Every Zig Has a Zag

With SPX approaching 1800, we suggested a reaction of 4-10% was probable, allowing for an overshoot to 1820-30. This was the historical precedent at prior round numbers and it was moreover supported by other market data (post here).

Further supporting evidence is in the latest Weekly Market Summary (post here).

This post looks at the length and extent of the current rally relative to others over the past 20 years, a period which includes the late 1990's tech bubble, i.e., the strongest rally ever seen in the market.

From the November 2012 low a year ago, SPX has risen 34%. A long, strong rally, but one which is not unprecedented.

The chart below uses 1-year log-scale boxes with a 34% rise in price. In the past 20 years, there have been six other comparable rallies, four of which were in the late 1990s.

We have not included rallies off of a significant low (1994, 2003, 2009) as the start of a bull market is expected to be long and powerful.

Weekly Market Summary

Two themes continue to define the market.

First, that underestimating this bull has been the biggest mistake in 2013.

And second, that what has mattered has been trend and volatility and what has not mattered has been everything else (sentiment, valuation, breadth, seasonality).

This continues to be the case through this week, with all four indices making new highs.

We are proponents of using the 13-ema to judge trend in SPX. Two consecutive closes below is typically sufficient to make this moving average decline and provide a heads-up that a larger move to the 50-dma might be in store. The 13-ema for SPX has been rising since mid-October. This Wednesday's low nearly touched it. The trend higher remains intact for now.

Weekly Market Summary

3 of the 4 US indices made new highs this week, as did 8 of the 9 SPX sectors. Both trend and breadth are strong.

SPX closed higher for a 6th week in a row. It has closed higher on the 7th week just twice in the past 10 years (including January of this year). This kind of strength has, in the past, led to higher highs in SPX further out. The trading odds are here (via @WildcatTrader).

Coming up next for SPX is a breach of the 1800 level. In the past, centennial milestones (1400, 1500, etc) have led to anywhere from a 4% to a more than 10% reaction. We detailed this yesterday here.

Your Risk/Reward in SPX is More Than 2:1 Negative

Its very clear that US equities are in a strong uptrend. Not only are the major indices hitting new highs, but a majority of the sectors are, too (thus confirming breadth). This is not, therefore, a "this is the top" post.

SPX is approaching 1800. Over the past three years, each round number milestone (1400, 1500, etc) has been met with a negative reaction of at least 4% and at times more than 10%. On an overshoot to 1820-30, SPX has upside of 2% versus more than 4% downside, a negative profile.

Fund Managers' Current Asset Allocation - November

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 positioned in various asset classes. These managers oversee a combined $700b in assets.

There was very little change since October. Overall, fund managers remain very bullish on risk. In September, exposure to global equities was the second highest since the survey began in 2001; it is only marginally lower now. What is particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013). This is longer than any period between 2003-07.