Sunday, November 22, 2015

Week In Review (11/16 - 11/20)

Stocks finished higher again this week with the S&P 500 gaining 3.3% and the Nasdaq Composite, as it has all year, outperforming with a 3.6% gain.  The tech-heavy Nasdaq is now up 7.8% year-to-date and stands just 1% from all-time highs.  Meanwhile, the S&P is up 1.5% for the year, the Dow Jones Industrial index is exactly flat and the Russell 2000 still lags behind with a loss of 2.4% in 2015.

The chart below from Bespoke offers comprehensive look at key ETFs from just about all asset classes.

After last Friday's tragic events in Paris, it was fair to expect to some volatility this week.  Thankfully those fears never seemed to materialize as the market got the week's lows out of the way early on Monday and pretty much didn't look back.  Taking a broader view, the S&P is now bumping up against an area of resistance that's given it fits this year.  This SPY chart from Urban Carmel shows how the index has been rejected each time it's ventured into the 2,100 - 2,130 area.  It seems like a given that the market will look to probe this area once more before year end.  We'll see if it ends with a more positive result the next time around.

As is mentioned every year, we've now entered the strongest seasonal window for stocks and it will be interesting to see how the next month and a half unfolds with the December Federal Reserve meeting looming in the background.  Speaking of seasonality, we came across a fascinating article this week by Steve Deppe that examined the TOY (Turn of the Year) Barometer that was created by quant analyst, Wayne Whaley.  The full article is linked here but essentially Whaley set out to uncover the "King Pin of seasonal barometers" by in his words:

"I implored my computer to take a few seconds to exhaustively study S&P performance over every time period of the year and determine which time frame’s behavior was proprietor of the highest correlation coefficient relative to the following year’s performance.”

His findings were pretty remarkable.  Per Deppe:

"What he found was that the performance of the S&P 500 Index over the two-month time period from November 19th to January 19th was remarkably effective in predicting the forward looking twelve month returns for the index, specifically from January 19th to the following January 19th.  Wayne decided “Since this two-month time period (Nov19-Jan19) extends across the Turn of the Year (TOY) and encompasses the gift giving season, I have coined it the ‘TOY Barometer’...

The “TOY Barometer” is calculated by measuring the S&P 500 Index’s price-only return from the close on November 19th (or the preceding Friday’s close if the 19th’s on a weekend) through the close on January 19th of the following calendar year (or the preceding Friday’s close if the 19th is on a weekend). “TOY Barometer” price-only market returns that exceed 3% are considered “bullish” signals, which historically suggest the S&P 500 may be headed to “infinity and beyond”. “TOY Barometer” returns that fall between 0%-3% are considered “neutral” signals and have far more normalized returns. “TOY Barometers” that happen to be negative are considered “bearish” signals and tend to be a harbinger of bad things to come for stocks. Just how successful has the “TOY Barometer” been in predicting the forward returns of the S&P 500? Let’s take a closer look…


You can see the full results in the linked article but just for example's sake, Whaley found that since 1950 there have been 33 cases of "bullish" TOY Barometers where the S&P's return from November 19th to January 19th of the following year was 3% or greater.  The market went on to have positive gains for the next 12 months in 32 of the 33 years, a 97% success rate.  The "neutral" and "bearish" cases revealed equally compelling results.  We highly recommend giving it a read and looking into more of Mr. Whaley's work.

Another much talked about issue is the discouraging lack of breadth that's occurred as the market has recovered from the September lows.  We've written about it as have many others.  Those with a bullish view on this market would like to see more stocks participating in these bounces and less of a need to think up creative acronyms like FANG (facebook, amazon, netflix, google) as a tribute to the market's narrow leadership.  Stats like these below speak to that:

A couple good reads from the week that was..

Santa rally anyone?

Can Biotechs help pull the market higher?

"Risk management is boring until it's not"

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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