Friday, December 20, 2013

Weekly Market Summary

US markets end the week back in an uptrend, led, interestingly, by SPX and the Dow, with NDX and RUT lagging. A majority of sectors regained their rising 20-dma (short term) and 50-dma (long term) trend.

SPX is back above a rising 13-ema (yellow circles). With this week's new high, it fulfills the pattern we described two weeks ago - that 8 week streaks of higher closes do not end an uptrend, a higher closing high is high odds (post).

If this week marked a durable low, it was conventional in two respects: (a) Vix spiked higher twice and (b) the break of the 13-ema led to a touch of the 50-dma, both patterns we have seen throughout 2013.

But it was an unusual low in more respects: (a) put/call never exceeded 1.0; (b) Trin never exceed 2.0; (c) there was neither a major accumulation day nor a major distribution day; (d) Vix never exceeded 17; (e) after NYSI went negative, NYMO never dropped below minus 75 (past examples of all of these are described here and here). In a year of mild drops, this was the most mild of all.

In the short term, indices are heavily influenced by seasonality, which turned strong on Tuesday and goes into overdrive next week through January 2.

After the holidays, be aware that new highs formed as a result of FOMC meetings have a strong tendency to fade over the next 60 days (red line). The chart below is from September 19, the day after a new high on FOMC day, after which SPX fell 5% over the next two weeks.

We discussed Wall Street's very bullish expectations for 2014 versus what we feel is more likely; read the post here. This is a point of view, not a roadmap for trading the year ahead.

Add to this the current positioning of fund managers (read here) and we will be keeping an eye on potential rotation into EMs, staples and commodities and out of DMs and cyclicals.  Our view is that sentiment/asset allocation tells us there is a bend in the road ahead, but we wait until we reach the bend before turning the wheel.

To wit, current allocations to EMs is at a low (first chart) while valuations are also at a low (second chart). That's very fat pitch-ish.

As investors have embraced cyclicals and risk, they have, in equal measure, dumped income (e.g., municipal bonds). Discounts on closed-ended funds that invest in income are at an extreme; also a seasonal tendency that peaks now.

Finally, one curiosity that has been puzzling is this: sentiment on many measures is at an extreme. Investors Intelligence bears, for example, is the lowest since March 1987. Yet short interest in SPY is rising; normally, high/rising short interest implies stubborn bears that will capitulate before the rally ends. How to reconcile these two divergent data points?

One answer is that short-interest is a less useful measure of sentiment as institutions increasingly use index ETFs (e.g., SPY and QQQ) to hedge their exposure. In fact, SPY short interest rose to a peak with the index in 2007 (circle). This is not to imply that SPY is peaking right now, only to say that an apparent contradiction is probably not.

Our summary table is below. 

Have a great holiday. The Fat Pitch will return in January.