Weekly Market Summary

Summary: Equities fell this week, led by an 11% drop in the US's largest stock, Apple. For the first time since the February low, the near-term trend in SPY is weak: the current set up normally leads SPY, through price and time, to its 50-dma and lower Bollinger Band, both currently about 3% lower. Overall, breadth, sentiment, macro, commodities and seasonality support higher equities prices in the week(s) ahead. The month of May typically starts strong and the Nasdaq has been down 7 days in a row: combined, these suggest a positive start to the week is likely.

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Equities fell this week. Worldwide, equities lost just 0.4%, as did emerging markets. Europe lost 2%.

In the US, SPX and small caps lost 1.2%.  Leadership has moved to small cap stocks: the RUT made a new 2016 high this week.

For the second week in a row, NDX was the laggard: it lost 1.5% last week and another 3% this week.

What accounts for the disparity between the greater weakness in NDX and the other indices? Primarily, the price of oil. Crude gained another 5% this week and helped offset weakness in SPX and RUT. NDX has zero exposure to energy.

Safe havens - treasuries and gold - were higher: treasuries gained 0.8% and gold gained 5%.

Why did equities fall this week? It's an important question because the cause of weakness says much about what happens next.

Deteriorating breadth was not the cause. Below the surface, breadth has been strong.

The NYSE advance/decline line - the cumulative total of the daily difference between advancing issues and declining issues on the NYSE - reached a new all-time high on Wednesday. This means that participation in the rally continues to be widespread. Recall that the advance/decline line has declined before the SPX has made its final high at every cyclical top in the past 50 years. Further gains should still be ahead (post here).

The average stock in the SPX has been rising faster than the size-weighted index (lower panel). This is another way of saying that participation has been strong. It's not a perfect predictor, but very often the average stock will underperform the size-weighted index before a correction of greater than 5% (arrows). That hasn't happened.

Sell in May And Buy Back Higher In November

Summary: The "summer months" start next week. The period from May through October is known as the "worst 6 months" of the year for stocks. True, the probability of a truly bad month is higher and the probability of a really great stretch of months is lower during the summer than in the winter. But, overall, the expected return over the next 6 months is positive: median returns in winter and summer since 1970 are nearly the same. You might very well sell in May and buy back higher in November.

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One of the axioms of Wall Street is 'sell in May and buy after Halloween'.  Mark Hulbert says that over the past 50 years, the Dow has an average return of 7.5% from November through April ("winter") versus an average loss of 0.1% from May through October ("summer").

So, is the summer period that awful?

Using SPX instead of the Dow, the data since 1970 still favors winter over summer: the average return is 6% in winter versus 2% in summer.

But this data is skewed by a few outliers; stocks fell 37% in the summer of 2008, by 20% in 1974 and 15% in 1987, to name a few.

Using median values, winter's return is 5% versus 4% in summer. That's a very small difference. The returns in summer are typically positive, meaning, you might very well sell in May and buy back higher in November.

Overall, 76% of winters since 1970 have been positive; fewer summers are positive (67%), but the difference is slight.

So why do investors fear the summer months?  There are two reasons.

First: since 1970, 64% of the worst months (in which stocks fell 5% or more) occurred during the summer.  A bad month is twice as likely during the summer as the winter. 

Moreover, really bad seasons with losses of more than 10% occur more often in the summer: 13% of summers experience a "correction" versus only 4% of winters.

Second: great returns overwhelming take place in winter. 37% of winters produce a return of 10% or more. In comparison, only 17% of summers have produced a great return. A good stretch in the market is more than twice as likely during the winter as the summer.

Weekly Market Summary

Summary: SPY made a new all-time high this week. The short and long term trend is higher. Despite a gain of 16% over the past 10 weeks, the majority of evidence indicates that investors largely remain skeptical and defensive. That, together with strong breadth, implies that higher highs still lie ahead. Shorter term, SPY is back to where it failed, repeatedly, to go higher in the spring, summer and fall of 2015. In the best scenario, attaining and then holding significant gains will likely take time.

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Equities rose again this week. Worldwide, equities gained 1.5%. Europe gained 1.5% as did US small caps. SPY and the DJIA gained 0.6%.

Weakness was confined to large tech companies: NDX lost 1.5% but the equal-weight version of NDX (QQEW) was flat. In other words, a few large tech companies pulled the Nasdaq 100 lower.

Safe havens - treasuries and gold - were weak: treasuries lost 2.6% and gold was flat.

By most accounts, the uptrend from the February low continues to be strong. SPY has gained in 8 of the past 10 weeks. It has also gained in 7 of the past 9 days.

Since mid-February, SPY and NDX have both gained 16%. Leading the upside, however, has been emerging markets, which are up 25%.

Advances as strong as the current one are relatively rare. The S&P has made a "higher low" every week since mid-February. Since 1954 (62 years), this has happened only 13 other times. What happened next? In every case, the S&P had a higher weekly close within the next 2 months. At the end of 2 months, 85% of these cases closed higher.

Below the surface, breadth has been strong. The NYSE advance/decline line - the cumulative total of the daily difference between advancing issues and declining issues on the NYSE - reached a new all-time high on Friday. This means that participation in the rally continues to be widespread.

For those concerned about a bear market, this is significant. The advance/decline line has declined before the S&P has made its final high at every cyclical top in the past 50 years. This implies further highs still lie ahead. Read more on this from Dana Lyons here (enlarge any chart by clicking on it).

The New All-Time High in SPY That Was Considered Impossible

Summary: SPY made a new all-time high on Tuesday despite falling margin debt, the end of QE, negative household fund flows, flat profit growth and a host of other reasons. In other words, exactly as a rationale and objective investor should have expected.

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SPY closed at a new all-time high (ATH) on Tuesday. Recall that SPY pays a 2% dividend, so a new ATH in SPY is equivalent to a new ATH in the S&P 500 index on a total return basis. The Dow Jones Industrials index has also made a new ATH on a total return basis (enlarge any chart by clicking on it).

Is this the top?

Fund Managers' Current Asset Allocation - April

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 14%. Despite this, investors remain defensive. Over the past month, cash balances have risen and allocations to equities have declined. 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 12 months. Europe remains overweight. Emerging markets remain underweighted but allocations have jumped significantly in the past three months.

The dollar is still considered overvalued. Under similar conditions, the dollar has fallen in value. In the past two months, the dollar index has fallen 6%.

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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 April (5.4%) is still near the highs and is supportive of further gains in equities.

April Macro Update: Still No Sign of an Imminent Recession

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 234,000 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 2.3% yoy in March.
• Most measures of demand show 3-4% nominal growth. Real personal consumption growth in February was 2.8%.  
• 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 2008.

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

• Core durable goods growth fell 1.6% yoy in February. It was weak during the winter of 2015 and it has not rebounded since. 
• Industrial production has also been weak, falling -1.0% yoy due to weakness in mining (oil and coal). The manufacturing component grew 1.8% yoy.

Prior macro posts from the past year are here.

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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 March non-farm payroll was 215,000 new employees minus 1,000 in revisions. In the past 12 months, the average gain in employment was 234,000. 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.