Weekly Market Summary

Summary: Equities fell for the first time in six weeks. The intermediate-term uptrend remains healthy, but some minor short-term weakness has crept in. SPY could be setting up within a trading range between 200 and 206: fading extremes at these levels is probably the set up going forward.

Equities are entering a buyback blackout period, but these have had no consistent bias (positive or negative) in the past. April starts Friday: over the past 10 and 20 years, April has been one of the most consistently positive months of the year for stocks.

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Equities fell this week for the first time since the February low. They had risen each of the prior 5 weeks. SPY lost 0.6% and NDX lost a scant 0.1%. Leading the downside were small caps, with RUT losing 2% for the week. Emerging markets also lost 2%.

Safe havens - treasuries and gold - which had been in high demand during the sell off in equities, were mixed. Treasuries gained 0.4% this week but gold dropped 3%.

Oil and equities had risen together the prior 5 weeks. Not surprisingly, oil also fell this week, by nearly 4%. What happens next for equities is largely contingent on oil: if the rally in oil is over, it is very likely equities will sell off more (enlarge any chart by clicking on it).

Current Investor Concerns

The US economy is stuck in one of the most sluggish recoveries in history. Growth is just 2% and it will remain slow as consumers and companies work off vast amounts of debt. The country has gotten off track and neither political party has any answers.

These sentiments were written in Time in 1992, the year one of the biggest growth eras in American history began. But these same words are often used to describe the current economic environment.

Weekly Market Summary

Summary: Equities rose for a fifth week in a row. In many important ways, the current uptrend does not fit the profile of a bear market rally. That means that further gains lie ahead and a return to the February low is unlikely. On a shorter timeframe, there are several compelling reasons to expect a retracement of recent gains in the days ahead.

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Equities continued to rally for the fifth week in a row. SPY has risen 11 of the past 14 days. SPY, NDX and RUT all gained over 1% for the week. Emerging markets gained 3%.

Safe havens - treasuries and gold - which had been in high demand during the sell off in equities, also gained. Treasuries had sold off the past 4 weeks in a row but gained just over 1% this week. Gold was up just 0.3%.

Oil has been leading to the upside every week since the bottom on February 11. This week it was up another 6%. Equities have gained 12% off the bottom; oil is up more than 40%.

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).

Fund Managers' Current Asset Allocation - March

Summary: At the panic low in equities in February, fund managers' cash was at the highest level since 2001, higher than at any time during the 2008-09 bear market. Global allocations to equities had fallen from 40% overweight to only 5% in just two months. Since 2009, allocations had only been lower in mid-2011 and mid-2012, periods which were notable lows for equity prices during this bull market.

Since then, equities around the world have risen an average of 12%. Despite this, investors remain defensive: cash balances remain high and allocations to equities have increased only slightly. This supports higher equity prices in the month(s) ahead.

Allocations to US equities remain near an 8-year low, a level from which the US should continue to outperform, as it has during the past 11 months. Europe remains very overweight. Emerging markets remain underweighted but allocations have jumped significantly in the past two months.

In February, the dollar was considered to be the most overvalued in the past 9 years. Under similar conditions, the dollar has fallen in value. In the past month, the dollar index has fallen 5%.

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Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Cash: Fund managers cash levels in February were 5.6%, the highest since the post-9/11 panic in November 2001, and lower than at any time during the 2008-09 bear market. This was an extreme that has normally been very bullish for equities. Cash in March declined to 5.1%. This is still high and supportive of further gains in equities.

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).