Weekly Market Summary

SPX has now alternated direction (up/down) every week since March 11. March 11 was also the week SPX entered the 2000-07 expected resistance zone. It had gained 16% in the four prior months. In the seven weeks since then, it has gained a net 1.5%. In other words, 90% of the gains from this rally came before the resistance zone was met. The remaining 10% has come in the choppy trading since early March.

This has been without a doubt one of the strongest rallies in more than 30 years. SPX will likely close higher every month from November through April for the first time in 15 years. 2013 is the first time in 17 years that there hasn't been even a 5% retracement by May. The gain over the past 6 months is 4 times greater than the average annual gain in SPX.

Rallies like the current one have happened before, but they are less than a once in a decade occurrence. What makes this current rise unusual is that it did not start at a major bottom (like 2003 or 2009) but at the end of the successful uptrend in 2012. In the past 13 years, this has happened only once before: 2006-07. That rally eventually went up a total of 21%, just a bit more than the 19% this one has achieved. That rally was followed by a swift 7% decline, then a 15% rally into the major 2007 top. Should that pattern be repeated again now, SPX could rise to 1625, then fall to 1510 before rising later this year to 1740.

Two things are clear: on the one hand, more than 30 years of market history do not support a continued, significant, uncorrected rise in the SPX; and on the other hand, this rally has been successful at defying convention. It's therefore hard to say with conviction what might happen next. That is not a set up which favors disproportionate risk-taking.

Placing The Current Rally In Perspective

Let's place the current rally in perspective to determine whether it is unusual or extreme.

Key points:

• SPX is likely to close higher every month from November through April for the first time in 15 years. It's only the third such streak since 1980.
• The current rally has gone up by a larger percentage than two-thirds of the multi-month rallies of the past 13 years.  With only one exception, its the biggest rally that didn't start at a major bottom (like 2009).
• 2013 is the first time in 17 years that there hasn't been even a 5% retrace by May.
• The gain over the past 6 months is 4 times greater than the average annual gain in SPX.

Weekly Market Summary

In early March, SPX entered the 2000-07 resistance zone. Last week, after 6 choppy weeks of trying to move higher, it finally reached the top of this zone. This week, it fell 4%, ending right back where it was in early March. In the process, it broke the uptrend line that had held the SPX in a bullish channel since November. Downside volume was significant; two days this week recorded more than 90% downside volume, evidence of strong institutional distribution.

Prior resistance aside, there are two main reasons SPX fell. 

First, expectations for FY13 EPS are high. After EPS that has stagnated over the past 7 quarters, the market has been expecting 10-15% growth through the remainder of the year. 1Q13 reporting has started and, while it is still very early, the initial results are disappointing. The beat rate on revenues is the lowest since 2008. This bodes poorly for earnings growth for the rest of 2013, as margins are already exceptionally high and margin expansion has also stalled.  This implies weaker guidance going forward. As a result, whether they 'beat' or not, IBM, GS, GE and others have been sold after reporting, a risk we noted last week.

Second, the current uptrend is extended. Jeffrey Saut says the current rally has gone more than 100 sessions without a 5% pullback, the third longest since 2002. Momentum after a long uptrend typically fades as marginal demand is reduced. Last month, global funds were the second most overweight equities they have been since 2001. This month, global funds reported being net 20% overweight the US market; for comparison, they were 3% underweight in January (post). Margin debt is at the highest since 2007. Without a reset that shakes out weaker hands, it becomes increasingly hard to push prices higher. 

The theme in the market has been yield. This week, dividend paying utilities and consumer staples stocks made new all-time highs, as did junk bonds, and 30-year treasuries made new 2013 highs. Contrast this with US growth-oriented cyclicals; the cyclical index and 4 of the 6 SPX sectors focused on cyclicals closed below their 50-dma. Both the Russell and Nasdaq are also below their 50-dma, as are the Euro 350, emerging markets and All World Ex-US index. 

So what's next? 

Ex-US markets, the Russell, Nasdaq, transport and semi-conductor indices (all of which lead) broke their uptrends in February and March. SPX is following. Those other indices have been chopping in a 5-8% wide horizontal pattern. On the upside, after their first touch of their 50-dma, they retested their highs. SPX touched its 50-dma Thursday and could well be on its way back to 1600. 

The Pattern That Is Developing

One of the oldest axioms on Wall Street is that the market redistributes wealth from the many to the few. It will, in other words, fool the most. Keep that in mind as you read further.

We have previously noted how 2013 appears to be, in many ways, a dead ringer for 2011, a year in which SPX started very strong, following on the heels of a great market in 2010, then proceeded to trade sideways in a 10% band for 5 months. Sentiment, fund lows, sector rotation, ex-US markets and junk bonds have all behaved very similar between the two years. Catch up with this analogy here.

We've also noted the recent pattern in the market, shown in the first chart below. After a long uptrend (blue line), the upward momentum begins to wane, the trend line is breached and trading becomes choppy, with break downs and break outs failing (yellow areas). By appearances, SPX is starting to repeat this pattern now. Having said that, re-read the first paragraph above.

What lends some credence to the pattern playing out again is that we are seeing it in other markets and sectors.

Time to Pay Attention to Macro Again

The Citi Economic Surprise Index (CESI) for the US crossed below zero this week. This is the second time this year it has done so. CESI is indicating that macro data is coming in below expectations.

A couple of points:

Global macro cycles tend to most often be highly correlated. You can see that in the first chart below. The red lines indicate periods where CESI in the US (top panel) has corresponded with downside data from the G10 economies. In the current situation, the US data is weakening at a time when G10 data has already been weakening for several weeks.

If you have been following treasury yields moving higher the past month and commodity prices moving lower this year, this should not come as a major surprise.

In late January, CESI for the US turned negative. In March, it turned positive again. Might this happen again now? It's less likely. In the same chart, note the black circles. The false breaks in US CESI have occurred when the G10 was stronger. That's not the case now.

What are the implications for US markets?