Saturday, March 30, 2013

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).