Saturday, February 7, 2015

Weekly Market Summary

SPX has only risen 2 of the last 6 weeks, including this past one. For the week, SPX gained 3.1% and DJIA 3.8%. NDX is the worrisome laggard, gaining 1.9%.

The equity market is carving out a high volatility pattern: since December, SPX has lost 5%, gained 6%, lost 5%, gained 4%, lost 4%, gained 4%, lost 4% and now gained nearly 5%.

We haven't seen this degree of indecision in more than 3 years. In the past, this pattern has meant that the market is either in the process of changing trend (in this case, from up to down) or it is in a long period of consolidation. There's no clear way to know which one. In the late 1990s, a long consolidation period within a trading range of about 10% happened in 1994, 1996, 1997 and 1999 (blue lines). We haven't seen this pattern recently, but it's hardly unusual.

The best argument in favor of a long consolidation is the positive macro environment in the US. The rate of jobs growth is now the highest in 15 years (chart below). Housing starts and housing sales are the strongest in 7 years. The trend for most macro indicators is improving (a full post is here).

Arguing in favor of a drop in the market is the following: SPX has doubled in 3 years and hasn't experienced even a 10% drop since mid-2012, an unusually long time period. As a result, investors have become complacent and valuations have become rich.

On top of this, with weakness in energy, a flat yield curve and a strong dollar, corporate results for 4Q14 have been mediocre. 2015 EPS is now expected to grow less than 4% (it was expected to be 8% in December) and sales growth is expected to be 0%. This will make TTM valuations unattractive as the year progresses unless price appreciation remains muted.

Let's look ahead to the coming week.

At the end of last week, trend, breadth and sentiment all looked ready to pull the markets lower. The only element missing was a break in price below the recent range. That break appeared to be starting Monday morning but it reversed within 20 minutes and equities moved higher the rest of the week (post).

SPY has now reversed off the same support level five times in a month. Rejection of the downside is normally bullish, setting up an upside break out. That breakout nearly happened on Friday.

SPY is now back near the top of it's 5 week range. It would be comical if it traded all the way back down to 198.5 again this week. That level would likely break and SPY would at least retest its December low (196.8) which is now near the 200-dma (196.5).

Could that happen? Yes. The market is oscillating in wild swings. It's very unpredictable and oil and Greece are major wild cards.

Assuming the uptrend continues, the best long set up would be to buy weakness near the 204 support level (arrow). That area is also the 50-dma, 13-ema and the weekly pivot (203.6). That would be a good risk-reward entry for a retest of this week's high (207).

Below 204 and the trend again becomes negative (under the key moving averages and MACD would again turn downward). Above 207 and it is conceivable that SPY will make an attempt at the top trend-line, near 212 (arrow). The top Bollinger Band (Friday's high), however, will likely meter upward progress.

The sectors within the SPX are mixed. On the positive side, financials, energy, materials, home builders are above their highs from two weeks ago (green lines).  Discretionary stocks made a new all time high, gaining 4% this week.

On the negative side, transports are lagging, as are technology and semi-conductors (orange lines).

Which bring us to NDX. Of all the indices, this one is lagging the most. It was the first to peak (in November), it was the first to break its 50-dma and now it is the only one to fail to exceed its high from two weeks ago. It is still forming a descending triangle of lower highs. It needs a follow through week to break this pattern. Watch it as a tell for the broader market. A strong NDX would increase our confidence that the uptrend is resuming.

The other indices are similar to SPY.

DJIA bounced off the 200-dma and channel bottom we highlighted last week. It made a higher high, trading above its early January high pivot. It has the same set up as SPY: a trade off the 50-dma on weakness this week for a test of 18,100. Below the 50-dma will look like a failed break out of the channel.

RUT seems to be the most attractive. It had been trading in a 10% range for most of a year until November; since then, it has traded in a 5% range near the top (yellow). This is a strong positive. It closed Friday about 1% from a new all-time high, and at resistance. Above Friday's high, and it could go. The 200-dma has been consistent support on weakness.

Arguing in favor of equities moving higher are put/call and equity fund flows.

The equity put/call ratio has turned down from an elevated level. That's normally bullish, but note that it failed two weeks ago (chart from McMillan).

Equity ETF and mutual fund flows have been negative 4 of the last 5 weeks, since the $36b inflow the week of Christmas. Since then, outflows have totaled $27b. In other words, over 70% of the big Christmas inflow that marked the top of the equity markets has been reversed. The 4 week moving average of outflows is at an extreme (data from Sentimentrader).

Energy is a major wild card. The 60% fall in oil prices has hurt corporate results. The S&P has been correlated with oil prices; WTIC moved up 10% this week, and that had a positive effect on the rest of the market.

However, the pattern has been for the first bounce in oil to fail near it's 50-dma; that's now only about 2% above Friday's high. If the prior pattern holds, oil prices will weaken and then oscillate as it carves out a bottom. A new post on this topic is here. An example from 1986 is shown below (the arrow is similar to the current price).

The week after the release of NFP has tended to be weak, particularly in the first few days. Keep in mind that weakness could set up SPY and DJIA near their 50-dma, as detailed earlier (data from Chad Gassaway).

The first week in February has the strongest positive seasonal tendencies. That week has now passed. The next two weeks (green and blue boxes) are at best neutral. Recall that returns in February have tended to be flat to negative over the past 20, 50 and 100 years, so giving back early month gains is normal (chart from Sentimentrader).

If the pattern of the last 24 years plays out, the coming week will be net positive, but that would mark the top for February. In other words, we could see a continued move higher and then have those gains (and more) given back into the end of February. This is speculation, but more volatility into the end of the month could set up a more durable low. Something to keep in mind on strength this week (chart from CXO).

Our weekly summary table follows.

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