Weekly Market Summary

1Q13 ended this week with SPX up about 10% year to date. It is one of the fastest starts to any year and, impressively, follows 12% gains in FY12.

All 9 SPX sectors and the 4 main US indices have been in uptrends for the past 19 weeks (chart). No trend lines have been broken and their 20 and 50-dmas are rising. Moreover, the weekly trend favors equities over bonds. Seasonality is very strongly in favor of equities throughout April. Finally, volatility is very low, a strong indicator of favorable equity performance in the past.

SPX entered an area of strong prior resistance two weeks ago (chart). The 2007 high (1575) and the 2000-07 trend line (1590) are about 1% higher from here. Price action since entering this resistance zone is telling; SPX has been largely alternating direction (up, down) every day for these two weeks and there have been nine overnight gaps. Total gain: 0.4%.

Sector rotation is also telling: in the first half of 1Q, high beta and cyclical stocks led, supported by commodities and ex-US markets and by declining bonds (chart and chart). The second half of 1Q couldn't be more different: high beta, ex-US markets and commodities were all negative; defensive dividend stocks are responsible for the market moving higher. Moreover, treasuries have been equal performers over the past six weeks and led the past 3 weeks (chart and chart). The Euro 350 looks like it has broken trend (chart), following emerging markets (chart).

Breadth is mixed. On the one hand, the advance-decline line keeps marching higher. But the day to day alternation in the market appears to masking distribution (post and chart). We know from 2012 that this can persist for many weeks amidst higher prices, but we also know that price eventually gives way (post and updated chart). Darren Miller has a very interesting alternative way of seeing this (chart).

Seasonality in April, especially during post-election years, has been very strong. But SPX has now been up every month since November. It has not also closed higher in April after that long a stretch in the past 15 years. Put another way, April has been strong partly because at least one of the prior 5 months has provided a dip. That hasn't happened this year (post and an un-updated chart).

Finally, a word about the strong start to 2013. It is true that a fast start in 1Q is, on average, a positive for FY results. But there are two major caveats to this statistic. First, many of those fast starts happened when the prior year was either flat or followed a bear market (1983, 1991, 1993, 1995). Second, in the other years, all of the 1Q gains were entirely given up in 2Q (1987, 1996, 2006, 2010, 2011, 2012). What is the relevance to 2013? It follows neither a flat year nor the bottom of a bear market. Which means, on average, that 2Q is typically rough. That is simply the historical record when you look at fast starts in 1Q next to comparable years since 1980. It doesn't mean 2013 won't end up being a great year. It already is, up 10%. But, betting on all zig with no zag is a low probability event. Read about timing and magnitude here. 

The coming week is the last before 1Q earnings reporting begins (Alcoa in Monday, April 8). 1Q EPS is expected to decline by 0.7% (post). 

What to Expect in April

The best six months of the year are November through April. April is particularly strong, with the Dow up more in April than any other month over the past 20 years and the past 50 years.

Post-election years are particularly strong for April; according to Stock Traders Almanac, April is the second best month for the Dow and the fourth best for SPX. A number of good charts on performance during April can be found here.

So, all is good, right? A few caveats worth keeping in mind:

First, SPX has been up every month starting in November 2012. It has not also closed higher in April after that long a stretch in the past 15 years. Put another way, April has been strong partly because at least one of the prior 5 months has provided a dip. That hasn't happened this year. Since 1980, there has been a 5% dip before April 90% of the time (here).

Second, the post-election pattern is for a weak March followed by a strong April. March in these years is typically one of the worst of the year. Unless something dramatic happens Thursday, March will close up strongly (right now, it is up 3%). This pattern is apparently off.

Third, April has been a key turning point in many years in the past, especially the past 3. Those years bear a strong similarity to 2013. See the chart below. Why is it a turning point? Because April is also the last month before the traditionally weakest 6 months of the trading calendar, a period when bonds have a pronounced tendency to outperform (read here). Trade the trader.

Sentiment Is Not Bearish

There are many debates worth having in the markets right now. The most valuable to us is the apparent strength in US macro against an incredibly weak economy in Europe and parts of the developing world. How this translates into earnings growth, where expectations are very high and yet half come from outside the US, is fundamental to FY13 performance of SPX. There are valid arguments from both sides to be considered.

One debate not worth having is sentiment, specifically questioning whether investors, pundits and the media actually are now bearish equities, meaning, the real contrarian play is to go long(er).

Sentiment works best at bottoms; prices fall quickly, everyone panics and sells. Sentiment studies work nicely here because bottoms are notable events. Tops are much more difficult; prices flatten, the process can take months, during which some become conservative and others stay bullish. This creates divergences (bulls decline while indices move higher) that are harder to interpret. For examples, read further here, here and here.

The first chart is a recent analysis that has led several to conclude that everyone has turned bearish just as SPX and DJIA have reached all-time highs. When the blue line on the chart is high, "too many expect a correction" (like now).

Time To Short Treasuries?

There are three data points you might want to consider before deciding to swing at that pitch.

Short Side of Long (with a new publication I recommend reading, here) uses COT data for small speculators to show that they are already way ahead of you. As a group, they are mega short, which has previously been the signal to look long instead.

Weekly Market Summary

In the past two weeks, SPX has traded in an open/close range of just 1%. The net gain during this time has been exactly zero. Over the past 7 days, SPY has gapped overnight 6 times. And over the past 8 days (including Sunday), ES has alternated direction (up, down) everyday with only one exception. In short, this is a market either changing direction or simply looking for direction.

Since mid February, there has been no net performance differential between SPX and TLT (chart). When you include the higher yield of bonds, equities have underperformed. Moreover, upside has been half of the downside range during this period. This means there has been no reward for risk; in fact, risk (upside)/reward (downside) has been much less than 1. It also implies a divergence has taken place, with equities moving up in the past month as bond yields have sunk (read further here).

None of the 4 US indices nor any of the 9 SPX sectors have either broken their trend line nor made a meaningful lower low over the past 18 weeks (chart). That is a strong trend and, as we have said, this is the most important indicator of the market.

Beneath the surface, however, defensives stocks have, as a group, been leading in the past two months (chart). Cyclicals have been a mixed bag, with some keeping pace with SPX and several underperforming. Andrew Thrasher has shown that high beta has been underperforming low beta, a negative development in the past (chart). Leaders on the way up, Amazon and Goldman, have each lost about 10% within the past two months. Semiconductors (which lead the tech cycle) have gone sideways during this time and have recently broken their trend line (chart). All of these are below their 50-dma.

The implication is that US markets may be beginning the sideways pattern that has been present in the Euro 350, All World Ex-US and Emerging Markets for most of 2013 and from which the US indices have so far been immune. The see-saw action with no net gain and frequent overnight gaps of the past two weeks are typical hallmarks.  To watch going forward is the sideways pattern (chart; explained here).

As it has been since the first week in March, SPX is within a prior area of strong resistance (1555-1575) just as its upward momentum typically begins to fade, (here and here). There is another 1% to the top of the range and an overshot could easily take it 2% higher. Weigh this potential reward against the fact that, since 1980, the probability of a 5% correction by the first week in April is 90% (read here). 1Q13 EPS season begins shortly and guidance has been downward (here and here). To take the market significantly higher, fund managers will need to commit more capital, yet their exposure to equities increased 6 percentage points in the last month and is now the second highest of any period since 2001 (here).