Jul 17

Weekend Review

Overview

This week the S&P 500 broke above its levels of over a year ago and made new highs for four days straight. Breadth is at all time highs, and bullish sentiment again moved higher but remains below its historical average.

Looking at the range of the S&P over the last 10 sessions, you can see the context for last week’s rally. It gapped higher and never looked back, climbing higher throughout the week before finishing unchanged Friday.

 

The last six months on the S&P may look fairly routine, but to put into context the speed and magnitude of the turnaround from the post-Brexit lows to all time highs, the VIX is down over 50%, the largest 3-week decline in history (h/t @MktOutperform).

 

On a weekly chart of the last three years, that’s a very clean and welcome breakout so far, ending nearly two years of no net progress. If this were a single stock I’d be using that 6/24 weekly close of around 2037 as a stop, so that might be a level to watch on any reversal back into the range to invalidate the longer term uptrend.

 

Here’s the Dow with a similar pattern:-

 

The NASDAQ isn’t yet at new highs but it did give those with round-number bias something to cheer about, clearing 5000 this week:-

 

The Transports are still stuck in traffic a long way from home, but are at least now heading in the right direction:-

 

The Midcap index had one of the strongest recoveries from the February lows and is now just below all time highs:-

 

The Russell made further progress, overcoming the Nov highs to post the highest weekly close since Aug 2015.

 

It also continues to outperform the S&P, something we’ve been monitoring for a few months now:-

 

Breadth is at all time highs. Here’s the Cumulative Advance/Decline for the NYSE:-

 

Bullish sentiment via AAII rose to 36.9%, but remains below its long-term average of 38.5%, as it has now for a record 36 consecutive weeks (h/t @RyanDetrick).

To sum up, the market is at all time highs, breadth is too, and sentiment while more bullish is still far from extreme.

It fascinates me however that after the market has effectively gone nowhere for 18-24 months, that within a week of it breaking out to all time highs, commentators are already lining up to call the next top.

Sure, short-term we are ‘overbought’. The S&P 500 has been two standard deviations about its 50-day MA for six straight days, something it’s achieved only four times since 2000 (h/t @RyanDetrick).

For my own part, in the last week I’ve seen more people wanting to fade this move, calling a top, or waiting for a pullback, than wanting to simply go with the trend.

Perhaps we shouldn’t be surprised. Afterall, if you watch the news rather than price you’d be forgiven for being concerned. Just in the last week financial media saw fit to extensively cover and opine on the tragic events in Dallas and Nice, the appointment of a new PM in the UK, the comments of a Supreme Court judge, and Trump’s VP pick. I guess the guys from the Fed were on vacation.

And yet we’re at new highs, not new lows. After Friday’s close news also broke of an attempted coup in Turkey. I have absolutely no idea what will happen there. All I know is like any other event, the only relevance it has to my process is an indirect one, by which it may manifest itself through the price action of what I own and what I’m watching. I react to price, not events.

@PeterLBrandt said this weekend: “How do you know when you are in a bull market? Because whenever you get out you must pay up to get back in.” To that end, it seems to me the path that would currently frustrate most people would be for this rally to continue, and for our longer-term timeframe, if history is any guide, it’s more likely than not.

 

Sector Rankings

All nine S&P Sector SPDRs are above their 20, 50, 200-day MAs. In times of great strength like this, the ranking becomes much more nuanced, relative, and timeframe-dependent.

For me the sectors that showed the greatest strength this week, with moves to all time highs, were Industrials and Technology. The recovery in Materials was also notable. Staples were weak on a relative basis, and Utilities have faded too, so some sector rotation has been evident since the market made all time highs. Consider also that Financials, which have been the worst of the nine, have improved significantly too.

Industrials ($XLI)

 

Technology ($XLK)

 

Materials ($XLB)

 

Financials ($XLF)

 

Alpha Capture Portfolio

This week our portfolio slipped 0.4% vs a 1.5% gain for the S&P, to take it back to unchanged YTD.

On the surface that’s frustrating in a week when the market makes new highs, but perhaps shouldn’t be unexpected with our portfolio having been higher for 6 of the last 7 weeks.

So what’s going on?

Many of the stocks that got us here haven’t been the ones to benefit as the market made new highs this week. They’ve instead consolidated recent gains but remain in strong uptrends. We have total open risk of just under 6% in a highly-concentrated portfolio of 12 names, the majority of which are at or just below their highs.

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