Saturday, March 12, 2016

Weekly Market Summary

Summary: Equities rose the fourth week in a row, led by continued strength in oil. SPY has now rallied 11% and is back above a key support level and its 200-dma. Breadth momentum during this rebound has been stronger than nearly every bear market rally in the past 16 years. Moreover, despite the large gains, investors remain mostly skeptical. Turbulence during the upcoming March OpX week would be normal, but this week is seasonally bullish. Below, we outline what to look for before assuming the rally has come to an end.

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Equities continued to rally for the fourth week in a row. SPY gained 1% while NDX and RUT gained 0.8% and 0.5%, respectively. Emerging markets also gained 1%.

Safe havens - treasuries and gold - which had been in high demand during the sell off in equities, were lower, each losing about 1%. Treasuries have sold off the past 4 weeks in a row.

Oil gained another 6% this week. It's leading to the upside.

The rally in oil has coincided perfectly with the rally in equities: both bottomed on February 11, the same day high-yield bonds and treasury yields also bottomed, and both have risen the last 4 weeks in a row. The rally in equities is, for now, contingent on oil continuing to move higher. Should the rally in oil fail, it is very likely equities will sell off (enlarge any chart by clicking on it).



Crude has rallied back above its 50-dma, has pushed through the pivot (green line at $35) and is staying overbought (top panel). Friday's close was the highest in 3 1/2 months. The 50-dma is starting to rise. This remains very constructive action. The next test will be at $40.



For SPY, $201 was a major support area for most of 2015 (yellow shading). This was expected to be resistance this week, and it was. Like last October, this week SPY fell back to the rising 13-ema (green line) before exceeding $201 on Friday. If past is prologue, SPY may back test that level in the days ahead before continuing higher. $201 is the weekly pivot point (WPP) this coming week.



Note that momentum has remained "overbought", a positive indication that the rally will continue higher (top panel in the chart above; boxes). The rally is not giving any easy opportunities for sidelined investors to get back.

On a shorter timeframe (hourly), SPY has (1) held its rising 5-dma (green line) and (2) remained mostly "overbought" (top panel). This uptrend is not showing signs of weakening; again, $201 is now support (blue line and arrows). Above, gap fill from December 31 lies at $203.9. Sellers are likely to come out at that level.



Many traders, investors and gurus seem eager to assume this rally has come to an end. Before doing so, here are three things to look for:
First, the 5-dma (daily chart) has been rising since the February low. The first sign of a weakening trend will be when this inverts. 
Second, SPY closed at a new uptrend high on Friday: a small sell off and rebound that fails to exceed today's high will mark a potential price point to short against. 
Third, deterioration in RSI(5), falling below 50 on the daily and remaining below 30 for a prolonged period on the hourly chart, will indicate a loss in upward momentum.
Right now, none of these conditions is present. SPY has risen in 8 of the past 9 days. At a minimum, positive and negative days should fall more into balance as the top is formed.

Might this week ultimately mark a top? It's possible.

Below is a weekly chart. Note that momentum has hit 70: this is where rallies failed during the 2000-03 and 2007-09 bear market (top panel). It's also where the rally after the 20% fall in 2011 rolled over. A lower close this week will raise risk that the rebound has topped, while another strong move higher will make a failed rally less likely.



Breadth is supportive of the rally in equities. Unlike last October, both small cap stocks and the equal-weight version of SPX have been outperforming the index (lower panels). The implication is that the rally is supported by many stocks, a positive that did not exist in October.



All nine sectors are above their rising 13-ema (green line) and their 50-dma (blue line). All are trading at at least two month highs. None has a MACD that has flattened or inverted. For now, the sectors within SPX are confirming the move higher in the index.



Another way to look at breadth is the Summation Index (NYSI), which is the sum of the daily McClellan oscillator (NYMO) discussed last week. Recall that NYMO closed over 90 a record 5 days in row in the past week. This means that the momentum in breadth is exceptionally strong.

NYSI is now nearing 700. The October rally ended with NYSI at 500. NYSI never exceeded 500 during any of the rallies during the 2007-09 bear market. Only one rally during the 2000-03 bear market experienced a NYSI over 700. It's not perfect, but the indication is that the momentum in breadth is unlike those during a bear market rally, with the implication that the rally is not likely to fail.



We can add that the current rally has retraced 65% of the decline from November to February. That's also not a perfect measure, but a countertrend rally most often fails before retracing 62%. Put another way, if this is a bear market rally, it is very likely near its end. A further strong move higher makes this scenario highly unlikely.

NDX looks less strong than SPY. Momentum is weaker (top panel) and price has not regained the significant 4400 support/resistance level from the past year. This is something to look for in the week ahead.



Investors remain skeptical of the rally. For the first time in nine weeks, money flowed into equity funds this week, but the amount was modest: $4.6b. Recall that equity fund flows have been negative 13 of the past 15 weeks, longer than any time during the 2007-09 bear market.  Meanwhile, investors have added to the safe haven of bonds, with a further $5.8b inflow this week. Those flows have been positive 13 weeks in a row.

As we have said in the past, we would expect improvement in investor sentiment before this rally ends. The bear market rally in March-May 2008 included several positive weeks of equity inflows, including one that was more than $20b in one week. It seems unlikely that the modest inflow this week marks a significant top (from Lipper and Sentimentrader).



Likewise, money in Rydex equity bear and money market funds remains high relative to last November's peak in SPY as well as relative to other rally tops that followed a sharp fall.



The Investor's Intelligence bull/bear ratio is barely above parity. These advisors remain skeptical. Even within the context of a bear market rally, this ratio should rise to at least 1.5x (from Yardeni).



Unlike last October, corporate insiders are not selling into this rally. Insiders aren't perfect market timers - no one is - but their track record tends to be good (from Barron's).



Finally, an interesting study by Brett Steenbarger shows that shares in SPY have been redeemed on a net basis over the past several weeks, meaning: "Investors have not believed in this rally and, if history holds, that's one indication that the rise could continue" (click here for his article).

Macro data continues to be non-recessionary. Growth is sluggish, but positive. In the US, 1Q16 GDP is tracking growth of 2.2% (from the Atlanta Fed).



Unemployment insurance claims are trending lower, in contrast to the pattern prior to previous recessions.



Even in Europe, a source of much investor consternation, GDP growth through 4Q15 was 1.6% yoy.  Growth is meagre, but not recessionary.



The upcoming week is options expiration. The seasonality of these weeks varies, with March being one of the strongest OpX weeks of the year. Read more about this from Rob Hanna here.



The economic calendar is busy this week. The FOMC finishes a two-day meeting on Wednesday. Retail sales are released Tuesday. Housing starts, CPI and industrial production are all released Wednesday.

In summary, equities rose the fourth week in a row, led by continued strength in oil. SPY has now rallied 11% and is back above a key support level and its 200-dma. Breadth momentum during this rebound has been stronger than nearly every bear market rally in the past 16 years. Moreover, despite the large gains, investors remain mostly skeptical. Turbulence during the upcoming March OpX week would be normal, but this week is seasonally bullish. We outlined above what to look for before assuming the rally has come to an end.


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