Monday, May 30, 2016

Week In Review (5/23 - 5/27)

If you were expecting a calm trading week heading into the long Memorial Day weekend, you were probably caught just a bit off guard by the S&P 500's 2.3% gain and even more so by the NASDAQ's 3.4% rise.

The market's gains came in the face of continued talk by Federal Reserve officials that a summer interest rate hike is now a real possibility.  The fed funds futures market is now showing that expectations of a June hike have risen from just 8% probability a few weeks ago to 30% now.  More telling perhaps is that the probability of a July hike now sits at 62%, up from 55% a week ago.

With just one trading day left in May, the S&P 500 is up 1.6% for the month and 2.7% year to date.  The NASDAQ, meanwhile, has seen a surge of more than 3.4% in May and now sits down only -1.5% in 2016.

One weekly metric that continues to baffle is the sentiment survey taken by the American Association of Individual Investors (AAII).  The survey, which gauges the direction that individual investors think the market will take over the next six months, is generally regarded as being contrarian in nature.  Meaning, when investor optimism is low it is cited as a potential catalyst for the market to move higher and vice versa.  

Interestingly, recent AAII surveys have been sending some fairly rare signals.  The latest data showed that just 18% of respondents are leaning bullish over the next six months.  This is the lowest level since mid-January and, according to, is even lower than the 18.9% reading that was registered the week of March 5, 2009 (i.e. the market bottom during the 2008-2009 financial crisis). While the survey's bearish reading during that week in 2009 hit an extreme 70.3%, the measure sits at just 29.4% bears today.

So what gives?  Well, it appears that a lot of investors just simply cant make up their minds.  The percentage of respondents with a neutral outlook for the next six months currently stands at 52.9%.  This is far higher than the historical average of 31.2% and, again according to, is the highest neutral measure since April of 1990.  With so many investors sitting on the proverbial fence in terms of near-term market direction, Briefing looked at the history of the AAII survey to find similar instances.  Their comments:

"Looking at the data set from the American Association of Individual Investors, which dates back to 1987, the most analogous period in our judgment to the sentiment readings seen today was the week of September 9, 1988, when bullish sentiment was 17%, neutral sentiment was 52%, and bearish sentiment was 31%. For what it's worth, the S&P 500 was up 4.2% four weeks later.
As an aside, neutral sentiment topped 51% the week of December 31, 2015. That was the first time it has been above 50% since the week of February 7, 2003. The survey for the last week of December also showed bullish sentiment at 25.07% and bearish sentiment at 23.62%. Four weeks later the S&P 500 was down 8.7%.

A lot of individual investors aren't expecting any big move for the market over the next six months, so if the market starts to get away from them, that could force a squeeze play that exacerbates the directional bias of the move."

Nothing actionable there but we like the idea of a "squeeze play" that forces these neutral investors to get involved in one direction or the other (buying or selling).

Have a great week.

Sunday, May 22, 2016

Week In Review (5/16 - 5/20)

The S&P 500 pinballed back and forth between positive and negative territory all week and ultimately finished with a small gain.  This brought an end to the market's 3-week losing streak and helped to keep the S&P in positive territory for the year.

While the index finished just 6 points higher than where it closed 7 days earlier, it took a rather bumpy course to get there.  The average intraday swing for the S&P on the week was 1.1% and much of this volatility can be attributed to the anticipation of and reaction to the minutes from the FOMC's April meeting.  A number of Federal Reserve officials seemed to be in agreement that a June rate hike could be warranted.  According to the Minutes:

 "Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation marking progress toward the Committee's 2.0% objective, then it would likely be appropriate for the Committee to increase the target range for the federal funds rate in June."

As of last Friday, the futures market was pricing in just an 8% chance of the Fed making a rate move at the June meeting.  That probability had jumped to 30% by the end of this week while the likelihood of a July hike had risen to 55%.

With the last full trading week of the month upon us, the S&P is down 0.63% in May while this week's outperformance by the NASDAQ (+1.1%) helped it climb back toward flat for the month. 

On a year-to-date basis, the NASDAQ and Russell 2000 still lag behind the other domestic indexes by a wide margin.  

It's also worth noting that this week also marked the 1-year anniversary of the S&P making its all-time high of 2,134.  We've observed in this space and elsewhere that even while the index is within spitting distance of the high set last May, investor sentiment readings suggest that we're anything but overly bullish.  Laszlo Birinyi, president of Birinyi Associates, says that this is one of the reasons that an end to this bull market won't be any time soon.

"There are lots of concerns—economic, technical, political, fear that we haven’t topped the all-time high of 2130 from last May, stories about people taking $20 billion out of the market or hedge funds losing billions. But the market is only 5% from the all-time high. To an old trader, this is encouraging. There is an underlying strength. We have a new high in the S&P 500 advance/decline line. Since 2009, so many of the negative concerns have been ill-founded. One of the headlines was “U.S. Stock Rally Narrows, Signaling End.” That was June 2009.
At the end, the market gets narrower, and if you use the historical template, people get excited, money goes into growth funds. That’s not happening. Enthusiasm is tempered, which suggests to me it has a ways to go."

If the past week is any indication, there is going to be a whole lot of Fed watching over the summer months and its actions will play a large role in whatever direction the market takes over the near/intermediate term.

Have a great week.

Monday, May 9, 2016

Week In Review (5/2 - 5/6)

Stocks dealt with slight headwinds again this week and the S&P 500 finished down nearly 50bps from last Friday's close.  Conflicting economic signals seemed to be the drag on the markets as doubts about global growth seemed to drag on investor sentiment.

As it stands, the S&P remains modestly up on a year to date basis as we move into the historically vulnerable summer months.

With stocks coming under pressure over the last 3 weeks, we've been looking for the rotation in leadership that's bound to happen at these types of inflection points.  One potential development that we're watching is the relationship between Growth & Value stocks.  For years now, Growth has outperformed on a relative basis and while still in an uptrend, Growth stocks could be weakening relative to their Value counterparts.  The chart below shows the long term relationship between iShares S&P 500 Growth (IVW) and the iShares S&P 500 Value (IVE).  We're seeing a clear breakdown by IVW which is suggestive of Value stocks assuming leadership.

The chart below shows the Nasdaq from the Feb 11th bottom (grey line).  The blue line, representing 20 day highs, shows how breadth and momentum topped much earlier than price in this recent run-up.  As we can see, the index ran for another month after this breadth measurement topped out.  And why was the index able to continue upward?  Well for one reason, even though the buying thrust slowed down in early March there was also a real lack of selling pressure (orange line = 20 day lows) until the end of April/early March.

Have a great week.

Let's Go Caps!

Wednesday, May 4, 2016

The More Things Change, The More They Stay The Same

The following is a passage from "The Panic of 1907: Lessons Learned from the Market's Perfect Storm" (Bruner & Carr).  If you didn't know any better, you could have picked up a random newspaper off a bench this morning and assumed it was written to describe present-day America:

"Americans had become increasingly disturbed by the tumultuous changes that had accompanied the country's impressive industrial growth.  They were worried about the number and type of immigrants entering the country; the size, noise, and frenzy of the nation's large cities; the effectiveness of their elected representatives; the consequences of old age, illness, and injury on the job; the day-to-day hazards of urban life; and even the quality of their food and water.  Yet most of all they reacted with alarm to the rise of big business and the corporate merger movement.  Some Americans, calling themselves "progressives," argued vociferously for the right of a community to protect itself against those who pursued their economic self-interest without concern for the common good."

If, like us, you're a student of history, you know that patterns have a way of repeating themselves and that's why we like to look at charts, data, and trends from year's past to help assess the current market landscape.

With this thought in mind, we thought we could offer up a couple of interesting settings/conditions playing out right now that evoke memories from past market periods.  We've got a couple of incredibly bullish data points and a few bearish stats as well.

Bullish Potential

We looked at data going back to 1950 and found that the S&P 500 finished April with a peak to trough range of just 17.23% (using monthly closing figures).  That's 760 months worth of market history and the 2-year period that just concluded (April 2014 - April 2016) featured one of the tightest S&P ranges that we could find.

Knowing this, we then wanted to look at forward returns after similarly narrow 2-year consolidations.  The results are exceptionally bullish looking out 1 to 2 years and mildly bullish over more intermediate-term spans.

What we found is that there have been six 2-year periods since 1950 where the market stayed within a 20% peak to trough range.  After the S&P broke free of those ranges, it moved significantly higher on average with 1-year returns being 16.6% with an 83% success rate.  And average 24-month returns being nearly 35% with a 100% success rate.  These numbers come in well ahead (nearly double) of the results when you consider all days from 1950-2016.

Looking at the chart below, we admit that the sample size is small and it's hard to draw confidence from such infrequency but we still found it interesting that the trend has resolved to the upside every time after similar long, tight consolidation phases.

*Please note that one reason the sample size is so small is that we eliminated all months within the same 2-year span except for the final month before the S&P staged a break out.  There were 27 total instances but we did this to reduce redundancy.*

This study is complimented with some recent work done by Steve Deppe, of Nerad & Deppe Wealth Management, that analyzed instances where the monthly Bollinger Bands on the S&P had squeezed to a width of less than 15.  Bollinger Bands essentially measure volatility by looking at price highs and lows over a given time period.  Deppe looked at the last 20 months of S&P data and found that the index had demonstrated very little volatility over that span and even less when considered within the context of market history.

He noted that at the end of March the S&P's BB width sat at 11.53.  Meanwhile, since 1970, the average monthly BB width has registered at 33.2, nearly 190% greater than where March closed.  His chart below shows the results of when the monthly BB width squeezed to below 12 from 1970 onward.  The forward looking results are overwhelmingly positive.

Bearish Potential

When weighing the current evidence, bears are quick to point out that we are heading into, historically speaking, the worst stretch for the market in terms of seasonality.  It's well known that the next 6 months have routinely been the market's toughest, hence "Sell in May and Go Away."

We can add further fuel to the bears' fire by dusting off a resource we highlighted several months back.  This work comes by way of market analyst Wayne Whaley and Steve Deppe again.  We were first introduced to Whaley's "TOY Indicator" and its remarkable success rate by Deppe back in the fall and again in January.

In short, Whaley looked at the S&P going back to 1950 and found that the two month window, November 19th to January 19th of the following year, had a striking accuracy in calling the performance of the following 12 months.  TOY stands for Turn Of the Year since the indicator covers November to January.

And in a recent note, Whaley went even more in-depth and highlighted that when the TOY Barometer was negative (as it was from November 19th, 2015 to January 19th, 2016), the traditional "Sell in May and Go Away" period (May 5th - October 27th) was positive in only 2 out of 14 instances and lost an average of 9.55% (with a median loss of 9.21%)  Terrible odds, poor results and not very comforting as we head into the summer months.

Whatever your bias in this environment, you can certainly find the data and the anecdotes to back it up.  Have a good evening.

Sunday, May 1, 2016

Week In Review (4/25 - 4/29)

It was a tough week for stocks as the S&P 500 sold off 1.3% and the tech-heavy NASDAQ lost 2.7%.

The S&P essentially went nowhere from Monday to Wednesday in the build up to the latest announcement out of the FOMC.  Ms. Yellen's statement was more dovish than anticipated and contained no language suggesting that a rate hike would happen in the near future.  Stocks hit their highest point of the week on Wednesday after the announcement but the S&P still only closed up 4 points on the day.

Then Thursday and Friday came and they brought carnage along with them.  The Bank of Japan disappointed investors after it chose to not introduce additional easing efforts.  The market sold off on that news and weakened further on the back of several disappointing earnings reports.  At its low on Friday, the S&P fell into negative territory for the month but ultimately recovered to finish up 27bps for April.

Taking a year-to-date view, the S&P is now up just over 1% in 2016 which is still impressive given the early January and February weakness.

Moving ahead to May, we looked back at the last 20 years and found that the S&P has generally moved higher during the month.  The chart below plots the average and we see that index has finished higher by nearly 40bps over the last 20 May's.

Our friend Steve Deppe of Nerad & Deppe Wealth Management has been putting out some excellent research lately and this week was no different.  In the chart below, Steve offers compelling evidence that suggests the S&P could be headed for a date with its 100-day moving average (currently at 1,995).  We hope you give him a follow on Twitter.

Have a great week.