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.  

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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