Friday, November 8, 2013

Weekly Market Summary

The Short story:

The trend is up (chart).

The Long Story:

It's hard to beat SPX.

Money has been flowing at record pace into European equities, yet over the past 3 months and 5 months, SPX has appreciated by the same net amount (chart).

Emerging markets had been underperforming until summer, then started to strongly outperform. No more. They too are net flat against SPX over the past 3 months (chart).

SPX has beaten both over the past month.

Even small caps, which had been the leader through September (the beta-chase), have been beaten by large caps the past month and it's net flat against them over the past 10 weeks (chart).

The current cyclical bull market in SPX is the second strongest in 80 years, with a gain twice the average. It has advanced for over 1700 days, making it the longest since the massive one of the 1990s. It has now traded above its 200-dma for longer than at any time in the past 10 years. It has gone longer without a 3 week losing streak than all but two other rallies in the past 40 years. 2013 will be the 5th up year in a row for the Dow, an accomplishment it has achieved only 3 times before in the last 113 years.

This week it added another feat: making a new 20 day high and a 10 day low on the same day for the first time ever. That was Thursday. On Friday it regained every penny it had lost from Wednesday's close.

The biggest mistake of 2013 has been underestimating this bull market. It poses a dilemma for traders.

No matter how you measure it, the duration and extent of the rally relative to history suggests that it is in the late innings on a cyclical-basis (not on a secular-basis). Investor allocation to equities is at a 6 year high; funds allocation to equities is near a 13 year high; cash levels are among the lowest since 2001; "dumb money" confidence is at a 30 month high; investment advisors are more bullish than they ever were during 2004 to 2007; institutional "smart money" has been selling. The list goes on (all data here).

Below is equity put/call (at a low), followed by Nasdaq daily sentiment (DSI), at a new high.

Meanwhile, valuations relative to history are over the 90th percentile on several measures.

At market troughs, trend and macro look terrible and volatility is high, but sentiment and valuation are attractive. In the late innings, the opposite is true: trend, macro and volatility look great but sentiment and valuation look stretched. That is the current set-up. And that, of course, can go on.

Two positives occurred this week: macro relative to expectations moved higher, and in response, treasuries moved lower. Treasuries have been moving together with equities for 3 months. In the past week, the two have started to diverge. On the face of it, treasuries are confirming the move higher in equities (chart).

Next to watch will be the CRB index. If there is macro growth around the corner, commodities should start move higher. Friday's action was a first small step.

Going into next week, SPX will start at the top of its 6 month channel. It formed a momentum low on Thursday. Very often, a price low occurs within a week. Note that this did not happen at the October low (circle), and Friday's rally was extremely powerful.

Aiding that, perhaps, will be treasuries, which ended the week on a very significant support level. It has formed a large red candle like this week's at prior lows, so this week's action was not unprecedented. It looks bad, but it's not entirely done.

While Novembers are typically very strong, they tend to have a wide range. The last several years have also seen weakness, especially mid-month. This week is also OpX; SPX has been down 6 of the last 10 November OpX weeks, as well as 4 of the last 5. The average loss is 3.7x the average gain (here). SPX and NDX have also been up 5 weeks in a row; according to Tom Bulkowski, a 6th week up has less than a 10% probability (here).

Finally, the spread in sentiment, when this wide between "smart" and "dumb", leads to weakness over the next 2+ weeks. The only time there was not a lower close in the next 3 months was in 1997. This is a strong indicator, with a 94% win rate (data from Sentimentrader).

Note on earnings: 89% of SPX have now reported. 3Q EPS growth is tracking 3.4%, well below the 7.2% growth expected on 7/1 when the quarter began. Sales are tracking 2.9% (vs 3.0% expected). FY13 EPS has now been revised lower to 4.9%. On 12/31/12, it was 9.5%. Sales are tracking lower at 2.1% vs 3.7% on 12/31/12.