Wondering why stocks are surging this morning - aside from Fischer's comments, OPEC rumors, Greek bank recaps, and JPY ignition? Perhaps it is the veritable swarm of professional technical analysts out with notes warning of significant problems ahead. From John Hussman's refined Hindenberg Omen and Carter Worth's "sell stocks, breadth is a problem," to Oppenheimer's warning of "seasonals and weak internals," and Louise Yamada's "stocks are vulnerable, keep cash on sidelines" warning - it appears today's early bounce is as much about contrarian oversold bounce as it is about any macro news. But with 73% of the largest 1000 stocks at least 5% off their highs, stocks remain fragile as they push back towards highs.
However, one could reasonably infer a very unfavorable signal about market internals if leadership, breadth, and participation were all uniformly negative at a point where the major indices were still holding up.
Indeed, that’s exactly the situation in which a Hindenburg Omen becomes ominous. The chart below identifies the small handful of instances in the past two decades when this has been true.
Cornerstone's Carter Worth (via Bloomberg)
“Plain and simple” the U.S. equity market has a breadth problem just as certain momentum stocks (AAPL, DIS, Biotech) are being sold; the message is to sell stocks, writes Cornerstone Macro technical analyst Carter Worth in note.
8 stocks with combined market cap of $1.47 trillion up 41% YTD vs S&P 500 +0.9%: Google, Facebook, Amazon, UnitedHealth, Walgreen, Nike, Starbucks, Regeneron, Netflix
Those momentum stocks either fully or near-fully exploited, while underperforming stocks (Energy, Materials, Industrials) showing no signs of turning higher
For the second time in three weeks, Oppenheimer technical analyst Ari Wald warning that weakening stock market internals and the headwinds of weak seasonal performance mean the S&P 500 likely headed down 5.2% to 1970.
Equity market breadth continues to narrow, momentum “waning” with “less offensive leadership”, Wald writes in note
Seasonals poor as Aug., Sept., Oct. are worst performing months of the year
Recommends hedging portfolio by buying volatility, adding shorts to long positions, buy Cons. Staples, build cash to buy stocks later
Sell stocks that are breaking down: BEN, BWA, CAB, CMI, DAR, DFS, DISCK, DOV, FAST, GPS, HST, IBM, RL, TROW, WCC, WFM
Last week’s outperformance by Utilities shows investor posture is shifting towards defensiveness and is a “cautious sign” for stocks; buy Utilities and sell REITs, writes MKM Partners technical analyst Jonathan Krinsky in note.
Utilities more defensive than REITs, so when Utilities relative strength vs REITs rises, signals defensive posturing by investors
Utilities outperformance occuring now was seen in 2007, 2011
Utility buys: ATO, ED, LG, NEE, NWE, OGS, PEG, PNY, PPL, SO, WGL, XEL
REIT sells: BXP, CMO, CUZ, FSP, HST, IRC, LPT, OFC, SKT, SLG, SNH, VNO
Equities remain “vulnerable” to further declines given narrowing stock market breadth,
...violation of uptrend lines off of 2009 lows and “depressed” volume readings, writes independent technical analyst Louise Yamada in August note.
Recommends keeping any cash on the sidelines for now; encourages “greater discipline, even defensive behavior” as more stocks show evidence of distribution
Relief rallies certainly possible for Dow Transports, Dow Utilities, S&P Energy, S&P Materials, S&P Industrials, however they all appear to be “fragile” and rallies “offer an opportunity to sell into strength” as declines in those areas have further to go
If equities unable to reach new highs and hold onto them, then charts could form right shoulder of head-and-shoulders top formation, similar what occured before 2011 cyclical bear
Investors can buy stocks in uptrends, though “many are parabolic, as money concentrates in outperformers”
Strateges Chriss Verrone
Investors should remain cautious as weak time of year for stocks and defensive portfolio positioning (given high quality, low beta stocks are gaining) signals stock market rallies can be sold into...
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And then there is high yield decoupling...
Quality is now essentially price momentum and vice versa, and history tells us when these two strategies collide the omens are not usually good, as it is a phenomena usually associated with equity markets turning bearish. This becomes even more evident when they plug the factors into their bear market indicator...
Simply put, we are in a bear market!
...when you view the US equity market through the prism of investment style performance (which as we stated earlier is one of the useful features of factor indices), you can see that investors are positioning themselves EXACTLY as you would expect if faced with an economic deceleration. The 20 day correlation between our US quality style and commodity prices has averaged ca. 60% since November last year, and prior to that the correlation was effectively zero.
So as we have said many times, investors may be buying equities because they have few alternatives, but they are clearly economically bearish.
Source: Societe Generale