Friday, March 31, 2017

A Look Ahead To April

Looking Ahead
  • Last 20 years: April is the best month of the year with an average return of 2.01%
  • Last 20 years: The average April has rallied strong after tax day into month-end
  • Since 1950: April ranks 3rd in monthly performance with an average gain of 1.46%
  • The full year average gain is roughly 20% when January, February and March are all positive (note: The S&P officially closed March just barely in negative territory after a late day pullback on Friday)

Areas of Note

One area we're watching is the VIX term structure.  It is trading at the highs of the year but not yet at extreme levels.  While the VIX has been dormant thus far in 2017, it recently started to move higher as the market has pulled back.  The ratio below plots the VIX vs VXV.  When this indicator is rising it is telling us that the current volatility (VIX) is rising faster than the 3-month volatility (VXV).  Essentially it is another fear and greed measure.

The S&P hit a new all time high on the first trading day of March.  Since then it has pulled back and consolidated for the entire month.  This consolidation helped to work-off the excessive overbought readings created on March 1st.   The S&P corrected -3.25% from peak to trough in March while also breaking the uptrend line from the November lows.  However, the gap down on Monday (3/27) held support at the 50-day moving average.

The historical data shown above is quite favorable for April with tendency being for the market to rally into month-end after April 15th.  The current consolidation has served to work off excessive conditions while setting the table to resume higher.  At some point this market is poised for a bigger sell-off than 3.25% but we just may have to wait a little longer. After being defensive for much of the last month, the current pullback has allowed us to put some money back to work as the market attempts to re-take recent highs.

Tuesday, March 21, 2017

Some Alarming Contrarian Indicators

In our last post we stated that while the market remained in a sustained uptrend, we'd noticed some indicators that had started to flash caution signals.  Today, the Bank of America-Merrill Lynch monthly global fund manager survey (FMS) was released and it comes at the appropriate time as the market is experiencing its biggest down day of 2017.

There are some data points in the survey that serve as contrarian indicators and others that highlight potentially crowded trades.  To top it off, the S&P is currently breaking the uptrend line from the pre-election lows.  Are we finally getting the pullback that everyone has attempted to predict?  Lets get to the facts...

Below is the summary of the FMS survey straight from BAML:

"Bottom line: March FMS shows investor sentiment in a “bullish holding pattern”; cash can fund H1 upside but FMS Positioning & Profits argue for March/April risk rally “pause”; Policy the key catalyst for “Icarus trade” to fly higher in coming months."

These are some of more interesting data points from the FMS:

Crowded Trades:
  • The 2 most crowded trades are long dollar and long banks
  • The dollar has a potential bearish head and shoulders top while challenging the uptrend line from 2016 lows.  
  • Banks via the KBE index are rolling over as they took out the Jan 2017 lows and are now negative on the year.

  •  Fund managers favor Emerging markets over US and more defensive sectors (utilities & staples) over more volatile sectors like energy.

Equities Overweight:
  • Equity overweight is highest in almost 2 years
  • However allocations to US equities dropped sharply to net 1% OW from net 13% OW last month.
  • As we see above money has rotated to Eurozone as equities rise to 11 month highs to net 27% OW

  • While this measure can stay extended for long periods it is flashing contrarian readings favoring a pullback in the US dollar.
  • The second chart confirms why fund managers are rotating into EM equities vs. US equities.


Fund mangers seem to be rotating into undervalued markets and defensive sectors.   The pullback today in financials flashed a perfect contrarian signal as it was the second most crowded trade.  The S&P 500 is having its first 1% down day since October 11th, 2016.  That represents 109 trading days since the last 1% drop.  This coincides with a break of the clearly defined uptrend from the election lows.  We have been raising cash the last few weeks because the evidence didn't suggest being too aggressive at current levels.  However, we maintain that this is a bull market and pullbacks after a sustained run are normal and should be looked at as buying opportunities. 

Wednesday, March 15, 2017

What's On Tap?

The S&P continues to operate in a strong uptrend.  While momentum may have stalled a bit since the March 1st high, the overall trend remains healthy.  A longer-term chart shows that the S&P has broken to the upside of a huge wedge pattern.  The question is: does this propel the market higher or could it be a false breakout?

While we think this market more resembles a 2013-type of rally environment rather than the chop of 2014-2016, we want to be on the lookout for potential cracks in the armor.  We offered up some stats in our last post that confirmed our bullish bias however we also know markets don't go straight up and even in strong years like 2013 there were plenty of small pullbacks and consolidations.

Below are some of the measures we're watching that may be a tell for a pause in the uptrend. 
  • High Beta vs Low volatility ratio has peaked
  • The current weakness in oil
  • The pullback in high yield and junk bonds
  • Small cap weakness
  • Narrowing leadership
  • Length of current move without correction
A longer term chart of the S&P 500 showing the breakout to the upside of a large wedge formation.  It this real or fake-out?  Only time will tell.

Every time the high beta vs. low volatility ratio peaked and then broke its uptrend the general market has also peaked and pulled back. 

Oil and Junk Bonds had a rough time last week while small caps have underperformed by a wide margin over the last month.

The % of stocks above their 50-day moving average continues to lag as the S&P has rallied.  This measure peaked in January and for the market to sustain its momentum, leadership will have to widen.    

We've now gone 90 days with out a 5% correction.  Getting long in the tooth? Perhaps but today's rally (post-Fed hike decision) in everything except the dollar could offer more fuel to the bull thesis over the near-term.