Saturday, May 30, 2015

Week in Review (5/26 - 5/29)

The market ended the week and month with a bang.  Three out of four days in the holiday shortened week had intraday ranges of greater than 15 points in the S&P 500 as volatility shot back after hitting 2015 lows last week.  The VIX finished the week up 15% while the S&P was down .90%.  The S&P once again finds itself engulfed in a range bound market.  Attempts to sustain last week's new highs and a range breakout were thwarted as price once again was faded back into the chop zone.

For the week, all the major index's finished in the red.

Looking at sector relative strength, semi's (SMH) broke out to new highs on more M&A action with AVGO taking out BRCM and what was already a leading industry continued it pattern of success.  An area of weakness that almost every talking head has discussed was the continued move lower in transports (IYT).  While this divergence doesn't worry us too much it's something we do, and will continue to, watch.  We would prefer to see the opposite with transports confirming the industrials but negative divergences  can just as easily be resolved to the upside.

It was a different story when taking a full month view.  Domestic indexes finished in the black for May while weakness found its way into international markets.  From a sector standpoint, financials and healthcare exerted leadership while energy continued to be a laggard.   

For some real volatility all we have to do is look across the globe and see the action in the Shanghai index.  This, by far, has been the best performing market for the last year up a blistering 133% while also up 43% year to date.  But moves like this don't come without some wild volatility and drawdowns.  This week saw one nasty sell off from the top as it closed down 6.5% on Wednesday alone.  Who knows if that was the ultimate top or not but this is a great example of upside and downside volatility.

Here's what we were reading this week:

Raymond James Weekly Investment Strategy Update

Michael Santoli on stocks paying attention to what the bond market is saying

Investors are heavily levered

Larry Kudlow on Yellen's approach

Josh Brown notes that it's been 3 and a half years since the last 10% correction

Thursday, May 28, 2015

A Boring Market But For How Much Longer?

There's been a fair amount of chatter in recent weeks about the "boring" look and feel of this market.  We've seen a handful of articles, tweets and charts depicting in one way or another the tight range that stocks have moved in for most of 2015.

Just today, Kimble Charting,  posted a study showing the Dow to be in its 4th tightest trading range (through a year's first 5 months) in last 115 years.  Each of the other "tight" years shown in his study went on to break out to the upside.

And given the converging support and resistance trendlines that the Dow is dealing with, he argues that a resolution, either decidedly up or down, could come soon.

A recent post by Bespoke surveyed the year-to-date action in the S&P 500 and arrived at similar conclusions.  They went back over the last 20 years and found only a few times when the S&P had experienced such a dramatic drop in volatility and direction.

So after digesting this and similar data, do we gain any type of edge? Well, one indicator that we and others have pointed to in recent months has been the VIX. Each time the index has drifted near 12 (while stocks have slowly trudged higher) that has been the level in which volatility picks up and markets tend to sell off.  The best strategy has been to fade strength and buy weakness especially when coupled with a low VIX.  

At some point we'll have an upside breakout and follow through but over the last several months the easy money has been made doing the opposite. We saw this on Tuesday when the VIX neared 12 and promptly jumped 20% while the S&P fell 1%.

While the path of least resistance for stocks continues to be higher we'll see if the traditionally lazy summer months are the excuse the market needs to stay boring.

Tuesday, May 26, 2015

A Not So Welcome Back...

Well it didn't take long for volatility to pick up.  On the first trading day after a long holiday weekend we're seeing deep red across the board.  Volatility in the form of the CBOE Volatility Index (VIX) is up over 15% and all the major domestic stock indexes are down around 1%.

Underneath the surface there continues to be some major moves in macro assets.  The Euro is heading south again after a brief relief rally and the Yen is breaking new lows from a 6-month consolidation.  The beneficiary continues to be the dollar as that is surging and now back above its 50-day moving average.  Meanwhile, oil is getting hammered lower as gold and silver sell off as well.  In a rotation to safety, bonds are having a nice rally to the upside.

From previous posts and numerous studies, we know that a low VIX coupled with an extended market has not been a good combination in terms of short-term upside potential for stocks.  This once again proved true (at least for a day) as volatility has spiked and the S&P is reverting back into its range.  We'll be looking for clues to see if buyers have dried up or if fresh new selling/supply is coming into the market.  Added developments here could mean fresh new lows for the market.

Additionally, after today we had more 52 week lows than highs across all US exchanges which is interesting considering the S&P hit a new high last week. 

A recent tweet from Nautilus Research sums up the divergence in breadth and the unfavorable returns going forward.  Is the deteriorating breadth finally catching up to this market or is it more of the same chop and slop?

Monday, May 25, 2015

Week In Review (5/18 - 5/22)

Last week saw the S&P and Dow finish on Friday just a few basis points from where they started on Monday.  Meanwhile, the Nasdaq and Russell 2000 made admirable pushes higher.

The outperformance of the Nasdaq and the Russell also extends out to the monthly view as they lead the Dow and S&P by a comfortable margin so far in May.

On Thursday, we posted a chart created by the Fat Pitch blog and it entirely sums up the current situation for the S&P 500.  The index has been mired in this sideways channel for 2+ months and we've now reached a point where it needs to make up its mind.

Breakout or Breakdown?

On a year to date basis, the Nasdaq has taken over as the clear winner through the year's first 5 months.  It's now just about doubled up the S&P's performance and has been the index of strength in recent weeks.

On a sector basis, Health Care continues to be the clear leader while Utilities, Financials and Industrials remain underwater on a year to date basis.

So as stocks grind marginally higher seemingly week after week, they do so while shrugging off less than awe inspiring economic news, the threat of the Fed raising rates and the occasional international/geopolitical event (Greece, ISIS, etc).  The VIX is back to its 2015 lows and to levels that have previously indicated that volatility was set to jump and stocks experienced some stress.  We'll see if the same holds true this time around.

We hope everyone is having a great holiday weekend and today we thank all those who have served and sacrificed while protecting our freedom.  See you this week.

Thursday, May 21, 2015

State of the S&P in One Tweet

The Fat Pitch did a pretty thorough job of summing up the current state of the market with the tweet and chart below...(scary visual by the way).  Not much more we can add going into a holiday weekend.

Have a great Memorial Day Weekend!

Tuesday, May 19, 2015

Another Look At Breadth

With many markets currently either hitting new highs or testing their upper range we wanted to take a quick look at how breadth is stacking up.  As we've touched on repeatedly over the last month, market breadth has lagged price but a few bullish indicators have actually started to sprout.

First, the Advance/Decline line of the S&P 500 looks very healthy in accompanying price to new high ground.  As the S&P has broken out to the upside of its 3 month sideways range, the A/D line has also made fractional new highs.  This is a healthy sign for a continuation of the bull market.

Even though 52 week highs has lagged (bottom in blue) we are starting to see some broader participation in our short-term indicators.  The % of stocks above their 10-day moving average has started to creep higher and is close to levels seen at prior highs. 

Again we'd ideally want to see broad participation across all of our breadth indicators but after months of chop and the markets now testing the upside of the range, we're at least seeing a few silver linings.  Markets rarely give us exactly what we want so it's a constant test of weighing both sides of the argument.

Sunday, May 17, 2015

Week In Review 5/11-5/15

The week ended with all the major US equity indexes having moved higher and the S&P 500 has now almost fully erased its year-to-date lag relative to Russell 2000 (2nd chart).

Looking under the hood, the week was a continuation of the current sideways trading range along with the now familiar divergence in breadth.  When the dust was settling at week's end, the S&P had reached the top end of the range only to stall again on Friday.

After a powerful move on Thursday, the market had the potential to pave some new ground on Friday but once again shifted into neutral right at the breakout level.   Breadth continues to lag but did pick up some this week.  For a continued move higher, we'd still like to see broader participation.  The current trading range has shown a characteristic of both buyers and sellers disappearing at the top and bottom of the channel.  We'll see if one party can make some meaningful headway in the near future.

Meanwhile, the VIX continues to show a high level of complacency as it has traded back to lows after a brief move higher last week.

The one area of weakness that concerns us is the sluggish behavior of small caps as witnessed in the chart of the IWM.  Still, we believe this has more to do with the current weakness of the dollar as money has flowed into bigger cap names of late.  Definitely a relationship and situation that bears continued observation.

Just when the bond bears were gaining some traction they pulled a houdini and allowed a huge rally Friday from some prior support areas.  We had a sneaky suspicion that the bond bulls weren't going to give up that easy.

Was this just an oversold bounce in a new downtrend or the start of a move higher? We have no way of knowing either way but it is something that piqued our interest.

From a sector standpoint, the market was lead by staples and utilities while financials were the week's laggard.

Another area of strength this week came from the commodity space.  Gold and silver made big price gains this week along with a nice move in the agriculture space.

Links of the week

WSJ Comments on Past Performance and Future Results

Thursday, May 14, 2015

The Market's Next Move: The Bull Case

On Tuesday, we gave reasons for why this sideways market could resolve itself with a bearish outcome.  Today, we're back to give some of the bullish arguments.

Bullish Outlook


While the S&P continues chop around it also only stands roughly 1% from new all time highs.   The 50-day moving average remains above the 200-day and on a monthly chart, price remains above the 12-month moving average.  From a trend standpoint, the markets are still clearly in a long-term uptrend. 

If we look at a ratio chart of high yield corporate bonds (JNK) to investment grade corporate bonds (LQD) we can see that it is turning higher and breaking a downtrend.  This is favorable for stocks as investors reach for riskier, higher yield debt.  We can see from the chart that the LQD has broken to multi-month lows while the JNK has formed a series of higher lows since December.  This can be viewed as bullish and a nice tell on the market's view on the overall economy.  During periods of stress like we had in October 2014, we can see how investors flocked to the safety of the LQD.  We are not seeing that with today's environment.  This ties in well with the positive fundamental/macro comments we'll show later.


The AAII weekly Investor Sentiment Survey measures measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months.  The most recent reading counted bullish investors at 27%.  This is well below the long-term average of 39%. Meanwhile, investors with a neutral/undecided stance are well above the historical average (47% vs 31%).

Macro Environment
  • While often looked at as somewhat of a lame excuse, we really do believe the harsh winter weather caused much of the weak Q1 growth as depicted by the recently published GDP number.  The economy could be primed to rebound over the next couple of quarters with better weather and energy prices still depressed.  If true, the market will surely take that into account.
  • While some have stepped out on a limb and suggested that the Fed will begin hiking rates in June, most data suggests that an initial rate hike is more likely to come in September or October at the earliest.
  • Geopolitics appear to have calmed for the time being.  People even seem to be less and less concerned about the possible Greece exit from the Eurozone.
  • While talk of the Fed raising rates will continue to be a hot topic for seemingly perpetuity, the data shows that the market does a good job of shrugging off the initial shock of a rate hike when viewed through a longer lens. (Charts and commentary from Russell Investments)

Fundamentals / Valuations

With earnings season just about wrapped up, we don't see anything that puts us wildly off course in terms of expectations or estimates.

And with earnings out of the way, the market may now turn its attention to bullish buyback activity among other influences which may act as a tailwind (chart from Deutsche Bank).


We are entering the calendar period where the thrust of gains has been made in pre-election years. As you can see in the chart below from Nautilus research, Q2 in the year prior to an election has been very kind to equity investors.

Tuesday, May 12, 2015

The Market's Next Move: The Bearish Case

Here we are again.  Back in the sideways pattern that's lasted since November without a truly decisive breakout in one direction or the other.  As it stands, there's not much new commentary to add regarding the current look and feel of the market so this week we're going to assess the most compelling arguments for both the bulls and bears.

In a "give me the bad news first" approach, we're going to dedicate today's post to the Bear case and follow with the Bullish view on Thursday.

Bearish Outlook:


S&P 500 continues to be rejected around the 2120 level.  And each subsequent attempt at new highs  has brought with it less and less buying pressure.  We continue to see the deterioration of breadth across multiple indicators and have talked about this at length over the last several months.  One gauge that continues to illustrate this point is the % of stocks above their 50 day moving average.  This has steadily declined since November. 

The IWM, which until recently had been a leader, is struggling right now and is again testing prior breakout levels (now support).  This would be viewed as a failed breakout if the index continues to lose steam. 

Interest rates continue to rise and if we overlay the yield on the 10 year vs the S&P you can see how the stock market has chopped around trying to deal with rising rates from the February lows.


The latest data on margin debt shows that we are again at highs which suggests that speculative optimism must also be.  For the bears to really feel confident about this gauge they probably want to see elevated margin debt amounts accompanied by a strong pickup in the rate of change.  Doug Short ran a far more in-depth study of this over on Advisor Perspectives.

Click to View

And according to Bloomberg, there's not much cash idling on the sidelines that could be used to push stock indexes higher and out of this range.  They reference Bruce Bittles and William Delwiche, strategists at Robert W. Baird, who recently noted that mutual fund managers have the lowest cash levels in history and money market fund levels are lower now than in 2007 and near a record low from 2000 relative to the capitalization of the stock market.


As we noted last week, the bearish crowd shouldn't rely too heavily on the "Sell in May and Go Away" theory as basis for an extended down turn.  Recent history tells us that, depending on the month, while gains are minimal stocks aren't always downright losers during the lazy days of summer (chart going back to 1995).

However, May through October is without question the weakest 6-month period on the calendar. Chart below from Bank of America Merrill Lynch.


Apparently our own Fed Chair thinks that the market is over valued.   Yellen said "I would highlight that equity-market valuations at this point generally are quite high, not so high when you compare returns on equity to returns on safe assets like bonds, which are also very low, but there are potential dangers there."

And that may be bad news for stocks, says Jeffrey Kleintop, chief investment strategist for Charles Schwab.

"With stocks on the rise in the world’s major markets in 2015, investors may be overlooking the fact that earnings, one of the most important drivers of long-term stock market performance, have been falling," he writes in Barron's.

"Fortunately, we believe this decline may be relatively short-lived. But if earnings keep dropping for a prolonged period, stocks may suffer significant declines, since their above-average valuations in many markets leave little room for disappointment."

Warren Buffett recently told CNBC’s Becky Quick that "stocks are inexpensive if interest rates stay low for the next decade, but not so much if interest rates normalize."

With interest rates rising coupled with extended valuations there is limited margin of safety today, which is most likely another contributor to the choppy nature of this market.

We'll be back on Thursday with a bullish case for stocks.

Saturday, May 9, 2015

Week In Review (5/4 - 5/8)

It was another choppy week for the markets as the first 3 days were decidedly down before steadying on Thursday and then bursting higher Friday to finish the week, in most cases, slightly positive.  The first chart below shows major US equity market performance for Monday - Thursday.  As you can see, it had been a tough week up until that point as we heard comments from Janet Yellen suggesting that, in her view, US stock markets may be fully or even slightly over-valued.

Then Friday morning came and with it the April non-farm payroll report.  The uninspiring numbers gave investors further confidence that the Fed would continue to be in no rush to raise rates and thus the all clear to buy stocks en masse.  Here is the same chart as above but with Friday added:

 From a sector perspective, utilities continued their year-to-date struggles and were joined by energy and technology as this week's laggards.

Looking internationally we saw a mixed bag.  China and emerging markets struggled while European stocks surged into week's end after the election results in the U.K.

Lastly, in surveying a grab bag of other asset classes, we saw bonds up slightly for the week, the dollar continued its recent fall and commodities were relatively flat.

There's not much else to say.  We continue to watch stocks fluctuate in this months long range and wait for signals of a breakout/breakdown.

Have a great Mother's Day!

Thursday, May 7, 2015

Nasdaq - Post Winning Streak Update #3 (50 Days Later)

As promised, we've kept a close eye on the Nasdaq's performance since it completed a rather significant winning streak in late February.  If you recall, the index posted a run of 10 consecutive up days with the last day coming on February 24th.  Since then, we've written updates at Day 15, Day 30 and wanted to circle back one last time after Day 50 (yesterday) to see where we stood.

As mentioned in the original post, since 2009, this was the Nasdaq's 9th instance of an 8 day or longer winning streak.  The index's short and intermediate-term performance after those streaks suggested that we were likely to see some immediate weakness (5, 10, 20 days out) followed by very mild gains further out (50 days).  Much weaker performance than if you just bought the index on any given day during this 6 year bull.

As we study the results of this most recent streak, we see a bit more dispersion but the general theme has remained: weak to flat action over the next several days and weeks.

-Day 5 (March 3rd) - Nasdaq closed at 4,979.9 for a gain of 0.237%

-Day 10 (March 10th) - Nasdaq closed at 4,859.79 for a loss of -2.181%

-Day 20 (March 24th) - Nasdaq closed at 4,994.73 for a gain of 0.53%

-Day 30 (April 8th) - Nasdaq closed at 4,950.82 for a loss of -0.35%

Looking at yesterday's close, things have deviated just a bit from historical precedent.  The index closed May 6th at 4,919.64.  This is nearly a 1% loss from the February 24th close of 4,968.12.  So instead of the anticipated small gain after 50 days the Nasdaq has actually fallen 100 basis points.

While the Nasdaq's lack of returns over these time periods can't be attributed to the predictive powers to this or any other study, it's interesting to know that after the index goes on such runs of momentum it's common for it to take a breather for a few weeks/months.  And that's indeed what it's done here.

Tuesday, May 5, 2015

Let's Talk About Sell in May and Go Away...

The first couple days of May have definitely been an extension of the months long choppiness that has come to personify the market.  This from Jeff Saut's (Raymond James) weekly investment strategy note yesterday:

...I have seen a lot of folks attempting to trade this market over the past few months all to no avail. What has typically happened is that one day they are able to make some money, but the next day they give that profit back. Dougie (Kass) even tweeted on this by noting, “The market has no memory day to day!” I have not gone back and counted, but my sense is that over 50% of this year’s sessions have seen 100 point daily swings in the D-J Industrials (INDU/18024.06) with one day being up and the next day being down. If you can trade that successfully, you are a better trader than I am, which is why I have not attempted to trade this market all year. Clearly, sometimes me sits and thinks, and sometimes me just sits! As my friends at the sagacious Bespoke organization wrote Friday morning: “As of yesterday’s close, the S&P 500 has essentially not changed since the closes on: 4/17, 3/30, 2/12, and 12/24. What’s more, 19 of the 88 trading days since 12/23 have seen a tick that included yesterday’s closing price. US equities are on a treadmill thus far in 2015, with year-to-date gains of 1.3% for the S&P 500 hiding a very persistent sideways move.."
As we sit here in no-man's land waiting for the market to resolve itself, we've been left with plenty of time to run even more studies, scans and scenarios.  One such area that we quickly covered was seasonality and, yes, that included the oft-quoted "Sell in May and Go Away" mantra that pops up around this time every year.  
The idea behind the "rule" being that May kicks off a 6-month seasonal period that has historically been weak for stocks and investors should not expect much in the way of gains.  And if you break the calendar down into two 6-month periods (May-October and November-April), the data does support the idea.
In one study, we started in 1995 looked at the S&P 500's performance in every month for the two periods.  The results in the table below show that the index's average performance in the May-October months (0.16%) has been considerably lower than the November-April period (0.92%).  The May-October months also sport a much lower reward/risk ratio, 1.09 vs 1.81.

We also looked at May through October on an individual month basis.  While the overall picture of this period during the last 20 years has lead to basically flat returns, certain months stand out in terms of strength and weakness.  June, September and particularly August have been the historical losers while May and October have offered the best statistical chance for gains.

We're not going to recommend that anyone invest based on solely on seasonal patterns but you could've had worse strategies over the last two decades that's for sure.