US Stocks Tread Water

November 30, 2015

Not surprising for a holiday shortened week, the S&P500 finished the week virtually unchanged from the prior week’s close. The Thanksgiving holiday removed almost a day and a half of trading time from the week. So associated with this was a severe reduction in trading volume. Volatility dipped, but again, given the light volumes and negligible change in index price level, this also didn’t hold a lot of meaning.

Economic news, on the other hand, was plentiful. The week kicked off on a down note—the Chicago Fed National Activity Index fell again.  Then the PMI manufacturing flash index fell a lot more than expected. Existing home sales also disappointed. The Case Shiller home price index (non seasonally adjusted) fell. Consumer confidence absolutely crashed. And the Richmond Fed manufacturing index missed badly. New home sales also missed. Personal spending fell way short of expectations and consumer sentiment dropped. On the positive side, durable goods orders beat consensus estimates. Initial jobless claims were also better than expected. And PMI flash services beat consensus estimates. So overall, mostly bad news, with some positive surprises mixed in.

The technical picture for the S&P is still somewhat unclear. On the bearish side, the 50 day moving average is below the 200 day moving average; in other words, the death cross is still in effect. Also, all the breadth signals are very concerning—the vast majority of stocks in the S&P are under performing the handful of super strong leaders which all by themselves are pulling the overall index upwards. On the bullish side, the index prices are holding above the 200 day moving average and the average itself is no longer sloping downwards.

So we’ll need another week or two in early December, which is usually a somewhat strong month for stocks, to decide if the multi-year bull run has room for yet another push higher……or if the year-long topping formation that we’ve already noted is the start of a more serious move down.


Stocks are Bullish, while Commodities, Spreads, and Internals are Bearish

November 23, 2015

What a yo-yo last couple of weeks. After soaring in the entire month of October, the S&P500 plunged two weeks ago by about 3.6%.  But then, just like that, the S&P jumped right back last week, almost erasing the earlier loss, by gaining about 3.3%.

Volume, however, didn’t confirm the jump in prices because it was barely changed from the prior week. Also, volatility dipped only slightly; this also suggested that the coast was not clear for another rally to set another all-time high in stock prices.

The technical picture on the longer term weekly charts is still quite bearish. Not only is the 50 day moving average below the 200 day moving average, but because the highs set in October never exceeded the all-time highs set earlier in the year, what we see is a very long-range topping formation, a formation that we first mentioned here several months ago. This formation is seen when large institutional holders of stocks decide to distribute their holdings to less sophisticated retail (mom and pop) buys who’ve joined the stock market party near the time it usually ends. Sadly, these folks will be the bag holders when (or if you are simply always bullish, if) stocks enter a bear market cycle.

The US macro picture certainly didn’t get any stronger last week. The Empire State Manufacturing survey recorded another abysmally bad figure. Industrial production missed badly. The housing market index also missed. Housing starts disappointed. Initial jobless claims were higher than expected.

The big headline story of the week was that the Fed is on track to raise the fed funds rate by a quarter point in December….despite the fact that the US economy is clearly not showing any concrete signs of strong recovery…..fully 7 years after coming out of the last recession back in 2008.

Finally, the persistent strength in US equities has now started to puzzle more than one market analyst from Wall Street. While the S&P500 hovers just below all-time highs set earlier this year, commodity prices are dropping to 15 year lows. Copper and oil prices in particular have been substantially depressed lately. Also, credit spreads (between say high yield bonds and the comparable maturities in US Treasuries) have been widening over the last six months and are far greater (ie. worse) than they were when the S&P set all-time highs earlier in 2015. Finally, the breadth of the stock market rise recently has been horrible. It turns out that only a handful of massive market cap stocks (think Apple) have driven the overall index higher while at the same time a huge percentage of other stocks are still stuck below their respective 200 day moving averages.

All these other indicators are clearly bearish. And this divergence from the strong overall level of the S&P500 will not last forever.

US Equity Market Rebound Reversing?

November 16, 2015

Just like that, not only did the S&P500 fail to continue to rise last week… a bid to transform the rebound into a new bull market move to even higher highs…..but the S&P reversed course and tumbled. Actually, it was more like a major reversal—the S&P500 lost a whopping 3.6% in five trading days. Volume was modest; in other words, this was no panic rush for the exits among investors or traders. And volatility while rising notably, didn’t spike anywhere near the levels seen in later August.

Interestingly, there was no obvious catalyst for the weekly drop in equity prices. And while the US economic reports were weak as usual, they weren’t catastrophically bad. Initial jobless claims, for example, inched up but still came in well below 300,000. Wholesale trade actually beat expectations; that said, the inventory to sales ratio spiked to new cycle highs, and this portends a manufacturing slowdown in the near future (to work off the excess inventories). Consumer sentiment also slightly beat consensus estimates. On the negative side, retail sales missed expectations; and retail sales excluding autos missed very badly.  Also, producer prices, both headline and core, fell notably; in a healthy economy, both prices measures should be increasing slightly. So all in all, we saw the same story in the US economy—very weak growth, but no suddenly shocking collapse in results.

Technically, the S&P500 is still in a bear market mode—primarily because the 50 day moving average is still well below the 200 day moving average. And after last week’s loss, it will be even more difficult for this “Death Cross” to be reversed.

So now the US equity markets are facing a bigger challenge—since the upward “rebound” momentum that began in early October has suddenly ended, it will be more difficult for further near-term moves higher to occur. In other words, US equity markets, having lost their prior reason for rising (upward momentum of the bounce) will now need something new, some other reason for them to reverse last week’s decline and push back up.

Getting this new bullish catalyst will be more difficult for bullish traders than it would have been to continue to ride upward momentum.

If markets fail to reverse last week’s losses this week or next, then a resumption of the August downturn becomes much more likely.

US Equity Market Rebound Completed!

November 9, 2015

Like magic, the entire 11% drop in the S&P500 has been recouped. After moving above 2,120 in July, the S&P dropped below 1,880 in August. Remember, because the index fell only about 10%, this was considered to be only a correction, not even remotely close to a bear market which requires at least a 20% drop to be recognized. But then after testing the lows again in late September—and holding them—the S&P5oo rebounded all the way back up to (but not quite above) 2,120 again.

Last week’s gain was 0.95%. Volume was modest, and contradicting the rise in prices, volatility as measured by the VIX index crept up slightly, which suggests that many traders are recognizing that markets approach major resistance when they rebound back from notable losses.

In economic news, the week began with a so-so report from ISM manufacturing which only met expectations. Construction spending beat estimates slightly. On the other hand, factory orders missed as did the ADP employment report. ISM services beat consensus estimates. Productivity also beat estimates, but remember that while this is good for corporations in the short run, in the long run it means that consumers as a whole (employed and unemployed) may be earning less money with which to buy the products that the corporations sell. Initial jobless claims were slightly better than expected. And on the surface, the headline payrolls number also surprised to the upside, by recording a much larger number than experts had expected. On the downside, about half the jobs gains came from the government’s birth-death model (in other words, the jobs were “assumed” to be created), and the labor force participation rate did not improve at all. Instead, it remained at lows last seen in 1977. So while the headline unemployment rate looked great (5%), the labor force participation rate was the lowest in almost 40 years!

Finally, now that the S&P500—as already mentioned—has recovered most of its recent losses, a big test lies directly ahead:  will the return to the prior highs create major resistance and downward pressure on prices (because everyone who’s been underwater on paper has now recouped their losses, and may seek to “get out”) or will the upward momentum be so strong as to overcome the sellers seeking to get out and to power the S&P upward to another notable new high?

This upcoming week is about all we’ll need to find out.

US Stock Prices Rebound but Breadth is Lacking

November 2, 2015

Last week the S&P500 rose a little bit more, rising only 0.2%, but the weekly increases are clearly not as strong as they were when the started in early October. Volume also dropped back, confirming the lack of buying interest. And volatility actually went the other way—it crept back up a bit, which contradicts the slight rise in prices for the week.

Macro news became more gloomy last week. New home sales missed very badly, as did the Dallas Fed manufacturing survey. Durable goods—headline and more importantly ex-Autos—missed expectations.  Home prices, as reported by Case Shiller, also missed. PMI flash services missed. Consumer confidence crashed. the estimate for the 3rd quarter GDP growth disappointed. Pending home sales missed badly. Personal spending and personal income both missed. Consumer sentiment missed badly. For the week, only Chicago PMI and initial jobless claims beat expectations.

Perversely, as noted in several prior posts, all this bad economic news was met by the US equity markets with a positive attitude. And not because the Fed would be delaying its tightening (on the contrary, the odds of a Fed tightening in December soared last week), but because equity markets were in part expecting more easing from other global central banks—the ECB in Europe, the central bank in Japan and the central bank in China.

All that said, the momentum of the increase in US stocks is clearly slowing. Last week’s increase was the smallest of the rebound. But there’s a bigger concern that most market analysts when cheering the rebound in the overall indices fail to point out—the US equity markets have bounced on the performance of a few key “generals”. At the same time, the vast majority of the smaller less glamorous stocks, the “troops” have been sorely lagging in performance. Most have not rebounded much if at all.

How do we know this? For one, only 36% of individual stocks in the S&P500 are above their 200 day moving averages.  So the vast majority of stocks are far, far away from their recent all-time highs. At the same time, the overall index has now closed in on its recent all-time high.

This is a problem. In almost all equity market crashes, in the months before the actual crash, something similar happened—markets dropped initially, only to rebound back to their prior highs…..but without the participation of most of the stocks in the index. Then, when the markets broke down the next time, losses far worse than the initial break were incurred. In other words, stocks then crashed.

This pattern is now possibly repeating itself.