Sunday Night Recap

After a week of pent-up frustrations (talking about the market), ‘Quad Witching’ Friday saw the great unleashing of said frustration, as Scotland decided it’d rather take its chances with an emotionally distant England than slapping on some lipstick and prettying itself before heading off to see if the EU is still interested. So after two days to digest Yellen’s “extended period”, a truly united United Kingdom and the great Alibaba IPO, Friday ended after a mostly back and forth session that should have left large cap investors worried and small cap investors positively fearful.

The Big Picture:
First, anyone who still wants to look at the tables of ETF performance can find those at the end of the article. Take a look at this chart of the Dow Jones Industrial Average (I know, who cares about this?) and zero in on Friday. Huge volume and a close near the open/low of the day as some investors choose this moment to take profits but just part of a larger trend amongst large and mega caps that outperformed for the week. In fact, large cap outperformance has gone from amazing to downright disturbing as mid and small cap investors run for the hills.

indu
Here’s a chart of the Vanguard Mid-Cap Vipers compared to the S&P 500 and then the Russell 2000 iShares to the S&P. Mid-Caps are holding their own while still being stuck in a trading range but the Russell 2000 continues to get beaten on like a rented mule. Long term momentum scores are close to the lows of early August but you could still see a few days of weakness ahead. For the intrepid investors, there could be a good buying opportunity for at least a short term trade this week.

vipers

IWM
But the relative strength of large-caps belies a disturbing trend of weaker breadth. Fewer stocks are helping carry the S&P 500 to new highs while the situation for the NASDAQ has gotten positively disturbing. As you can see from the chart below, the S&P 500 had Friday not unlike the Dow but with a small loss on the day, but a similar pattern of weak participation has been forming for some time. The % of stocks above their 50 and 200 day moving averages has been moving down steadily with the market since early September and remains well below the levels of June and July. A longer term chart shows that this is part of a pattern that has been playing out for some time.

S&P

Shifting the focus over to the NASDAQ where we’ve overlaid the % above the 50 and 200 day compared to the top NASDAQ 100 is nearly as revealing and better shows the overall weakness of the small and mid-cap names. Hardly a reassuring sign of market strength

NASD
Domestic Sectors:
Healthcare continues to be the big winner in the domestic sector game as biotech tries to regain momentum lost over the last few weeks although the real standout has been the pharmaceuticals sector (at least IHI anyway.) Financials and consumer staples tried to keep their good thing going (or at least their one month performance trend) although it’s really a tale of two cities. While financials are seemingly going to benefit from a steepening yield curve, the uncertainty over rate increases held them back this week and when looking a longer-term chart, they remain stuck in a trading range relative to SPY. Consumer staples momentum has been bottoming out for an extended period and whether this trend can continue remains in doubt.

xlf

xlp

Two other sectors worth mentioning are utilities and energy. Utilities pulled out a slightly worse than market performance for the week but remain in a downtrend relative to the broader market. It’s hard to consider going overweight in the sector without seeing signs that it has more to offer. Energy stocks tell a similar story and leave one wondering whether this week’s small gain was more of a dead cat bounce off a prior resistance line.

XLE xlu2

Foreign Stocks:
The price action for foreign stocks remains grim and has left them as probably the only attractive segment of the investment market based on fundamental valuations or relative momentum. I don’t want to say, how could it get any worse but I’m totally going to think it.

Let’s consider the example of the iShares MSCI EAFE ETF, up a resounding .73% YTD compared to the more impressive 10.28% for the Vanguard S&P 500 ETF. When you consider this weakness relative to the S&P 500, EFA is back a level not seen since the 2012 ‘summer of the hatred tour’ in Europe when the prospect of messy collapse for the EU seemed all too real. While seemingly poised for a bout of deflation and yes, they may have to take down the “15 Years Since a War” sign, consider the counter-argument. Calls for easing austerity have increased, the ECB seems committed to actual growing their balance sheet and the depreciation of the Euro is long-overdue and will eventually help stimulate growth. European stocks still look to be the big winners of the EFA(it’s all relative people) and a quick gander at VGK shows that its first attempt to move higher after hitting long term support was premature.

VGK

Doesn’t mean they have to go up or up quickly versus American markets, but something to consider especially with December and the annual Great Rebalancing just a few months away. By now portfolio weights to domestic equities versus foreign have surely gotten out of whack and will need rebalancing.

And with that, it’s time go and see if Big Ben can find a way to hold off the Panthers so we don’t find ourselves slugging it out for the bottom of the AFC North with the Browns.

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