US Financial Market Update for March 2016 Prepared for the Market Technicians Association March 16 th, 2016
About Asbury Research Research, Methodology & Clientele Our Research: Asbury Research, established in 2005, produces unique and proprietary technical, quantitative and behavioral financial market research for professional investors. We help our clients to navigate the investment seas on a daily, weekly and monthly basis -- charting a course, and changing direction when necessary, to maximize returns and minimize portfolio risk Our research focuses on the US stock market and market sectors, US interest rates, the US Dollar, and economically influential commodities like copper,crude oil and gold, but our scope is global as it integrates a broad spectrum of non-us asset prices that are statistically correlated to our domestic markets. This intermarket component of our research more comprehensively and correctly reflects global market conditions, which results in more forward looking and accurate investment strategies. Our Methodology: Our analysis is derived from a comprehensive list of strategic inputs including investor asset flows, intermarket relationships, market volatility, investor sentiment, seasonality, price patterns and trend analysis, market breadth, and relative performance, all which are geared toward determining upcoming market direction 1-2 quarters in advance. We then implement a conservative, consistent and repeatable tactical methodology to generate entry and exit points within that larger strategic bias. Our Clients: The typical Asbury Research client is a portfolio manager, hedge fund, or Registered Investment Advisor. However, our macro scope and breadth of financial assets covered has attracted a diverse clientele that includes corporate investment committees, money center banks, Commodity Trading Advisors and new this year individual investors. In 2016 we are expanding our business to include services for individual investors. Contact Us for details. 1
About Asbury Research John Kosar, Director of Research John, a 30-plus year veteran of the US financial markets, spent the first half of his career on the trading floor of the Chicago futures exchanges,where he had the opportunity to learn how the financial markets work from the inside out while being directly involved with many different types of financial assets. This experience, early in his career, became the foundation for the unique analysis, insight, and global intermarket perspective that defines Asbury Research. John is frequently quoted in the media and regularly appears on financial television. He was awarded the Chartered Market Technician (CMT) designation in 1999, is a former Vice President of the Market Technicians Association (MTA), and served on the MTA s Board of Directors between 2002 and 2006. 2
US Financial Market Update for March 2016 Executive Summary: March 16 th 2016 U.S. Stock Market: Our key metrics for the US stock markets are currently divided between a near term positive and intermediate term negative bias. Near term, the S&P 500 s (SPX) positive 1- month rate of change amid investor asset inflows in key ETFs, declining volatility, and narrowing corporate bond spreads suggest more market strength, perhaps into mid April as SPX potentially rises to challenge 2082. Intermediate term, however, an unmet target 19% below the market in the small cap Russell 2000 (RUT), intermediate term weakness in the retail and housing sectors, and recent breakdowns below 5-8 year uptrends in positively correlated Chinese, Japanese and European markets collectively warn of a deeper US broad market decline during the 2 nd Quarter. US Market Sectors: Our own asset flow and momentum based model is currently overweight Materials (Feb 29 th ) and Energy (Feb 1 st ) and underweight Health Care (Feb 8 th ) and Consumer Discretionary (Jan 11 th ). US Interest Rates: Chart patterns in ETFs and related futures contracts target an additional 5%-7% rise in long dated US Treasury prices. This suggests more upcoming weakness in the yield of the 10-Year Treasury Note, from the important 2.00% area, to potentially retest 1.66% to 1.43%. 3
Price & Trend (1): Small Cap Warns Of More Intermediate Term Weakness The genesis of US market weakness during the past 3 quarters was the NASDAQ Composite s inability last summer to exceed its Mar 2000 benchmark high. That weakness from the June 2015 highs evolved into a bearish chart pattern in another market leader, the Russell 2000, which targets a 19% decline to 880. 4
Price & Trend (2): But Tech Suggests The Potential For A Near Term Rally First. The NASDAQ 100 s late February breakout from a month of sideways indecision targets an additional 5% rise to 4600 that remains valid above 4088. Meanwhile, SPX is at an inflection point at 2019. The next near term move, either a 3% rise to 2082 or a 4% decline to 1947, is likely to begin from it. 5
Price & Trend (3): Breakdowns In Retail, Housing Warn Of More Overall Weakness Despite the recent recovery, the retail sector s January break of its 2008 uptrend warns of more upcoming weakness. XRT is positively correlated to the S&P 500. HGX, also positively correlated to SPX, also broke its 2011 uptrend in January. Retail and housing are 2 influential components of the US economy. 6
Intermarket Analysis (1): WTI Crude Oil Testing Formidable Resistance At $38.25/Barrel West Texas Intermediate crude oil has risen by 32% since testing major support in February, but is now challenging formidable overhead resistance at $38.25 per barrel. The positive correlation between WTI crude and the S&P 500 since Q4 2015 suggests that how oil reacts to $38.25 is likely to influence US broad market direction. 7
Intermarket Analysis (2): Break Of 4.5 Year Uptrend In Germany Ominous For The US The DAX broke its 2011 uptrend in mid January and is now retesting it from below as overhead resistance. Warns of more intermediate term weakness. The DAX and S&P 500 have maintained a tight and stable positive correlation since 2000, most recently 0.66 since January. As goes DAX so is likely to go SPX. 8
Intermarket Analysis (3): Major Bearish Trend Change In Japan Is A Red Flag For The US The Nikkei s failure to exceed its 2000 highs in Jun 2015 and subsequent decline below its 12-month MA and July 2007 high suggest that the major trend is down. The tight and stable positive correlation between the Japanese and US markets warn that more weakness in the Nikkei will negatively influence the S&P 500. 9
Intermarket Analysis (4): Major Trend Change In China Warns Of More Weakness In The US China s Jly-Sep 2015 collapse below its 2008 uptrend was the trigger that sent global stock markets reeling. The Hang Seng s major trend remains negative. The long term positive correlation between the Hang Seng and SPX warns that more weakness in China will significantly influence US markets. 10
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 momentum metric, warns that the S&P 500 is at or near a multi-month top. 11
ETF Asset Flows: Near Term Positive 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. Near term bullish conviction is corroborated by the market leading PowerShares QQQs which have been in a trend of monthly expansion since Feb 29 th. 12
Corporate Bond Spreads: Near Term Positive The February 22 nd trend of monthly narrowing in high yield corporate bond spreads has historically coincided with US broad market strength. Lessening credit/repayment risk according to the bond market is corroborated by monthly narrowing in BAA corporate bond spreads. 13
Volatility: Near Term Positive, But Watch 12.00 In The VIX The VIX s location below its 50-day MA indicates a level of investor complacency that has historically coincided with / helped fuel stock market rallies. Bigger picture, though, a decline to 12.00 in the VIX would indicate an extreme in complacency that has historically coincided with or led stock market peaks. 14
Investor Sentiment: Near Term, Intermediate Term Positive The ISE, which only measures opening long transactions by private investors, is at a least bullish extreme historically coincident with minor market bottoms. Meanwhile, a survey of stock market newsletter writers is also at a least bullish extreme that has historically coincided with intermediate term market bottoms. 15
Market Breadth: Near Term Negative, Intermediate Term Positive The percentage of NYSE Composite stocks trading above their 40-day MA has reached 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 hovering near a low extreme of 20% that has historically led intermediate term market bottoms. 16
Overbought/Oversold: Near Term Negative, Intermediate Term Positive SPX is hovering at monthly overbought extremes that have previously coincided with every near term US broad market peak during the past year. Meanwhile, SPX is also rebounding from February quarterly oversold extremes that previously coincided with 5 intermediate term bottoms since 2008. 17
Seasonality: March-April Strength Leads Into May-September Weakness March and April are the 4 th and 1 st seasonally strongest months of the year in the S&P 500, on average since 1957 closing 1.12% and 1.48% higher and posting a positive monthly close 64% and 69% of the time. This chart, which plots quarterly seasonality via the same data, shows that the 3 rd week of March is the second seasonally strongest of the 2 nd Quarter. 18
The US Stock Market Size: Large Cap Over-Extended, Vulnerable This chart plots the S&P 500 ETF (IVV) in the upper panel, the daily relative performance of IVV vs. the S&P 1500 ETF (ITOT) in the middle panel, and quarterly momentum in the relative performance line in the lower panel. This metric shows that large cap is at a quarterly overbought extreme versus the benchmark and thus vulnerable to upcoming relative underperformance. 19
The US Stock Market Style: Quarterly Outperformance Trend Emerging In Value This chart shows that S&P 500 Value began a new quarterly trend of relative outperformance in early February, marking the end of its June 2014 trend of relative underperformance (and coincident outperformance by Growth). 20
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. 21
Sectors Investor Assets Moving Into Energy, Out Of Financials Asbury s sector rotation model is currently overweight Materials (Feb 29 th ) and Energy (Feb 1 st ) and underweight Health Care (Feb 8 th ) and Consumer Discretionary (Jan 11 th ). The biggest ETF-related sector inflows over the past month went to Energy. The biggest inflows over the past 3 months went to Utilities. The biggest outflows over the past 1 week and 3 month periods came from Financials. 22
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 March 11 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. 23
US Interest Rates Chart Patterns Suggest Upcoming Decline To 1.66% - 1.43% In 10-Year Yields The February 1 st resumption of the ishares 7-10 Year Treasury Bond ETF s 2013 advance targets an additional 5% rise to 114.00 that will remain valid above the 107.88 area. An upcoming 5% rise in long dated Treasury prices implies that the 2.00% area will contain 10-Year yields on the upside, and that they will eventually revisit the 1.66% to 1.43% area. 24
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