Weekly Market Summary

Summary: Equities rose the fourth week in a row, led by continued strength in oil. SPY has now rallied 11% and is back above a key support level and its 200-dma. Breadth momentum during this rebound has been stronger than nearly every bear market rally in the past 16 years. Moreover, despite the large gains, investors remain mostly skeptical. Turbulence during the upcoming March OpX week would be normal, but this week is seasonally bullish. Below, we outline what to look for before assuming the rally has come to an end.

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Equities continued to rally for the fourth week in a row. SPY gained 1% while NDX and RUT gained 0.8% and 0.5%, respectively. Emerging markets also gained 1%.

Safe havens - treasuries and gold - which had been in high demand during the sell off in equities, were lower, each losing about 1%. Treasuries have sold off the past 4 weeks in a row.

Oil gained another 6% this week. It's leading to the upside.

The rally in oil has coincided perfectly with the rally in equities: both bottomed on February 11, the same day high-yield bonds and treasury yields also bottomed, and both have risen the last 4 weeks in a row. The rally in equities is, for now, contingent on oil continuing to move higher. Should the rally in oil fail, it is very likely equities will sell off (enlarge any chart by clicking on it).

Where SPY Will Go Next According to Twitter Finance

Summary: Despite a 10% rally, investors on Twitter Finance have not turned more bullish, even when given a strong disincentive to be bearish. From a pure sentiment basis, this implies that the current rally probably has further upside ahead.

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The day after the February low, we posted a survey on Twitter Finance: would SPY rise $15 or fall $15. From a price of $185, these were symmetrical outcomes.

The result of the survey was a bit surprising: a small majority foresaw a further fall. At the time, SPY had already fallen by about 14% and investors sentiment was extremely bearish. A good hypothesis would have been that many more on Twitter Finance would be bearish than the survey showed.

This week, we posted a second survey: would SPY rise $10 or fall $30. Instead of a symmetrical outcome like in the first survey, we made it much easier to choose the bullish option. The survey also came after SPY had risen 10% in three weeks. A good hypothesis would have been that many more on Twitter Finance would have turned bullish. Instead, there was no change from the first survey.

Despite the strong rally over the past month, flows into equity funds have continued to be negative. Sentiment surveys from a number of sources have shown only a small uptick in bulls (click here for an example). An interesting study by Brett Steenbarger shows that shares in SPY have been redeemed on a net basis over the past several weeks, meaning: "Investors have not believed in this rally and, if history holds, that's one indication that the rise could continue" (click here for his article).

In the same way, our Twitter Finance surveys showed no increase in bulls even after a 10% rally and the addition of a low bull hurdle/high bear hurdle as an incentive to choose the bullish option. From a pure sentiment basis, this implies that the current rally probably has further upside ahead.

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Weekly Market Summary

Summary: Equities rose 3% for their third weekly gain in a row, led by small caps and further gains in oil. SPY has now rallied 10%, back to a level that was major support throughout most of 2015. It would be easy to say that the rally ends here, but strong breadth, persistent investor pessimism and strength in other asset classes suggest that further upside ultimately lies ahead. That said, by the end of the week, the advance showed several signs of being overextended; weakness early next week would be normal. In fact, if equities continue with an uncorrected rally, those gains are likely to be given back in the weeks ahead.

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Equities continued to rally for the third week in a row. For the week, SPY gained 2.7% and NDX gained 2.2%. RUT again led to the upside, gaining 4.3%, making this a broad-based rally.

Safe havens - treasuries and gold - which had been in high demand during the sell off in equities, were split: treasuries lost 1% for its third weekly loss in a row, while gold rose 3% after falling the prior two weeks.

Oil gained another 10% this week. It's leading to the upside.

It's easy to forget, but the correlation between asset classes remains very high, with the common denominator being the price of oil. Oil bottomed on February 11, the exact same day equities, high-yield bonds and treasury yields all bottomed. Until Thursday, that day also marked the high point for gold.

The implication is that for the rally in equities to continue, the price of oil has to also rise, or at least stabilize.  We'll review other indictors, but it's likely these will make little difference if oil starts to fall. It's the single biggest wild card facing all of these markets in the weeks ahead (enlarge any chart by clicking on it).

March Macro Update: Recession Risk Remains Remote

Summary: The macro data from the past month continues to point to positive but sluggish growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The main positives are in employment, consumption growth and housing:

• Employment growth is close to the best since the 1990s, with an average monthly gain of 222,000 during the past year.  Full-time employment is soaring.
• Recent compensation growth is the highest in more than 6 years: 2.7% in December, dropping to 2.2% yoy in February.
• Most measures of demand show 3-4% nominal growth. Real personal consumption growth in January was 2.9%.  
• New housing sales, starts and permits remain near an 8 year high. 
• The core inflation rate ticked up above 2% and to the highest rate since May 2012.

The main negatives are concentrated in the manufacturing sector (which accounts for just 10% of GDP):

• Core durable goods growth fell 2% yoy in January. It was weak during the winter of 2015 and it has not rebounded since. 
• Industrial production has also been weak, falling -0.7% yoy due to weakness in mining (oil).

Prior macro posts from the past year are here.

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Our key message over the past 2 years has been that (a) growth is positive but slow, in the range of ~3-4% (nominal), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.

Modest growth should not be a surprise. This is the typical pattern in the years following a financial crisis like the one experienced in 2008-09.

This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels. The saying that "the stock market is not the economy" is true on a day to day or even month to month basis, but over time these two move together. When they diverge, it is normally a function of emotion, whether measured in valuation premiums/discounts or sentiment extremes.

A valuable post on using macro data to improve trend following investment strategies can be found here.

Let's review each of these points in turn. We'll focus on four macro categories: labor market, inflation, end-demand and housing.


Employment and Wages

The February non-farm payroll was 242,000 new employees plus 30,000 in revisions. In the past 12 months, the average gain in employment was 222,000. Gains since 2014 have been the highest since the 1990s.

Monthly NFP prints are normally volatile. Since 2004, NFP prints near 300,000 have been followed by ones near or under 100,000. That has been a pattern during every bull market; NFP was negative in 1993, 1995, 1996 and 1997. The low print of 84,000 in March, as well as the 'disappointingly weak' print in September, fit the historical pattern. This is normal, not unusual or unexpected.

McClellan Oscillator Hits 91

The McClellan Oscillator (NYMO) closed at 91 today. This is the first spike over 80 in NYMO since last October.

NYMO is a momentum indicator for breadth. When NYMO is positive and gaining, breadth momentum is increasing. This is generally good for the indices.

But breadth momentum can reach an extreme, and when it does, indices can fall in the next few days. That is the current situation.

The charts below look at all NYMO readings over 80 since 2009. Some conclusions:

Indices were generally weak in the following days. In most cases, indices traded at least 1% lower. In several cases, indices lost more than 3%. 

If the indices continued higher in the next day or two, it was by less than 1%, followed by a drop below the date of the high NYMO. 

The first spike higher in NYMO in several months (like now) didn't end the rally. The longest span before a "higher high" was one month (in September 2013).  

Let's review each case. In the charts below, SPY is shown in the upper panel and NYMO in the lower panel.

In November 2014, NYMO closed over 80. SPY fell 1% intraday the next two days, although the close on the second day was only 0.3% lower.

In October 2015, NYMO closed over 90. SPY gained 0.2% in the next two days before closing down 1% in the next two days.