Sunday, April 3, 2016

March & First Quarter Comments

March featured a continuation of the market strength that began after the mid-February bottom.  For the month, the S&P was up 6.60% while the Russell 2000 surged 7.75% and the NASDAQ gained 6.84%.

Factoring in the first day of April (Friday), the S&P and Dow Jones Industrial Average have now edged into positive territory year-to-date while the NASDAQ and Russell have recovered most of their early 2016 losses.

March's strength is compelling for a lot of reasons, one of them being the environment in which it occurred.  Last month marked the 12th instance since 1950 where the S&P gained 5% or more after hitting a 12-month low in the prior month.  The stats below show that average near-term returns (1 to 3 months) are a mixed bag at best.  Overall, the returns looking a quarter out have been muted on average but there have been some major outliers both up and down.

Looking at some breadth studies, the move off the February lows has created some massive thrusts to the upside on various measures.  One that we track daily is the % of stocks trading above their 40-day moving average.  The indicator has been extremely overbought for weeks now, this is not a typical condition and suggests just how strong this rally has been.

We use Telechart for this data and going back to 1986 the results are surprising.  Using month-end data, there have been 15 prior instances when the indicator closed higher than 80%.  Looking forward 1, 2, 4, 6, and 12 months the results are significantly stronger versus the whole sample size favoring a statistical edge for the bulls. 

We're always in search of what's "working" in a given market environment.  One very general way of doing this is by comparing low volatility stocks vs high beta stocks (SPLV vs SPHB).  When this ratio is trending higher it means low volatility, high quality equity plays are in favor and this is exactly what's happened in recent months.  When you have utilities dramatically outperforming year to date it shows that we're in a market favoring stability over higher risk assets. 

Next, looking overseas at European and Asian markets, all look virtually the same as they remain in strong downtrends.  Further, the moves in most of these over the past 2-months look more characteristic of bear market rallies rather than new sustainable uptrends.  In fact, many are now rallying into overhead resistance areas.  Something to watch out for in the near-term.

Have a great week ahead!

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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