Weekly Market Summary

Most weeks have ended with a clear set up for the week ahead. That wasn't the case last week. In the event, SPY, NDX and DJIA ended only slightly lower, while RUT lost more than 1%.

Our main conclusion from last week was that risk/reward in the US indices is skewed to the downside in the months ahead until the market experiences a washout. Nothing transpired this week to change that perspective. Read the full post here.

Our main short-term tells for the indices played out to the downside this week. For SPY, the key was to hold the 187 level. It failed and is now back in a well travelled zone where it has not had a meaningful reversal until price has reached 184.5 or lower. Note the very minor positive divergence in RSI.

Will AAPL Outperform Based Only Its Corporate Finance Activities?

What happens to Apple (AAPL) matters greatly to the market. AAPL is the largest capitalized company in the US. Its weighting in QQQ is about 12%; in SPY, it's about 3%.

After the close, AAPL announced an increase in its share buyback program (from $60b to $90b) and an 8% increase in its dividend. In response to the news, AAPL shares jumped 8% in after hours trading.

Aside from in the short term, will these non-operating actions make AAPL a better performing stock? Probably not.

To be clear, this discussion is completely independent of AAPL's operating fundamentals or valuation attractiveness. We have no view on these except to say that both are key drivers of the share price.

And that's the main point: operating fundamentals and valuation matter, corporate finance activities like these generally do not. If investor's liked AAPL before, these activities should make it no more or less attractive.

Let's take the stock split, the dividend increase and the share buyback issues separately.

First, AAPL's plan is to split it's shares 7:1, reducing the share price to $75-80.  Companies normally split their shares because they have been rapidly appreciating. In other words, companies that split their shares are doing well. And in fact, if you look at a portfolio of companies that have split their shares, it generally outperforms the SPX.

Weekly Market Summary

The set-up coming into this past week was clean: SPX and NDX exhibited breadth extremes from which they usually bounce and April Opex is a seasonally strong week (post).

In the event, SPX rose nearly 3%. In the process it exhibited a familiar pattern: overnight gaps in the past 4 days accounted 60% of the week's gain. Cash hours, when liquidity is greatest, was not where the meat of the gains took place. That was even more true for RUT and NDX which only posted cash hour gains during two of the four days.

After a sharp drop and a strong bounce, where does that leave the markets? Let's run through each of our market indicators.

Trend
Long-story short: trend is a mess. There is still a 1-year uptrend but there is also a 6-week downtrend.

Start with NDX. The positives are that it is still in a larger uptrend channel and its MACD and 13-ema are setting up for bullish cross on further strength. The negatives are that it was the only one of the US indices to trade below its February low, it hasn't made any net progress in four months, its under its 50-dma and there is a potential head and shoulders top being created.

Fund Managers' Current Asset Allocation - April

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

What has been particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013 and so far in 2014). This is longer than any period during the 2003-07 bull market (yellow shading). In September, exposure to global equities was the second highest since the survey began in 2001. In the past, after a massive overexposure, a washout low would be marked by an equity weighting under +10%.

In April, despite an 8% fall in Nasdaq and small caps, global equity allocations actually increased to +45% overweight.

In March, equity exposure appeared to fall substantially, but this was misleading. Allocations to Europe, the US and EMs were virtually unchanged. The exception was Japan, where fund managers halved their substantial exposure to a 12-month low. This accounted for all of the month over month decline in equity allocations in March. Japanese allocations fell further in April.

Weekly Market Summary

Last week ended with a failed break-out higher in SPY and with RUT and NDX plumbing below their 50-dma. This was our conclusion: "Often, having failed to break out higher, an index will test the bottom of the range (183), also the area of its 50-dma" (post).

In the event, SPY tested its 50-dma, bounced for two days and then closed lower. RUT and NDX are now off more than 7% from their highs in March. Both of those indices are now at interesting junctures. 

RUT is now right on its 200-dma for the first time since November 2012. Look back earlier and you'll see an initial bounce on the 200-dma two different time before heading lower. That's a likely set up here as well.