Weekly Market Commentary
WHICH BREAKS FIRST, STOCK PRICES OR UNCERTAINTY?
Burt White Chief Investment Officer, LPL Financial
Ryan Detrick, CMT Senior Market Strategist, LPL Financial
Some significant technical trend lines are in play, so we take a closer look at market technicals and sentiment this week. The longer-term technicals continue to look strong, and an evaluation of global market breadth suggests the path of least resistance remains higher for stocks. However, sentiment remains a much more mixed picture indicating that market volatility could finally be heating up.
LONG-TERM TRENDLINES SUPPORT HIGHER PRICES
It is easy to get lost in the daily news cycle, but a longer-term view can help put things in perspective. Two popular long-term trend lines used in technical analysis are the 50- and 200-day moving averages (MA). We have seen interesting developments in both indicators recently.
First up, on Thursday, April 12, the S&P 500 Index closed beneath the 50-day MA for the first time in 105 days [Figure 1]. This was the longest streak above the 50-day MA since 130 days in a row nearly six years ago. Could this be a sign of coming technical weakness? Going back to 1950*, the S&P 500 was above the 50-day MA for at least 100 days 14 times, and the performance after the initial close beneath this trend line did not suggest the start of a major breakdown. In fact, three months later the S&P 500 was up 2.2% on average, slightly higher than the average three-month return of 2.1%. Six months later gains have been slightly below average (3.8% versus 4.3%), but still higher 10 out of the 13 times.
Turning to the 200-day MA, it is 4.3% below current index levels and continues to trend higher. In fact, it has closed at a new all-time high every day since last Halloween (October 2016). As you can see in Figure 1, this trend line provided nice support on the pre-U.S. election weakness and has been firmly pointing higher since rising last summer. With both the 50-day and 200-day moving averages trending higher, this is a sign that the technical backdrop remains strong and any weakness could be a buying opportunity.
AN EXPANDED LOOK AT MARKET BREADTH
We’ve noted many times over the past year that market breadth has been strong, and this should lead to ultimately higher prices; fortunately, that has been correct. One of our favorite market breadth indicators is the NYSE Composite Advance/Decline (A/D) line, which is part of LPL Research’s Five Forecasters. Simply put, we are seeing more stocks advance than decline, a sign of a healthy market. We took a closer look at this bullish indicator in our previous Weekly Market Commentary, “How Much Is Left in the Tank?”
Market breadth can also show how strong global markets are, not just U.S.-based equities, as we are also currently seeing uptrends across developed markets in Europe and Asia and in emerging markets (EM). What is unique right now is the 200-day moving average is in an uptrend for these eight global indexes: the S&P 500, Nasdaq Composite, NYSE Composite, Dow Jones Industrial and Transportation Averages, Russell 2000, MSCI Emerging Markets, and MSCI EAFE. That’s a lot of underlying global strength.
The recent signal took place in late February, and Figure 2 has the returns for the S&P 500 across various time frames after all eight indexes are in uptrends. As you can see, continued equity gains are normal; a year later the S&P 500 has never been lower, with an average gain of 12.1% (based on data since 1990).
History has shown that the crowd can be right during trends, but it also tends to be wrong at extremes. This is why sentiment can be an important contrarian indicator, because if everyone who might become bearish has already sold, only buyers are left. The reverse also applies.
Sentiment polls are showing a good deal of worry even though the S&P 500 is less than 3% from all-time highs. The American Association of Individual Investors (AAII) Sentiment Survey has had more bears than bulls in each of the past three weeks for the first time since right before the U.S. election. Similarly, the National Association of Active Investment Managers (NAAIM) recently had the lowest exposure to equities since right before the election. Last, according to EPFR Global fund data, nearly $15 billion was pulled out of U.S. equity mutual fund and exchanged-traded fund (ETF) during the first week of April, the largest outflows for any one week during the past year.
It isn’t all skepticism though, as the Conference Board’s Consumer Confidence Survey shows confidence is at the highest level since December 2000. Also, the NFIB Small Business Optimism Index continues to retain almost all of its large post-election gains.
Sentiment has something for everyone, but to sum it up, we would say the overall backdrop is mixed.
TIME FOR VOLATILITY?
The CBOE Volatility Index (VIX), often referred to as the “fear gauge,” closed above 15 for the first time since early November 2016. It had closed beneath this level 104 consecutive days, the longest streak in 10 years. Is volatility finally coming back after taking a few months off? It could be...
Remember, last month saw the end to 109 days in a row without a 1% drop for the S&P 500, the longest streak in nearly 22 years. Also, before the late sell-off last week, the S&P 500 had gone 10 consecutive days with each close between up or down 0.35% for the first time since December 1968. Volatility doesn’t stay dormant forever, and it very well could make a comeback soon.
History has seen spikes in volatility during times of economic uncertainty. According to the Economic Policy Uncertainty Index, U.S. economic uncertainty has spiked significantly since late 2016. Interestingly, there has not yet been the subsequent spike in volatility seen during times of uncertainty [Figure 3].
Longer-term technicals continue to look firm and, we believe, suggest potential higher prices. Sentiment is more of a mixed picture, which coupled with high uncertainty may lead to increased volatility. Given 2017 has been historically calm for equities so far, it is reasonable to expect a bumpier ride later this year; but any dips may end up being nice buying opportunities. — —
Thanks to David Tonaszuck for his contributions this week.
*Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. All investing involves risk including loss of principal.
The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NYSE Composite Index is a float-adjusted market-capitalization weighted index which includes all common stocks listed on the NYSE, including ADRs, REITs and tracking stocks and listings of foreign companies. The index was recalculated to reflect a base value of 5,000 as of December 31, 2002.
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
The Dow Jones Transportation Average is a price-weighted average of 20 U.S. transportation stocks. The average as it is known today began on October 26, 1896. It was formerly known as the Dow Jones Railroad Average.
The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The index was developed with a base value of 135.00 as of December 31, 1986.
The MSCI Em (Emerging Markets) Index is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI EAFE Index is a free-float weighted equity index. The index was developed with a base value of 100 as of December 31, 1969. The MSCI EAFE region covers DM countries in Europe, Australasia, Israel, and the Far East.
American Association of Individual Investors (AAII) Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. Only one vote per member is accepted in each weekly voting period.
The Conference Board Consumer Confidence Survey reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes and buying intentions, with data available by age, income, and region. The results are based on surveys conducted among a random sample of households. Target Audience: random sample of U.S. households. Sample Size: approx. 3,000 households.
NFIB Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of ten seasonally adjusted components based on questions on the following: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect economy to improve, expect real sales higher, current inventory, current job openings, expected credit conditions, now a good time to expand, and earnings trend.
The National Association of Active Investment Managers (NAAIM) is a non-profit association of registered investment advisors who provide active money management services. NAAIM’s membership ranges from small regional firms to large national firms with over $1 billion AUM. NAAIM engages in numerous activities to promote active management and further the professional development of its members.
The Chicago Board Options Exchange (CBOE) Volatility Index shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.”
This research material has been prepared by LPL Financial.
RES 5850 0417 | Tracking #1-600064 (Exp. 04/18)
retrieved from: LPL-research.com
Prior Weekly Market Commentaries:
- August 21 2017: TAKING A LITTLE RISK OFF THE TABLE
- August 14 2017: BOTTOM LINE: IMPRESSIVE EARNINGS SEASON
- August 7 2017: BUY THE DIP? WHAT DIP?
- July 31 2017: IS POLICY SKEPTICISM CREATING A SMALL CAP OPPORTUNITY?
- July 24 2017: TAX REFORM PIVOT?
- July 17 2017: GLOBAL SUMMER EARNINGS: SIZZLE OR FIZZLE?
- July 10 2017: SECOND QUARTER 2017 EARNINGS PREVIEW: Q1 A TOUGH ACT TO FOLLOW
- June 26 2017: A TECHNICAL CHECK-IN: THE GLOBAL BULL LOOKS STRONG
- June 19 2017: MIDYEAR OUTLOOK 2017: BUSINESS FUNDAMENTALS BACK AT THE CONTROLS
- June 12 2017: HURDLING OVERSEAS EARNINGS-WHAT DO THE FORECASTS TELL US?
- June 5 2017: MASTER LIMITED PARTNERSHIP MORE GOING ON THAN OIL PRICE
- May 30 2017: CORPORATE BEIGE BOOK: IT KEEPS GETTING BETTER
- May 22 2017: FOCUS ON FUNDAMENTALS
- May 15 2017: EARNINGS UPDATE: RAISING THE BAR
- May 8 2017: FIVE REASONS NOT TO SELL IN MAY
- May 1 2017: REFLECTING ON NASDAQ 6,000
- April 24 2017: EUROPE ENTERS THE TOUR DE FRANCE
- April 17 2017: WHICH BREAKS FIRST, STOCK PRICES OR UNCERTAINTY?
- April 10 2017: FIRST QUARTER 2017 EARNINGS PREVIEW: DOUBLE DIGITS?
- April 3 2017: CHECKING IN ON SOME TRUMP TRADES
- March 27 2017: THE STOCK MARKET’S FINAL FOUR FACTORS
- March 20 2017: WILL THIS SIXTEEN BE SWEET?
- March 13 2017: HOW MUCH IS LEFT IN THE TANK?
- March 6 2017: CORPORATE BEIGE BOOK: BETTER SENTIMENT AND LOTS OF TAX TALK
- February 27 2017: TIPTOE THROUGH THE TULIPS AND OTHER EUROPEAN OFFERINGS
- February 21 2017: EARNINGS UPDATE: FIVE OBSERVATIONS
- February 13 2017: REAL ESTATE OVERVIEW: ALL ABOUT THE CYCLES
- February 6 2017: TAKING STOCK OF TECHNICALS AND SENTIMENT
- January 30 2017: IS THERE STILL VALUE IN VALUE?
- January 23 2017: INTERNATIONAL STOCKS WE LOOK EAST TO JAPAN
- January 17 2017: IS SMALL CAP STRENGTH SUSTAINABLE?
- January 9 2017: FOURTH QUARTER 2016 EARNINGS PREVIEW: LOOKS LIKE ANOTHER GOOD ONE
- January 3 2017: 2017 STOCK MARKET OUTLOOK: GEARS ARE TURNING, BUT PARTS MAY NEED GREASE
- December 19 2016: A LOOK BACK AT 2016 HITS AND MISSES
- December 12 2016: CAN’T STOCKS AND BOND YIELDS JUST GET ALONG?
- December 5 2016: IRRATIONAL EXUBERANCE PART TWO?
- November 28 2016: CORPORATE BEIGE BOOK: BETTER TONE, LITTLE ELECTION TALK
- November 21 2016: HOLIDAY SHOPPING PREVIEW
- November 14 2016: WHAT A WEEK
- November 7 2016: EARNINGS UPDATE: END OF A LONG DROUGHT
- October 31 2016: HALLOWEEN SPECIAL: WHAT MIGHT SCARE MARKETS
- October 24 2016: ELECTION PLAYBOOK
- October 17 2016: TAKING STOCK OF TECHNICALS AND SENTIMENT
- October 10 2016: THIRD QUARTER 2016 EARNINGS PREVIEW: GROWTH RETURNS?
- October 3 2016: WELCOME TO THE FOURTH QUARTER
- September 26 2016: FIVE FORECASTERS: FEW WARNING SIGNS
- September 19 2016: EM EARNINGS: BEGINNING TO EMERGE
- September 12 2016: SELL NOW?
- September 6 2016: DIVIDEND BUBBLE?
- August 29 2016: CORPORATE BEIGE BOOK: Q2 OFFERS FEW SIGNS OF IMPROVEMENT
- August 22 2016: WHAT THE MARKET IS TELLING US ABOUT THE ELECTION
- August 15 2016: OVERSEEING POOR EARNINGS OVERSEAS
- August 8 2016: EARNINGS UPDATE: WE WERE HOPING FOR MORE
- August 1 2016: TIME FOR AN AUGUST SWOON?