Friday, December 6, 2013

Weekly Market Summary

After a 5 day sell off, SPX closed higher Friday, nearly engulfing the entire week to date. It closed the week with a very small loss.

SPX had closed higher the prior 8 weeks in a row, the second longest streak in the past 10 years. The only longer one was in 2004 (9 weeks).

The main upshot is that long winning streaks like these do not mark market peaks. There is a high probability of a higher high on a weekly closing basis ahead. Ryan Detrick posted the SPX results for the weeks ahead (here).

The only caveat is this: the 2004 streak was also the prelude to the weak 2004 market year, when the indices took almost a year-long break, trading sideways and down before the uptrend resumed. More on this theme below.

The overall trend higher remains intact. All the US indices and a majority of the sectors are in both long and short-term uptrends.

If there is weakness creeping in, it is in select ex-US markets. The All World Ex-US index, the Euro Top 100, the FTSE and the Australian ASX are all below their 50-dma. Emerging markets are doing better. These markets bear watching next week for signs of follow through.

On Monday, we wrote a post on volatility (here). Vix rose Monday-Thursday and then fell Friday, triggering at least a short-term equity long signal. The watch out, which we described in the post, is that in 2013, important lows have come after the completion of a second Vix spike within a week. Should that occur, especially together with a spike higher in put/call ratios, it would likely be a solid equity long signal.

For SPY, it had a single close below its 13-ema this week. Today, it reversed higher. For now, the assumption is that the trend higher continues unabated. Note, however, that, like Vix, the recent pattern has been a fake out and return below before the ultimate low.

Also impacting the demand for equities is bond prices. Better macro data has pushed the 30-year yield back to the psychologically important 4% level for the 4th time in the past 4 months. 10-year treasuries are also at an important level going back 4 years. Higher yields (lower prices) usually creates further demand for equities.

Supporting the better macro data and higher treasury yields is demand for commodities. This has been a recent theme of ours. Both oil as well as the general CRB index continue to improve. Higher oil prices typically correlate well with equities.

Weakening breadth has been a feature of the market at many times in 2013. It remains so here as well. These divergences have not impeded the indices so far. But, note that fewer companies are pushing the indices higher.

Sentiment has also had little impact on equities in 2013. Nonetheless, with the indices pushing new highs, it's not surprising that Citibank's Panic/ Euphoria model hit euphoria levels in the past week. According to the bank, there is an 83% historical probability of market losses over the next 12-months.

(Image of Citibank Panic/Euphoria model removed at request of publisher on 3/15/21)

Similarly, investment advisor bulls this week hit a new high (from May 2011) and bears hit a massive low (from March 1987). Next 12-month returns are 20% of average. The r-squared is 56%, quite high for a single variable regression on SPX returns. In comparison, the ubiquitous BAML 'Sell Side Indicator', that strangely purports that Wall Street is now more bearish than in March 2009 (really?) has an r-squared of just 28%, i.e., half (chart from @MktOutperform).

The next 12-month return data from excessively bullish sentiment is particularly noteworthy when added to the  point made at the top of the page, namely, that the 2004 streak of 8 higher weekly closes preceded the sideways/downward 2004 market year.

With that, you have a possible theme for 2014 in the works.