Wednesday, September 18, 2013

Market Update: Many Bullish Indications, But....

Yesterday I wrote about how this rally off the August 27th low had good breadth, a bullish tailwind for the market.

I continue to see other bullish indications. Looking at several risk-on/risk-off measures, the bias continues to be risk-on.


Shown above, small-caps have maintained their uptrend in outperforming larger-caps, high-yield bonds have done the same versus T-bonds, and likewise cyclical stocks continue to do better than staples, recently hitting a new relative high. The bottom line is riskier assets have been outperforming their safer, more conservative brethren, generally a bullish setting for the market.

The daily chart below shows that while the uptrend for the market remains intact, it has started to level off a bit, with trend lines tilting more horizontal.


Nothing overly worrisome and is a natural occurrence with a maturing advance. Note that the MACD triggered a buy signal earlier this month and the stochastic, while overbought, is extreme and beginning to traverse sideways at this extended level -- signs of "good overbought" development (see red boxes for past examples, price continues to rise).

Based on what I follow, the market currently has many things in its favor, however I do want to see the S&P 500 successfully get through the prior high level of 1710. As shown in the chart above, we're not quite there yet, and as always I'd want to see a meaningful breakout, i.e. not just getting to 1710-1711 but rather beyond 1712.

A concern I have has to do with seasonality. I wrote late last month, "I would argue that since May 1st,  the S&P 500 has more or less tracked the seasonal averages directionally. Note that all three seasonal lines show the S&P 500 rising from the end of August and peaking out not long after mid-September." In that time, the S&P 500 has indeed risen by a bit more than 4%, again following seasonal tendencies.

But, as shown in the chart below, on average the next few weeks have been rough ones for the market.

Source: Bloomberg

Judging from the 5- and 10-year average performance lines for the S&P 500, the Index has tended to peak out and decline from mid-September to about mid-October. And as already mentioned, the Index has more or less directionally followed the seasonal script up to this point (purple line), particularly in the last few months.

I would point out that 2008 can dramatically impact the calculation of these seasonal studies. From 9/19-10/10 in 2008, the S&P 500 plunged by a whopping -28%, which greatly skews the 5-year and, to a lesser extent, the 10-year averages. In the chart below, I show the 5-, 10- and 30-year averages for the S&P 500 from mid-September to the end of October, but I also show a 10-year average without the year 2008 (blue line).

Source: Bloomberg

Even after excluding 2008, the general trend for the market tends to be down over the next few weeks.

Of course, if the S&P 500 does successfully get through the 1710 level, doing so meaningfully with some force, I would have to think such an occurrence would go a long way towards negating this seasonal headwind. However, that hasn't happened yet and until it does the seasonal charts above will be at the forefront of my mind.


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