STTG Market Recap March 13, 2014

Stocks have been weak this week… we mentioned early this week our NYSE McClellan Oscillator went negative which is a cautionary sign; generally we want to see that stay positive or if it goes negative, to rebound quickly.   The same China worries that have been there all week hit the market as were some news reports about renewed Russian activity near the Ukranian border.  Retail sales were “better than expected” but this time around good economic news was sold off.  That is a change.  Over the past few months most bad economic news has been explained away as weather related and there was little to no selling.  So these are things to be aware of.   The S&P 500 fell 1.17% and the NASDAQ 1.46%.

The Commerce Department said retail sales increased 0.3 percent last month as receipts rose in most categories. That followed a revised 0.6 percent drop in January and ended two straight months of declines.  Economists polled by Reuters had forecast retail sales, which account for about 30 percent of consumer spending, rising 0.2 percent last month.  So-called core sales, which strip out automobiles, gasoline, building materials and food services, and correspond most closely with the consumer spending component of gross domestic product, rose 0.3 percent.

We have some degradation in the indexes but truly we have been spoiled for a long time; indexes often drop to their 50 day moving averages even in bull markets and we’ve seen long periods where the current market bounces off either the 10 or 20 day moving averages.   If this selling continues and you have been reading us for the past 1.5 years you know what happens when the NASDAQ gets to the bottom of this channel or falls slightly through it.

spx

nasdaq

Here is the NYSE McClellan Oscillator – now firmly in red.  It is approaching oversold levels soon.

nymo

The volatility index jumped 12% today, its best session in a month.

vix

Gold continues its bounce back year, today it hit a 6 month high.

gold

Yelp (YELP) was one of the big losers today, falling to its 50 day moving average on above average volume.

yelp

So is record margin debt bad?  In the long run it usually is a sign of excess but this blurb from BeSpoke Invest shows that in the near term it is not.  A cynic could say bubbles take a long time to develop and until they blow up…ride the bubble.

A lot of the recent articles surrounding record levels of margin debt have suggested it is a sign of a market peak. The reality, though, is that equities have tended to see positive returns following periods of record margin debt levels.   The table below lists each of the prior 11 periods where margin debt hit a record high for five consecutive months as it has done in the last five months. For each period, we then calculated the S&P 500’s return in the following 3, 6, and 12 months. Over the following three months, the S&P 500 has averaged a gain of 4.0% with positive returns 91% of the time. Over the following six months, the average change is a gain of 5.3% with positive returns just under two thirds of the time, and over the next year, the S&P 500 has averaged a gain of 9.3% with positive returns 55% of the time.  While we wouldn’t go so far as to say that record margin debt levels are a buying signal, history has shown that record margin debt levels have not been a very good sell signal either.

Bespoke

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