A New Fear Emerges as the Dow Takes on 15,000
What are the odds of a continued winning streak for the S&P?
by Todd Salamone 5/4/2013 7:57:37 AM
"Sell in May and go away" advocates may have been smugly congratulating one another on May 1, but by the end of the week, the bulls were clearly back in control. Better-than-expected news on the employment front made light work of historical records, sending the Dow and the S&P 500 to never-before-seen heights. Plus, as Todd Salamone details this week, this upward momentum has prevailed even while hesitancy and fear linger on. This week also saw the S&P complete its sixth consecutive month in the black, and Rocky White takes a look at what such a winning streak can mean for the market -- and the odds of whether we'll see it continue.
- The changing tide of investor fear
- Here are the next levels to watch for mid-caps and small-caps
- The pros and cons of a six-month winning streak
Finally, we close with a preview of the major economic and earnings events for the week ahead, plus a featured sector to watch.
Notes from the Trading Desk: Round Numbers Everywhere
By Todd Salamone, CMT, Senior V.P. of Research
"...from a contrarian perspective, the sentiment backdrop suggests the pullback to the 40-day moving average last week could precede a breakout above the recent range, as there is more buying now relative to a few weeks ago. Active investment money managers have reduced market exposure, short interest continues to grow, and, once again, earnings season is being approached with skepticism, with Alcoa Inc (NYSE:AA) getting set to kick things off on Monday. Such skepticism with respect to earnings season suggests companies will have a lower bar to meet... "
- Monday Morning Outlook, April 6, 2013 "Global Investors cut stocks, boost cash on slower growth concerns"
- Reuters, May 1, 2013 "Spring Slowdown Paints Ugly Picture for Jobs: ADP"
- CNBC.com, May 1, 2013 "Since start of earnings season on 4/8, $SPX drawdown of 12 points vs. upside of 44 points #LowExpectations #Earnings"
- @toddsalamone on Twitter, May 2, 2013 Around this time last month, we were getting ready to embark on earnings season, and as reflected by the excerpts above, expectations were extremely low. We reasoned that a breakout to new highs could be in the cards, as potential buying power was increasing amid a still-healthy technical backdrop. Fast-forward to the present, and the S&P 500 Index (SPX - 1,614.42) has indeed moved into new all-time high territory, with major upside action relative to downside action during this period. Central-bank support from around the world has certainly been welcome in recent weeks, but a list we keep of major companies experiencing notable positive earnings reactions versus notable negative reactions favors the positive earnings reactions by a factor of nearly 2-to-1, suggesting earnings have also been a driving force in this rally.
Amazingly, the sentiment backdrop has not changed all that much from one month ago, even with the SPX up about 60 points, or 4%, since our pre-earnings season report on April 6. Fear is the common denominator, although what market pundits fear has changed. In other words, earnings concerns have given way to anxiety about a "Spring Slowdown" and the infamous adage, "Sell in May, and go away." In addition, last week, our Senior Technical Strategist Ryan Detrick, CMT, summed up the long list of concerns served up by technical analysts recently, a reminder that many participants are sitting on the sidelines and/or betting against a market that is hitting all-time highs.
With the SPX breaking out above the round 1,600 level Friday -- on the heels of a better-than-expected employment number and in the context of intensifying concerns about a "Spring Slowdown" -- I thought an interesting reality check would be to take a quantified look at the sentiment backdrop at present relative to that of early April. I am doing this because many confuse strong price action with growing optimism, but this is not always the case, as evidenced by the table below.
Despite the tremendous momentum in the market, there is still sufficient buying power to keep the current trend alive. And just as the crowd sets its collective mind on potentially disappointing economic data (as they did ahead of earnings season), a small string of positive economic surprises amid lower expectations could be very supportive of stocks in the coming months. Yes, there could be pullbacks along the way, and slight pullbacks in 2013 have kept the "wall of worry" alive. But as we have been advising for months, use market declines as buying opportunities, as many market participants continue to warn or position themselves for a correction, missing the rally in the process. These very individuals are representatives of future buying power. If you see a moderate pullback like the others in 2013 that does not provoke "correction talk," that is the time to be on guard for a correction. One area we continue to watch as potentially supportive is the SPX's 40-day moving average, currently at 1,566 and in the vicinity of the 2000 high at 1,553 and the 2007 high at 1,576.
Meanwhile, the SPX has taken out a round-number level in 1,600, and is now 150% percent above its 2009 low as the Dow Jones Industrial Average (DJI - 14,973.96) flirts with the round 15,000 millennium mark for the first time in its history. Surprisingly, the index sliced through 5,000 like a warm knife through butter in 1995, and took only three weeks to firmly surpass 10,000 after its first-ever test in 1999. This does not mean millennium levels on the Dow are of little significance, as 14,000 marked the top in 2007 and 11,000 proved to be a major area of resistance during the topping process of 1999-2000. Bulls hope the potential psychological barrier at 15,000 proves to be a weak one, like Dow 5,000 and 10,000.
Amid worries about small-cap and mid-cap underperformance just a few weeks ago, the S&P 400 MidCap Index (MID - 1,165.07) and Russell 2000 Index (RUT - 954.42) finally took out resistance at 1,150 and 950, respectively, half-century marks that we presented as potential speed bumps that proved stubborn during the past few weeks. Moreover, the underperformance is not as apparent, with the MID and RUT outperforming the SPX since mid-April. As expected, we aren't hearing much about this from the bears, although they were loud and vocal during the recent period of underperformance.
The next big area of potential resistance on the RUT is the 1,000 mark, as this would be the first test of this millennium level in its history. Long-time readers of Monday Morning Outlook know the significance of the 1,000 mark on the MID in its first attempts to cross this threshold in 2011-2012. New readers can see evidence of the importance of MID 1,000 on the chart below (blue line). If the RUT makes a move to the important 1,000 mark, the MID will be likely be challenging 1,200 simultaneously, which is triple its 2009 low. As you can see on the chart below, the double-low around 800 certainly had significance, acting as resistance in 2010 and support in 2011. The triple 2009 low for the RUT is 1,020.
Finally, good luck to those of you betting on the infamous Kentucky Derby this weekend. I don't have the "hot tip," but I do have something for you to ponder -- like the stock market, the biggest payoffs occur on the "low expectation" horses. But ensure that your information supports the case that the horse is better than the odds are suggesting. This is akin to evidence of a stock or asset with a sound fundamental and technical backdrop, which still isn't getting respect from short sellers and Street analysts. It is these names that represent the best opportunities in terms of reward versus risk.
Indicator of the Week: Monthly Winning Streaks
By Rocky White, Senior Quantitative Analyst
Foreword: April ended last week with the S&P 500 Index gaining 1.8% during the month. The index has a nice streak of positive months going -- six months, with October being the last negative month. Does this mean we're overbought? What are the chances of making it seven months? Obviously, I cannot guarantee what will happen in the future, but I can take a look to see what has happened in the past when we've hit similar streaks.
Six-Month Positive Streaks: Looking back over the past 30 years on the S&P 500, the table below summarizes how the index has done after six positive months in a row. The second table shows returns at any time for comparison. There's no sign that the streak signals an overbought market. In the last 30 years, there were 10 other times the S&P 500 gained six months in a row and the returns after the streaks outperform the market at other times. Seven times, the streak continued to the seventh month. One interesting stat is that all 10 times, the S&P 500 was higher 12 months later.
The table below shows each of the 10 times that stocks gained six straight months. The longest streak in the last 30 years was nine straight, which happened in 1983. The last time it happened was in 2009.
First Four Months of the Year: Also, I took a look at the last 30 years to see what happened after each of the first four months of the year were positive. The first table below again shows it's a sign of a strong market. It has happened six times, and every time the S&P 500 was higher over the rest of the year. The double-digit average return is also quite impressive. On the other hand, when looking at May, this month does better in other years when compared to the six times January through April were all positive.
This Week's Key Events: Earnings Action Begins to Slow
Schaeffer's Editorial Staff
Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
- There are no major economic reports scheduled for Monday. Elsewhere, First Solar (FSLR), BroadSoft (BSFT), Forest Oil (FST), PetMed Express (PETS), Scotts Miracle-Gro (SMG), SYSCO (SYY), and Tyson Foods (TSN) are scheduled to report quarterly earnings.
Tuesday
- The consumer credit report comes out on Tuesday. Furthermore, Walt Disney (DIS), Whole Foods Market (WFM), Checkpoint Systems (CKP), Chiquita Brands International (CQB), DIRECTV (DTV), Electronic Arts (EA), Fossil (FOSL), Marathon Oil (MRO), Molson Coors Brewing (TAP), OfficeMax (OMX), Onyx Pharmaceuticals (ONXX), Papa John's (PZZA), Quicksilver (KWK), TripAdvisor (TRIP), and ValueClick (VCLK) are due to announce quarterly earnings.
Wednesday
- The regularly scheduled crude inventories report is slated to hit the Street. Also, stay tuned for quarterly earnings reports from AOL, Inc. (AOL), Green Mountain Coffee Roasters (GMCR), Groupon (GRPN), Tesla Motors (TSLA), Activision Blizzard (ATVI), Clean Energy Fuels (CLNE), Ctrip.com International (CTRP), Liberty Media (LMCA, LMCB), Monster Beverage (MNST), News Corp (NWSA), Rackspace Hosting (RAX), SodaStream International (SODA), Transocean (RIG), VIVUS (VVUS), and Wendy's (WEN).
Thursday
- Thursday's docket features weekly jobless claims and wholesale inventories. Moreover, Wall Street can expect earnings reports from Molycorp (MCP), NVIDIA (NVDA), Agrium (AGU), Cablevision Systems (CVC), Dean Foods (DF), Dendreon (DNDN), DISH Network (DISH), MEMC Electronic Materials (WFR), Orbitz Worldwide (OWW), Priceline.com (PCLN), and Universal Display (PANL).
Friday
- The updated Treasury budget closes out the week's collection of economic reports. ArcelorMittal (MT) and Silver Wheaton (SLW) wrap up quarterly earnings reports for the week.
And now a sector of note...
Airlines
Bullish
The airline sector's sustained strong price action against a backdrop of skepticism continues to pique our interest as contrarians. The NYSE Arca Airline Index (XAL) is up 28.8% year-to-date, more than doubling a gain of 13.2% for the S&P 500 Index (SPX). The XAL recently bounced from a test of its 40-day moving average, which has served as a key layer of support since the second half of 2012. In Friday's trading, the XAL overcame the $56 level for the first time in several weeks. This level is notable, as it represents double the index's October 2011 low around the $28 mark. Drilling down to the individual stock level, 94% of the 16 names we track in the aerospace/airlines sector are trading north of their respective 200-day moving averages, but just 55% of all analyst ratings across the group are "buys," down slightly from 59% 12 months ago. Also, short interest across the sector has risen by nearly 6% in the past year, and the average short-to-float ratio among the stocks is 6.1%. Should airlines continue to soar up the charts, a gradual shift in sentiment toward the bullish camp could offer contrarian tailwinds.
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