Monthly Investment Compass Charting The Course Of The Markets April 22 nd, 2016
Monthly Investment Compass Executive Summary: April 22 nd 2016 U.S. Stock Market: The most important takeaway from the latest data is that this is an important inflection point for the US stock market, as it negotiates major resistance in several key indexes, from which its next 1 2 month trend is likely to begin. Risk/reward does not appear to be favorable for new longs at current levels due to a number of metrics/factors including major resistance in positive correlated crude oil prices, over extended bullish momentum, historically low put/call ratios, too bullish investor sentiment, extremely low volatility, and a 60 year seasonal tendency for US stocks to peak for the entire 2 nd Quarter this week. Bigger picture, however, we would view any pullback/correction from current levels as a potential intermediate term buying opportunity due to a number of factors including bullish chart pattern in the Dow Transportation Index (DJTA) and emerging strength in positively correlated markets in India and Japan. US Market Sectors: Our own asset flow and momentum based model is currently overweight Industrials (Apr 18th) and Materials (Feb 29th). US Interest Rates: Chart patterns in ETFs and in related futures contracts target an additional 4% rise in long dated US Treasury prices, which suggests that the 10 Year Treasury Note should remain below 2.00% while retesting 1.71% 1.63% later this quarter. Commodities: New major uptrends are emerging in base metals prices including copper. 1
Price & Trend (1): Key US Indexes Are Testing Formidable Overhead Resistance The benchmark SPX is testing a formidable cluster of overhead resistance at 2082 to 2116, a logical place to look for a pullback/correction to potentially begin. Meanwhile, the PHLX Semiconductor Index is testing and holding a similarly important cluster of resistance at 682 to 693. Semis typically lead the market. 2
Price & Trend (2): Small Cap At A Major Decision Point The January/February breakdown in the small cap Russell 2000 targets an eventual 23% decline to 880. However, the daily chart shows that RUT is edging above its 200 day MA, a major trend proxy. A sustained rise above it would put the 880 target into question. 3
Price & Trend (3): Dow Transports, Industrials Breaking Out Higher The Dow Transports, which underperformed for much of 2015, appear to be making a major bullish trend change by rising above their 200 day MA. Meanwhile, the Dow Industrials are breaking out higher from a year of investor indecision. Above 17,300 the pattern targets a 14% rise to 20,400. 4
Intermarket Analysis (1): WTI Crude Oil Testing Major Resistance Near $44.00 West Texas Intermediate crude oil has risen by 69% since testing major support in February, but is now testing major overhead resistance at $43.39 to $44.53 per barrel. The nearly lockstep positive correlation between WTI crude and the S&P 500 since January suggests that how oil reacts to this resistance is likely to influence near term US broad market direction. 5
Intermarket Analysis (2): 8 Year Uptrend In India Indirectly Bullish For The US This India stock index tested, held and aggressively rebounded from a March test of its 2008 uptrend line. SENSEX is positively correlated to the S&P 500. More recently, SENSEX is challenging major overhead resistance at 25,840 to 26,469. A sustained rise above it would be indirectly bullish for the US market. 6
Intermarket Analysis (3): Recent Strength In Japan Is Indirectly Bullish For The US The Nikkei 225 rose above its 1996 secular downtrend line in Sep 2014, and in February made a successful retest of that trend line as underlying support. That February retest developed into a bullish pattern that targets an additional 17% rise to 19,800. The Nikkei 225 is positively correlated to the S&P 500. 7
Momentum: Near Term Positive, Intermediate Term Negative SPX s 1 month rate of change, a near term metric, has been in positive (bullish) territory since Feb 16 th. A negative shift would be necessary to signal a top. However, the MACD, an intermediate term metric, continues to warn that the S&P 500 is actually at or near a 1 2 month top. 8
ETF Asset Flows: Turning Near Term Negative? The total net assets invested in the SPDR S&P 500 ETF (SPY) began a monthly trend of expansion on Feb 11 th, characteristic of healthy near term uptrends. Total net assets invested in the PowerShares QQQs, however, have edged below their 21 day MA as of Apr 21 st, warning of an emerging trend of monthly contraction. 9
Corporate Bond Spreads: Near Term Positive The February 23 rd trend of monthly narrowing in high yield corporate bond spreads remains intact, and has historically coincided with US broad market strength. Lessening credit/repayment risk according to the bond market is corroborated by the coincident trend of monthly narrowing in BAA corporate bond spreads. 10
Options Volume: Near Term Negative The CBOE Put/Call Ratio has reached a multi year least bearish extreme, indicating historically low put versus call volume, that has previously coincided with most of the near term peaks in the S&P 500 in recent history. 11
Volatility: Market Vulnerable To A 1 2 Month Decline The CBOE Volatility Index moved to as low as 12.50 on April 20 th. Previous declines into the 12.00 area have historically coincided with or led US market peaks. A sustained rise above the VIX s 50 day MA, however, would be necessary to indicate that investors have collectively become fearful enough to fuel a market decline. 12
Investor Sentiment: Near Term Negative, Intermediate Term Positive A survey of individual futures trader bullishness is hovering at a most bullish extreme on the S&P 500 that previously coincided with near term market tops. Meanwhile, a survey of stock market newsletter writers is reversing from an historic least bullish extreme that suggests more intermediate term strength is ahead. 13
Market Breadth: Near Term Negative, Intermediate Term Positive The percentage of NYSE Composite stocks trading above their 40 day MA is hovering at a high extreme of 77% that has historically coincided with near term market peaks. Meanwhile, the percentage of constituents trading above their 200 day MA is rising from a February low extreme of 20% or less that has historically led intermediate term bottoms. 14
Overbought/Oversold: Near Term Negative, Intermediate Term Positive SPX is hovering at monthly overbought extremes that have previously coincided with or led every near term US broad market peak during the past year. Meanwhile, SPX has recently rebounded from February quarterly oversold extremes that have previously coincided with 5 intermediate term bottoms since 2008. 15
Seasonality: Late April Strength Leads Into May Thru September Weakness April is the seasonally strongest month of the year in the S&P 500, on average since 1957 closing 1.48% higher and posting a positive monthly close 69% of the time. This chart, which plots quarterly seasonality via the same data, shows that the 3 rd week of April is the strongest of the 2 nd Quarter, after which the index statistically declines into mid to late June. 16
The Size: More Outperformance By Mid Cap? Large Cap Remains Vulnerable. IJH is reversing from a quarterly oversold extreme vs. the S&P 1500 ETF (ITOT). Previous similar reversals led/coincided with relative outperformance by Mid Cap. IVV is reversing from quarterly overbought extremes vs. ITOT. Previous similar reversals led/coincided with periods of relative underperformance by Large Cap. 17
The Style: Quarterly Outperformance Trend Emerging In Value? This chart suggests investor indecision following S&P 500 Value s June 2014 trend of relative underperformance (and coincident outperformance by Growth), and a potential emerging trend of relative outperformance. 18
Asbury Research s Correction Protection Model: Be Invested and Protected Purpose & Key Features: The model is a defensive hedge against market corrections and bear markets that can decimate investor portfolios. The model utilizes 4 quantitative inputs. The model uses the S&P 500 as a proxy for the market. The model is binary: either in the market or out of it. There are no short positions, leveraged longs, or hedging via derivatives. The model was designed to: 1) be in the market as much as possible, 3) exit on meaningful declines, and 4) quickly reenter as soon as a positive trend has been reestablished. Since 2007, the model has been in the market 74% of the time Since 2007, the model has averaged 4.1 signals per year or approximately 1 per quarter. 19
Sectors Investor Assets Moving Into Technology & Utilities, Out Of Financials Asbury s sector rotation model is currently overweight Industrials (Apr 18 th ) and Materials (Feb 29 th ). The biggest ETF related sector inflows over the past month went to Technology. The biggest inflows over the past 3 months went to Utilities. The biggest outflows over the past 1 month and 3 month periods came from Financials. 20
Sectors Materials, Energy Under Invested. Consumer Discretionary, Health Care Over Invested. This chart shows the historic daily average distribution of assets invested in the original 9 Sector SPDR ETFs since the series began in May 2006. This chart shows the current distribution of these assets through April 15 th. The most under invested sectors are 1) Materials, 2) Energy and 3) Utilities. The most over invested sectors are 1) Consumer Discretionary,2) Health Care and 3) Consumer Staples. 21
US Interest Rates Chart Pattern Warns Of A Decline Back To 1.71% 1.63% In 10 Year Yields The February 1 st resumption of the ishares 7 10 Year Treasury Bond ETF s 2013 advance targets an additional 4% rise to 114.00 that will remain valid above the 107.55 area. An upcoming 4% rise in long dated Treasury prices implies that the 2.00% area will contain 10 Year yields on the upside, and that they will revisit the 1.71% to 1.63% area. 22
Commodities Emerging Bullish Trend Change In Industrial Metals DBB s recent rise above its 200 day MA suggests an emerging major bullish trend change in base metals prices. A positive cross by the 50 day MA would indicate a bullish change in momentum. A similar bullish trend change is emerging in the Global X Copper Miners ETF, which clears the way for an additional 15% rise to test the 2011 downtrend line at $18.34. 23
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