Saturday, April 4, 2015

Weekly Market Summary

Indices closed lower following disappointing NFP data on Friday. For the week, S&P futures lost 1% and Nasdaq lost close to 2%.

Here is the set up for the coming week.

First, stocks have mostly struggled in the week after the release of NFP (more here).

Second, 1Q earnings reports start with Alcoa on Wednesday after the close. The meat of the earnings season begins the following week with the banks reporting on April 14-16. Expectations are that earnings for S&P companies will be 4.6% lower than a year ago. More on what this implies for equities here.

Third, in addition to weak earnings, the indices are weighing economic data that has been decidedly below expectations. Our views on what weak NFP and other economic data mean for equities are summarized here.

Fourth, sentiment remains mostly heady, and thus a headwind to share appreciation, a topic we wrote about here.

Fifth, the intermediate trend for US indices and sectors is at best neutral and more likely negative. Even before the drop on Friday, SPX, NDX and DJIA were under their respective 50-dma. Only RUT was higher.

Our view in the Weekly Summary has been that upside in US equities will remain limited until there is a fuller washout in the market. The pattern of incomplete sell offs over the past several months has led directly to failed rallies (here). Developments in the past week have not materially changed that view.

We are, however, keenly aware that April is one of the strongest months of the year and that, recently, that strength has started near mid-month. If the miss in NFP is a catalyst, a point of capitulation might be near, perhaps even this week.

SPY is back in its prior trading range from November and December. It's been largely trend-less over the past five months. RSI (top panel) is not oversold; note that better lows have had two pushes lower in RSI. MACD (lower panel) is likewise headed for oversold, but isn't there yet. In other words, a rally early next week would likely fail once again but a sell off could create conditions for a low.

The March low (203.5) was tested overnight twice in the past week. It should be tested during cash hours this week. Weekly S2 and monthly S1 are just below 203. Should this support area fail, the 200-dma and the lower end of the range (shaded) are at 199.5 and 198, respectively.

The failed rallies are reflected in breadth: note the lower highs on each failed bounce in the index this year (lower panels). The area for a washout is marked (blue lines). Watch these levels on weakness.

Similarly, average equity-only put/call ratios are headed higher but they are nearing levels that have marked lows in SPX in the near past. Watch this ratio on weakness (chart from McMillan).

Likewise, options skew is now in its lowest quartile where bottoms have tended to form in equities (here).

Our weekly summary table follows.

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