Saturday, June 6, 2015

Weekly Market Summary

Summary: US equities have refused to become either oversold or overbought during the past several months. They are now down two weeks in a row and at point similar to where there has recently been a bounce higher. Failure to do so now would mark a change in character for this rangebound market. Ultimately, the washout low probably still lies ahead.

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For the week, SPY and NDX lost 0.6%, but RUT gained 1.2% as investors rotated into lagging small caps.

Overseas markets performed much worse: Europe lost 2.7% and emerging markets lost 2.5%.

US 10 year treasury yields rose to their highest levels since October. TLT lost 4% this week.

SPY and NDX have now fallen the past two weeks in a row. If the pattern of recent months holds, US equities are at or near at point where they will bounce, even if it is short lived.

On a weekly scale, SPY is within 1% of a rising 4 year trendline. We have remarked repeatedly how SPY has not become oversold or overbought in 2015 (top panel); since December, SPY has risen the following week after RSI(5) is at current levels (green lines). Failure to do so would mark a change in market character.

On a daily scale, SPY's low on Friday was right on a rising 3 month trendline. This is where SPY has turned higher every time since March. Here too, RSI has not been oversold or overbought for months, but current levels are consistent with turns higher, even if short lived (green lines). Note also that SPY has not been below its 50-dma more than two days in a row since March (yellow shading). SPY closed just below its 50-dma on Friday.

What is troubling in the chart above is how weak was the recent bounce (last green line). RSI barely exceeded 50 at its high. This could certainly be a set up for a trendline break lower.

On an hourly scale, SPY is near the bottom of the rising channel. There's a positive divergence in momentum (top panel). That doesn't preclude a drop to the May 12 low (208.6 area; blue line); weekly S1 is just below. It's a messy pattern with months of overlapping price action that leaves weak support lines.

Breadth has not yet washed out as we expect it eventually will (blue shading). That said, about 40% of the S&P is now trading above its 50-ema (lower panel). This has marked a low point from which the index has bounced, even if short lived, since December (green shading).

Using another way of looking at breadth, the Summation index (NYSI) is a day away from crossing below zero. Other instances since 2010 are highlighted with vertical lines; aside from September 2014, SPY at least bounced before heading lower, although this also marked the low several times.

One observation on the chart above is that breadth has been week as SPY has stayed near its ATH. Two instances were similar: December 2013 and September 2014. The first instance bounced but the second did not; regardless, the durable low was lower both times. That seems likely now as well: the washout low is probably still ahead.

The leader, NDX, ended the week on top of its February-April trading range (shaded area) and its 2015 trendline. There's no foul here but lower, and NDX gives up its "breakout" a second time. NDX has been down the past 2 weeks; it has not been down 3 weeks in a row since early January.

Small caps continue to meander. The trend is up, as the rising channel shows, but there has been no gain in 3 months. It's the only index that hasn't made a new high in the past month.

Investors have become complacent. Equity-only put/call (CPCE) ratios have been falling with equities; they normally move opposite each other. Put another way, investors have become more bullish (forgoing protection and/or buying calls) as prices have fallen (lower panel). The 21-day average for CPCE is now close to the lows in March that marked the top in SPY (top panel). This is bearish.

US treasury yields have been rising. 10 year yields are now back to October 2014 levels. 2.4% has been a pivotal level for 5 years (arrows). If this level holds, its reasonable to assume rates could rise another 20-30 bp. Coincidentally, the taper tantrum was exactly 2 years ago; yields rose from 1.6% to 3% in four months.

The rise in rates has whacked dividend stocks. The consumer staples sector lost 2.5% this week. It closed on its 200-dma; it has not seriously breached below this level in 4 years. Momentum (top panel) is about as oversold as it has gotten during this period.

June is not a strong month for equities. The first week of June is the strongest part of the month (shading). The next few weeks are inconsistent at best (from Sentimentrader).

Our weekly summary table follows.

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