Sunday, July 17, 2016

Week In Review (7/11 - 7/15)

The markets continued their post-Brexit giddiness this week by gapping higher at every open and finishing higher every day but Friday.  All told the S&P was up 1.15% for the week and sits higher by 3% so far in July.

It wasn't just US stocks that traveled higher this week as international and emerging market stocks (EFA & EEM), commodities, bonds and the US dollar all made advances.  

The S&P is now attempting to confirm its recent breakout to new all-time highs and hold above the 2,130 level that stayed insurmountable for over a year.  We continue to see incredible breadth measurements that suggest this time may be the real deal.  Yet n the very near term we wouldn't be shocked see stocks back off a bit as we're just a little overheated here.  At the same time, the VIX has had a tendency in the past to bounce at these levels (closed Friday at 12.67) suggesting that a pickup in volatility is due.  And as earnings season kicks into high gear this week we may now have the ingredients necessary to see that happen.

We wanted to share a recent study we ran in search of finding markets with similar characteristics.  One that produced some interesting results (no bias here) had the following constraints:

-We used the Dow Jones Industrial Average through June 30th
-We looked for markets with a down trending 200-day (40-week) Moving Average
-We wanted to see a recent uptick in this moving average (weekly close greater than prior week)
-And we wanted to be within 6% of highs on the Dow

Below are all the instances going back to the 1950s and there's some takeaways to note:

1) The average returns are slightly weaker almost across the board relative to the entire sample

2) There's notable weakness in the forward 2 and 3-month timeframes

We've seen some stories comparing the current market to 97-98 currency crisis markets but one big difference we'd be quick to note is that from 1995 to 2000 the 200-day MA on the Dow was trending up pretty much the entire time.  A more similar market might be from 1956-1958 (seen in 2nd chart below) where you actually had the 200-day MA flatten out/decline for a period of time much like now.  That market whipped around for a few years, experienced a decent sized flush and then went on to put in much higher highs from 1959 onward.

We'll see if the breakout that's underway can sustain and we're able to buck the trend of the 2 and 3-month weakness that we've seen in past instances.


1950-1983 - *(1956-1958)*

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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