Thursday, July 30, 2015

A Technical Look At The Dow

Barron's was out this week with an interesting take on the Dow Jones Industrial Average and its recent encounters with several key technical levels.  

In the magazine's "Getting Technical" section, columnist Michael Kahn notes that, among other things, the: 

"Select Sector SPDR Industrials exchange-traded fund ( XLI ) is in serious retreat. And that does not bode well for the market and arguably for the economy a few months down the road.  

Though dominated by General Electric ( GE ) with its 10.2% weighting in the ETF, XLI still gives a good representation of what is happening to the sector. Peaking in February, the ETF has lost roughly 9% through Monday’s trading (see Chart 1). And this month, it joined utilities, energy and basic materials as the only ones with moving average death crosses in place. Each has its 50-day average below its 200-day average and that is not a healthy condition."

He goes on to note that the index failed to breakthrough prior support during the most recent rally in equities and has fallen below its long term trendline that dates back to August 2011.  He adds:

"But what I find more interesting is that the last time the market suffered a significant correction, aside from last year’s Ebola-inspired mini-panic, the industrials broke down first. That was in the summer of 2011 and the industrial sector broke down about a week before the broad market did (see Getting Technical, “Industrial Stocks Are Shutting Down,” August 1, 2011). Although we cannot make a rule out of so few observations, it probably is a good idea to keep cash levels higher than normal.

From the long-term view, the industrial ETF is now approaching a Fibonacci 61.8% retracement of its October 2014-February 2015 rally. It has already dipped below the major trendline drawn from the end of the 2011 correction although given the elapsed time and price movement involved I do not think this was a breakdown - yet.

Should the sector keep falling, the breakdown would be undeniable and a move back to the October 2014 low would be in cards. That would be a drop of roughly 7% from current levels."
We found this article to be an interesting take on the current environment and definitely something that bears watching.  With industrials being the canary in the coal mine before the 2011 broad market breakdown, they may deserve extra attention in this scenario.

Tuesday, July 28, 2015

Current Take

It's been 12 full trading days since the VIX poked itself above the much watched 20 level.  As we noted earlier in the month, buying the S&P 500 when the volatility index had risen above this level has provided steady opportunity for gains over the span of this bull market.  To review, since 2012, if you had bought the S&P each time the VIX clipped the 20-level you were likely to have achieved solid gains looking 5 to 50 days out.

According to the study above, the S&P has returned, on average, nearly 3.75% in the 10 days following a breach of the 20 level.  Last Thursday (7/23) was day 10 in this instance and at the time we were at least in spitting distance of staying on trend.  As of the close on Thursday, the S&P had risen 2.5% from its close on July 9th at 2,051.  At its high point on July 13th, the index got up to 2,116 which is a 3.1% gain.  However, in the two trading days since, the S&P has fallen swiftly and closed yesterday just 0.8% higher (2,067) than its 2,051 starting point.  Clearly, if the market intends to stay somewhat on trend with recent history it has its work cut out for it over the next 8 trading days.  The S&P has averaged a 20-day gain of 5.4% since 2012 when the VIX has traded above 20.  This would equate to an S&P close of 2,161 which is 85 points higher than where we're trading at this very moment.

One culprit in the S&P's inability to generate a sustained bounce is likely the lack of breadth and participation.  We've written on this topic many times before and you've likely seen renewed talk of it elsewhere in recent weeks.  Fewer and fewer sectors and stocks have been responsible for the market's recent thrusts higher.  As Andrew Adams of Raymond James summarizes:

The two graphics above illustrate an important point.  While the market has continued to move somewhat higher (ever so slightly) over the course of the year, it's done so with less leadership.  And while that can be fine for a time eventually one of two things happen:  the leaders stumble and take the market with them or the laggards play catch up.

It's now been nearly 4 years since the market's last 10% correction, much longer than the historical average and something that should not be ignored.  However, even with the recent weakness the S&P sits less than 3% from all-time highs.  Bears are going to need some additional catalysts in order to push this resilient market lower.

Looking more broadly at various levels, we'll be watching to see how the index handles any of the following:  a revisit to the 200-day moving average (currently at 2,065), the 2,040 - 2,050 zone which is the area of the most recent lows and the March lows, and lastly the 1,970 - 1,990 zone which would be going back to the December - January lows.  

We also believe that watching the monthly chart and its 12-month moving average continues to be a major tool.  A close below this indicator would likely introduce further weakness while staying above at the end of July could serve as the basis for a trip back up to the top end of the range.

Saturday, July 25, 2015

Week In Review (7/20 - 7/24)

Stocks struggled this week as the S&P 500 was down 4 out of 5 days and finished -2.21% lower from last Friday's close.  Meanwhile, the Dow Jones Industrial Average suffered its largest 1-week drop since December.  Friday was the ugliest day of the week as Biotech stocks like Biogen were hit hard. Biogen was down 22% for the day after issuing disappointed guidance in its quarterly earnings release.  The Nasdaq Biotechnology index was down more than 4% for the week.  This was more than enough to offset the market's glee over Amazon's earnings.  The stock opened trading Friday 20% above Thursday's closing price.  However, those gains were halved during the trading day as the weight of the market pulled it back into the atmosphere and it finished "only" 9% higher.

As the Wall Street Journal noted today, the market has, in recent weeks, seemed to pay less attention to macro events which has allowed investors to focus more on company specific news:

"The focus on individual companies marked a turnaround from earlier this month, when all eyes were on developments in Greece’s bailout talks and China’s tumbling stock
On Friday, dour economic news from China helped accelerate a gathering commodities-market rout, but investors said the big factors driving stocks were earnings-related, perhaps to a fault.
“The market has taken a break from the macro[economic] and is focusing more on the company level,” said Tom Digenan, head of U.S. equities at UBS Global Asset Management. “If you have a bad quarter, that doesn’t necessarily project that things will be all bad going forward, but the market seems to be playing that.”"


This week's stumble for the stock markets knocked off some of the shine on what was shaping up to be a really strong month.  The S&P is now up just 0.8% for July after being up 3% as of last Friday.  Thanks to some very positive earnings reports by tech giants like Netflix, Google and Amazon, the Nasdaq is still higher by 2% for the month.

Sector-wise it was another tough week for Energy as the space was down another 2%.  Cyclicals, Consumer Staples and Financials held up rather well in the face of the selling in the broad indexes.

Thursday, July 23, 2015

AAPL and The Market

Our Tuesday post highlighted the noticeably thin leadership in the market and the need for greater participation if the indexes were to head higher in the 2nd half of the year.  Through the 1st six and a half months of 2015, the market's stalwart has been the health care sector.  It has accounted for half of the S&P 500's overall gain so far and helped to offset the weakness in utilities, energy and elsewhere. In the post, we offered up some recent commentary for Nicholas Colas, chief market strategist for Convergex, where he noted that in addition to health care the sectors looking most primed for further upside were financials and technology.

Mr. Colas pointed out that technology stocks, which make up 20% of the S&P, had shown incredible strength in recent weeks including last week where the sector was up 4% after strong earnings reports from Google and Netflix.  Tech certainly has momentum and relative strength on its side right now.  However, those positive feelings were cast into some doubt on Tuesday afternoon when the market decided that Apple's near $11 billion in profits in Q2 were not enough.  The stock was off more than 7% in the after-market and threatening to breach its 200-day moving average in the $119-120 area.

Apple opened trading yesterday down more than 6% at $122/share but managed to rally intraday to close above $125 and down just over 4% for the day.  If there's one stock that could topple the market's upward trend, it's probably Apple.  In terms of size, it makes up nearly 5% of the Dow, 4% of the S&P 500, 15% of the Nasdaq 100 and 18% of the XLK (SPDR Technology Select Sector ETF).  As the Wall Street Journal noted during trading yesterday, the market was being held down by Apple's fall:

"In the price-weighted Dow, Apple, at $124 or so, doesn’t have the biggest weighting; that goes to Goldman Sachs Group Inc. and its $212 stock. However, Apple loss on the day, more than $6 right now, is the largest loss, so it’s having the biggest drag on the index. With the stock down $6.60, it works out to about 44 of the Dow’s current 67-point loss.
It’s easier in the S&P and Nasdaq, both market-cap weighted indexes. There Apple is the biggest component, and with the S&P having such little momentum in early trading, Apple’s is single-handedly pulling the index into the red.
“At $124.49, Apple is taking the index down 0.19% or 4.08 points,” said Howard Silverblatt, the senior index analyst at S&P Dow Jones Indices. “It is taking the S&P 500 Information technology sector down 0.95%.”" 


Further, the Nasdaq 100 fell more than 1% yesterday and the XLK was down 1.5% primarily because of Apple's weakness.  While the stock's intraday action yesterday was encouraging, we'll want to watch how it behaves in the coming weeks.  Its chart is now showing a triple top ($133-134 area) formation that began back in March.


How it resolves itself in this $120-134 zone will not only be important to Apple shareholders but to the overall market as well.  It will tougher for the broad indexes to make meaningful gains if this key component isn't along for the ride.  But with a very reasonable valuation we think the downside will be limited.  It may not take off to the upside like other stocks have upon their earnings announcements but if it holds here we think there's plenty of strength in other areas to propel the market higher. 

Tuesday, July 21, 2015

Where's The Performance Coming From?

Convergex's Nicholas Colas is out this morning with some interesting data on what's driven the market higher so far in 2015:

"You don’t hear it much, but the S&P 500 has been a bit of a “One trick pony” in 2015. No, it isn’t the 4% weighting in Apple that makes it such; it is the combination of a 15% weighting in Health Care AND that sector’s 12.9% return year to date.  When you compare the S&P 500’s price return year to date of 3.37%, you can see that the Health Care sector’s contribution is essentially just over half the market’s price return for 2015 (12.9 times 15% is 1.90 of that 3.37). Layer on the fact that 5 of the 10 industry sectors in the S&P 500 are still down on the year: Materials (-2.7%), Industrials (-2.9%), Telecomm (-0.7%), Utilities (-8.6%) and Energy (-9.7%).

So what happens when Health Care stops being such a strong performer or simply hits a valuation or fundamental pothole?  The simple answer is that other sectors have to step in with better performance, or the U.S. equity market will stumble, well, like a pony after its one trick. Two sectors have the potential to be that support, both by dint of their weighting in the index and recent performance.  Financials (17% weighing) may only be up 2.8% on the year, but over the last 3 months their performance is better – up 4.9%. Promises of a steeper yield curve and a better U.S. economy are the tailwinds there.  The Technology (20% weighting) sector is doing a little better YTD, up 5.6%, but has really hit its stride in the last 5 days, up 3.8%, on the back of positive earnings from the likes of Netflix and Google."


The chart below, which is something we frequently reference in our weekend market reviews, further summarizes Mr. Colas' commentary.  Here we're looking at a year-to-date performance chart of the various SPDR S&P Sector ETFs.  While there's some variation in the performance numbers he references, the larger points remain.  Health Care has been the clear leader through the first half of the year and if that sector stumbles in the coming months the market will need other sectors to pick up the slack if we're to build on these gains.

Health Care stocks were one of the few reasons that the S&P finished just barely positive through the year's first 6-months.  They've gotten some help of late as Technology stocks (Netflix, Google, Amazon, Facebook, etc) have perked up in recent weeks.  They were especially strong last week and have helped push the S&P to a 3% gain so far in July.

You've heard some chatter during this sideways market that there was money to be made if you were a stock picker and that's been true to a degree.  You certainly helped yourself if you were able to target companies within the stronger sectors mentioned above.

Saturday, July 18, 2015

Week In Review (7/13-7/17)

Markets kicked off the week's upward momentum with a powerful rush higher on Monday on the back of a Greek debt resolution.  As we commented on Tuesday, Greek Prime Minister Alexis Tsipras caved to the pressures of his European counterparts and agreed to a resolution that most saw as incredibly punitive on the Greek people.  In any event, stock markets worldwide celebrated the news and brought another V-bottom situation into play.  Further, the S&P 500, after piercing through its 200-day moving average for a short time last week, was able to correct that damage and then some.  It quickly bounced up from the 200-day to move back to the top-end of its months long range and worked off oversold conditions.  As the S&P has made its move, the VIX has once again collapsed after getting up near 20 last week.  We covered some interesting stats on the VIX in our Thursday post.

Every major US average was up handsomely for the week with the Nasdaq (+4.25%) being the clear leader and the S&P 500 coming in 2nd (+2.41%).

The Nasdaq's outperformance on the week continues its year-to-date leadership trend as it has now, by an ever so slight margin, cracked into the double digit gains category for 2015.

On a sector basis, technology led the way while energy and utilities continued to exhibit the weakness they've shown for many months now.

Technology's surge higher was led, in part, by a 3-headed monster of Google, Amazon and Netflix.  Each was up massively on the week and helped to pull its sector-mates higher.

Next week is another huge week for earnings announcements and will be sure to help shape the direction of the market's next move.

Thursday, July 16, 2015

The VIX Signaled The Bounce Again

Last week we talked about how the probablities were in favor of a bounce based on a variety of conditions.  If there is one condition that has been an absolute slam dunk for opportunity over the last few years, it has been the VIX.  Since the end of 2012, when the buy-the-dip market started, following the levels of the VIX has been great for timing purchases during market weakness.

We ran a simple study going back to December 2012 and looked at returns in the SPY going out from 5 to 50 days.  You can clearly see that buying weakness in the market on an elevated VIX reading has been a profitable trade.  We even looked at what happened if you filtered out instances where the VIX stayed above 20 over a period of several days (VIX>20 Filtered) and there was still an appreciable edge. 

We always enjoy reading the work of Ryan Detrick and he recently ran a study on backwardation that complimented our own findings. 

At some point we will have an extended down move that will leave the VIX elevated for a prolonged period of time.  Yet since the end of 2012 this one simple indicator has been extremely accurate and provided a huge edge if you had followed it.

Tuesday, July 14, 2015

What's Next For Greece?

Markets worldwide rallied yesterday on the news of an agreement being reached between Greece and its European Union creditors.  Greek Prime Minister Alexis Tsipras, after months of taking a hardline anti-austerity stance, finally capitulated and gave into the demands of his European counterparts.

While the summit agreement may have quelled the fears of a Eurozone exit by Greece for now, there is still much to be done to make this process appear even somewhat orderly.  Most immediately, the Greek parliament must pass these new measures into law by Wednesday.  No easy task as just last week Tsipras held a referendum to which the country voted a resounding "no" to measures seen as much less harsh than these latest terms.  Digging up the necessary support to pass the agreement into law is going to require a good bit of political creativity by the Prime Minister and may ultimately cost him his job.

Bloomberg was out yesterday with a helpful timeline of the deadline's that must now be confronted.

This continues to be a fluid situation and isn't a 100% certainty that the deal in its current form is signed, sealed and delivered.  If you look at the action of the market in recent weeks, we can see that the rally over the last 3 days was an exhale of relief that a Greek catastrophe will be avoided.  Those worries have been tabled for now and we're seeing the type of light-volume bounce that's been a familiar theme in this bull market.  These quick sell-offs have tended to be on higher volume only to end in a V-bottom that ultimately slingshots us back up toward the top end of the range.

We'll see how, and if, the timeline above impacts the future direction of the market.

Saturday, July 11, 2015

Week in Review 7/6 - 7/10

Wow!  What a week of volatility and stock market action.  It certainly was a contrast to the sometimes boring, range bound moves we'd seen thus far in 2015.  The tweet from Jason Goepfert on Friday helps to illustrate what similar conditions have meant during this bull market.

You don't have to look any further than your favorite financial news network/website for the "headline" reasons (Greece, China, etc) as to why the market feels shaky here.  However we prefer to look at price to best understand where things stand.  On a daily chart of the S&P 500 the market continues to reside in a 6-month sideways channel.  The current sell-off has taken the index to the low end of this range once again.  The 200-day moving average has also come into play for the first time since last October.

If we back out to a longer term timeframe and look at the monthly chart of the S&P, we see that we are bumping up right against the 12-month moving average.  This level also coincides with the uptrend line from the 2009 lows.  We'll be watching this chart closely as the month goes on to see if these important levels are respected.

We saw an expansion of breadth to the downside this week as the number of new 52-week highs vs lows hit the lowest level of the year.  However, the S&P did not follow suit and put in new 2015 lows.  As you can see from the sell-off last October there is plenty room to the downside for stocks making new lows.  If this happens, the S&P could get dragged lower.

The latest sentiment data continues to show that investors are terrified of this market.  Another statistic from Sentiment Trader's Jason Goepfert:

According to the CNN Fear & Greed Index, investors have become panicky. Fewer than 1% of all days since 1998 have shown the level of pessimism suggested by the index, and stock returns in the months ahead, have been significantly positive (see chart below).

It was also a week chock full of good reads:

Josh Brown on sector and individual stock performance dispersion

Charlie Bilello on the S&P's test of its 200-day MA

An update on asset class returns

Putting this most recent pullback into context

Are we finally getting a 10% correction?

Ryan Detrick with lots of commentary on the 200-day MA

A refresher on the impact of volatility on your portfolio

How might Greece impact the Fed's decision making?

Thursday, July 9, 2015

Revisiting Correlations

We follow correlations as another useful tool to track sentiment in the market.  Typically, during down trending markets everything gets sold at once and fast which in turn causes a spike in correlations.  Tracking sector correlations during market stress gives a nice view of the underlying market.  

Below is a chart of sector correlations versus the SPY going back to 2011.  You can see how they rise during periods of S&P pullbacks/drawdowns.  During this most recent pullback in which we are about 4.2% off the highs, correlations have started to rise.  Since the start of 2013 when this V-bottom market of shallow corrections really kicked into gear, the average pullback in the S&P 500 is 4.5%.  Considering we are 4.2% off the highs with rising correlations and a ton of oversold indicators, we give a higher probability to a potential bounce.  So unless we get a bigger flush lower in prices, correlations are likely to stay in this range of .7 to .8 before correcting lower. 

A recent note from the morning briefing by Nicholas Colas, the chief market strategist at Convergex, sums up the current environment:

"Markets don’t melt down because a few sectors or securities move lower; they drop like a stone because everything declines at once – essentially a price correlation of 100%. Bull markets, by contrast, tend to show declining correlations as varying industry and individual stock fundamentals c reate differentiated asset prices. On the plus side, that’s exactly what U.S. industry group equity price
correlations have done since 2011, when average S&P sector correlations to the index as a whole were +95%. 

This month that average is 82%. Now, the bad news: the long run average since the end of Financial Crisis is 84%. Simply put, we haven’t really broken free of the macro “Risk on, risk off” gravitational pull of systematic worries (read “Greek Debt Crisis”) or central bank watching (read “Fed lift off” and/or “ECB QE”). Should capital market volatility continue to increase – the CBOE VIX Index is up from 12.1 to 19.7 in just 10 trading days – correlations will likely increase as well. That will make “Safe” parking lots for capital very hard to find."

He goes on to list a number of keen observations:

"1. Asset price correlations for the 10 industries of the S&P 500 have been declining since late 2011, when they reached +95%.  That’s good news, as it allows active investors to benefit more from stock and sector picking and gives passive investors a smoother and less volatile ride. 

2. The bad news is that average sector correlations are up over the last month, from 77.6% to 82.4%.  We’ve tracked these numbers for years – since the Financial Crisis, when they skyrocketed – and the correlation between the CBOE VIX and sector correlations is 67%, a remarkably high reading.  Simply put, when volatility spikes correlations tighten up very quickly.

3. The second bad news “Foot” to fall is that average sector correlations since 2009 come in at 83.7%, or right on top of this month’s 82.4%. We have not, in other words, made any real progress in pushing sectors as disparate as Health Care and Financials to trade more on fundamentals than larger market-wide trends. 

4. As market volatility picks up – the CBOE VIX Index is up from 12.1 to 19.7 in just 10 trading days – stock correlations are already at the same elevated levels as the market has exhibited for years.  That’s a problem for two reasons.  First, it means it will be as hard to diversify an equity portfolio from incremental volatility as it has been the last +5 years.  Which is to say “Very hard indeed”.  Second, it also signals that equity markets are still in the sway of macro drivers rather than industry and stock fundamentals.  Yes, given the headlines over everything from Greece to Federal Reserve policy, perhaps that is understandable.  Even as it is unwelcomed."

It will be important in coming weeks to observe how correlations react as the market carves its path. Will it be more of the same and we're reaching an inflection point in both correlations and volatility? Or will individual sectors begin to behave a bit more independently when volatility flares up?