Promising Breadth Readings Last Week

The market action of the last week has been nothing short of remarkable.  From the election night futures plunge to its immediate reversal and the rally that followed, it's fair to assume that a number of traders and investors were left wrong-footed at one point or another.

Yet for those that positioned for a Trump-win rally, they've been all smiles over the last several trading days.  Today we wanted to look at recent market breadth.  By most measures the move over the last 5 days has been incredibly broad.  From the number of stocks at 52-week highs, to the % of stocks above a certain moving average, to A/D lines, to high/low ratios, all have shown solid breadth thrusts since last week. 

One other breadth reading we track on a daily basis is the number of stocks up 4%+ on the day accompanied with volume.  This unique measure provides clues into how much participation is really happening during a given price move.  Our universe covers roughly 5,000 publicly listed U.S. stocks and the reading we got on this measure last Wednesday (11/9/16) really grabbed our attention as it was the highest recording (by our count) since 2011.

This prompted us to go back into recent history and look for similar examples on this measure and see what happened in their wake.  We went back to 2010 and searched for readings where the number of stocks up 4%+ on a given day was greater than 600. *(We excluded 2009 since the readings off the financial crisis market bottom were too powerful.  We also removed clusters where multiple instances occurred within any 5 trading day span)*

Conclusions:

• Significant edge especially going out 3-6 months
• Every time-period experienced a sell-off prior to thrust except the first signal in Jan 2010
• 2010 & 2011 very different environments from 2012, 2013, and 2016
• 2012 and 2013 are most similar to current thrust considering proximity to new highs and prior shallow pullbacks

2010

2011

2012-2013

2016

Yesterday's Big Gap-Up Was Worth Noting

After falling for nine consecutive sessions, the S&P 500 put an emphatic end to that streak yesterday by gaining 2.2%.  The rally was sparked on Sunday evening in the futures market after FBI Director James Comey told lawmakers that, after a review of new emails, Hillary Clinton should not face criminal charges.  The market celebrated the news and by Monday morning, the S&P was set to gap higher by nearly 1.5%.

Given the nine day losing skid, the market went into last weekend approaching some fairly notable oversold levels.  And while a near-term bounce could have been expected, it's unlikely that too many of us were predicting the huge bounce we saw on Monday.

The recent market action nudged us to go in search of prior instances where we saw big gap-up openings in the SPY after reaching oversold levels.  One study we ran looked for gap-ups of at least 1% while the 14-day RSI on the SPY was in oversold territory (< 30) at the close of the prior trading day.

Observations (going back to SPY inception in 1993):

• Returns going out 3-months after a signal are incredibly favorable.  This trade offers an "edge"

• Yesterday was only the 19th occurrence since 1993.  We anticipated more.

• Almost all of these instances occurred during periods with elevated volatility

• Rarely did it mark the final bottom for the market during that particular period

• However, we did note that a tradable bottom wasn't far off in many cases

• Yesterday's signal was the first ever to occur within 5% of all-time highs (Friday's close at 2,085 is 4.95% from the all-time high of 2,193)

Below are some of the periods shown above:

2015-2016

2011

2007

2001

1996

October Recap - Stocks Weaken to Kick Off Q4

Equity markets saw some deterioration over the final few weeks of October as US stocks slid back to the bottom of their post-Brexit range.  The S&P 500 finished the month down nearly 2% while the Russell 2000 really took a hit, down almost 5%.  This was a departure from recent history as October had been the best month for stocks over the last 20 years with the S&P returning more than 2% on average and finishing higher 70% of the time.

Much has been made of the weakness in small caps over the last month and rightfully so as they (and micro caps) were the biggest losers in October.  However if we take a longer-term view, we can gain some valuable perspective.  The ratio chart of the IWM vs SPY has been in a well defined channel since 2013.  It recently tested the top of this range and was due for a potential reversion.

Some other things of note that took place during the month:

• 10 yr yields are up almost 20% from the September lows
• Regarding yields -are secular lows in?  Nice positive divergence with room to run before a potential test of the upper boundary (long-term chart below).

• Financials and Utilities were the only two positive S&P sector performers during the month.

• The Dollar looks set to rally to the top of its 2 year range (chart below)

Additionally:

• Real Estate and REITs down 7-8% for the month
• Biotechs underperformed - down 8+%
• Metals were very weak with miners down 10+%

Very generally, much of the sector performance can be attributed to the strength in yields as that is positive for financials but not so much for real estate.  Meanwhile, the dollar's strength has put pressure on metals.

Also, considering the strength in the dollar and the huge move in yields we would have expected to see relative weakness in large caps vs. small caps.  However, the S&P has held up remarkably well all things considered, leading us to believe that a December rate hike is already priced in.  Further, traders could be positioning more defensively ahead of the election by selling more risky small caps and rotating into large cap names.  Robert W. Baird & Co had some insightful commentary on these developments.

Recent action aside, there is a lot of seasonal data that suggests the last two months of the year should be strong.  We recently shared some stats on how favorable recent 4th quarters have been for stocks.
If this is to be, it might make sense for the market to sort've idle in place here until all of the election hysteria has passed.

Equally compelling though are the types of studies shared by Steve Deppe and others that remind us that the S&P still never really "broke out" after making new all-time highs in the summer.  In fact, if you really drill down into the numbers, Deppe shows us that the S&P reached an all-time high of 2,093 all the way back in December of 2014.  October 2016 finished with the S&P at 2,126, just 1.5% above the high made nearly two years ago.  Deppe has a point when he suggests that the S&P just needs to "prove it" at this point.