November 2014, NYMO closed over 80. SPY fell 1% intraday the next two days, although the close on the second day was only 0.3% lower.

In October 2015, NYMO closed over 90. SPY gained 0.2% in the next two days before closing down 1% in the next two days.