Friday, August 30, 2013

Weekly Market Summary

After the sharp V-bounce in July, the risk-reward for US equities in August was to the downside (post).

For bonds, it was the reverse (i.e., to the upside; post).

Indeed, the Dow, which has been leading, will end August being down 4 weeks in a row. For the month, equities will have underperformed treasuries by over 400 bp (chart).

Since the 2007 top, the Dow has been down more than 4 weeks in a row only once, in the 2Q of 2011.

2011 and 2013 are beginning to look very similar. Like 2013, 2011 also started very strong (black arrow). Its subsequent decline in 2Q11 (after green arrow) preceded a subsequent summer bounce and then the major August 2011 swoon (at red arrow).  The pattern between the two periods is similar.  In particular, note the very high RSI (top panel) that has been since been in decline for several months.

After 4 weeks down, the Dow may be due for a relief rally. On a weekly chart, RSI and the percentage of components above their 50-dma are in a configuration where a sharp rally within the next 1-2 weeks has typically followed. Also, note the black MA line which the Dow is sitting on. Uncomfortably, one of the two exceptions was 2011. Like then, a bounce in the near term could be a prelude to larger correction to follow.

For the broader market as represented by SPX, we have previously spelled out what to look for at a washout low (post). Too many of these have not yet triggered to expect that a washout has already occurred.

One of the more important of these triggers is time. As mentioned previously, a solid washout occurs over months, not weeks. This is well illustrated by this chart from Jon Boorman. The current correction is just 4 weeks old; prior ones have lasted at least twice as long. A correction deep into September would be healthy.

Before reviewing our indicators, consider that the current bull market is a month shy of the average post-war bull market and the percentage gain from 2009 is also at the median. With EPS growing at 2% and valuations near their 2007 peak, investors should ask what will drive the next leg of the rally in 2014. A post on this topic is forthcoming.

Brief review:

Trend: August will end with 7 of 9 US sectors and 3 of 4 US indices trading below their 50-dma; all of these are below their declining 20-dma (chart). This shows intermediate term weakness. Importantly, among the indices, only the Dow has broken its November 2012 uptrend line. Importantly, SPX is very near its trend line now (chart). Watch it for the bounce on weakness next week.

Breadth: There is a pattern of lower highs in the number of SPX stocks over their 50-dma (chart). Yes, the prior pattern (arrows) occurred in 2011. Summation (NYSI) is now -300 and NYMO is unable to regain zero. Since 2000, with this configuration, the SPX has subsequently fallen at least 7% and/or touched its 200-dma (chart). This suggests a low between 1560-1600, an area previously discussed (chart).

Sentiment: Long term, funds and individuals were overweight equities coming into the August peak, and this is a concern. Short term, put/call is not registering much risk-aversion (chart). Tellingly, AAII and NAAIM surveys this week showed a rise in bulls with the indices moving lower. None of these surveys has yet registered a washout low, but they are getting close (II chart and AAII chart).

Macro: Today's data caused several to lower their 3Q13 GDP growth forecast to 1.5-1.7%. Inflation (PCE) is running at half the Fed's target. Surprises are still to the upside, but starting to soften (chart). Overall, macro suggests slow growth. This is a concern for sales and EPS growth going forward.

Seasonality: The seasonal pattern for September is weak (chart). It is slightly less weak when during a bull market (chart).

Valuation: 99% of SPX companies have now reported 2Q13 financials. EPS grew just 2.1%, the third lowest rate in the past 4 years. Excluding financial companies, EPS fell 3%. Technology was particularly weak, with minus 8% growth. Revenue growth for SPX was only 1.7%. Looking ahead, 3Q13 EPS is now expected to be 3.7% higher versus 6.5% in June. We expect 4% growth in FY13 and FY14, whereas consensus is 5.8% and 10.9%, respectively.

Have a Happy Labor Day weekend.