Research Excerpts

Keys To This Week: The US Stock Market

Posted on: Monday, May 29th, 2017

The following is the most recent copy of our Keys To this Week report for the US Stock Market.  We also produce weekly Keys To this Week reports for US Market Sectors & Industry Groups, US Interest Rates & Treasuries, and Commodity-related ETFs.  Our new copy of this report will be available to Asbury Research subscribers tomorrow morning, Tuesday May 30th.

The report includes the key market factors that are likely to influence US stock market direction during the upcoming week, and also our current list of stock and ETF ideas (subscribers only).  You can view our recent stock and ETF picks with some related performance data by Clicking Here.

In an upcoming Research Excerpt we will publish a recent Keys To This Week report for US Market Sectors & Industry Groups.  You can contact us for further information about our investment research, including service options and pricing, by Clicking Here.


Conclusion, Investment Implications, Strategy
for the week of May 22nd 2017

The benchmark S&P 500 begins the week situated between two pivotal index levels at 2401 and 2348.  The broad market index’s near term bias will remain positive above 2348, but a sustained rise above 2401 would be necessary to clear the way for our 2430 initial upside target to be met.  From an indicator standpoint, however, this positive near term is suspect due to recently contracting investor asset flows, recent relative outperformance by junk bonds over the stock market, historically low put/call ratios, and very bearish seasonality from now through June.  From a strategy standpoint, amid these conditions managers/investors may consider waiting until the S&P 500 (SPX) rises and remains above 2400 before adding exposure, and tightening downside protection on existing positions on a decline below SPX 2348.

Bigger picture, and barring any upcoming geopolitical shocks, we continue to look for at least an additional 6% to 9% advance in the US index market, depending on the index, between now and year end.

Click Here for Asbury’s Stock & ETF Ideas

Click Here for Asbury’s Intermediate Term Market Outlook: Global Asset Prices

Table 1

Listed in the order of their importance and expected impact on market direction.

  1. Chart Patterns: S&P 500 (SPX). NEAR TERM BULLISH.  The green highlights in Chart 1 below show that SPX begins this week situated between 2348 support, which is the upper boundary of the March-April investor indecision area, and 2401, the March 1st benchmark high.  A sustained move through either is necessary to signal the direction of the US broad markets next near term trend.
  2. Near Term Price Momentum: Monthly Rate of Change (MROC), S&P 500 (SPX). NEAR TERM BULLISH.  Chart 2 shows that the S&P 500’s (SPX) 1-month rate-of-change (MROC) moved back into positive (bullish) territory on April 20th, indicating the post-election US stock market rally has resumed.
  3. Investor Asset Flows: SPDR S&P 500 ETF (SPY). NEAR TERM BEARISH.  The rightmost red highlights in Chart 3 below show that the total net assets invested in the SPDR S&P 500 ETF (SPY) edged back below their 21-day moving average on May 4th to indicate a trend of monthly contraction characteristic of near term declines.  In addition, the chart shows these assets are also contracting below the very important $228 billion threshold, a level that previously became the springboard for the strong February broad market rise into the March 1st high.  As long as these assets remain in a trend of monthly contraction, we will expect more upcoming broad market weakness.
  4. Credit Spreads: High Yield Corporate Bond Spreads. MINOR DECISION POINT, TURNING NEAR TERM BEARISH?  The red highlights in Chart 4 below show that the BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread rose above its 21-day moving average on April 17th to suggest an emerging trend of monthly widening characteristic of near term US stock market advances.  However, the spread must remain above 379 basis points this week for the potentially negative implications of this metric to remain valid.
  5. Relative Performance: SPDR Barclays Capital High Yield Bond ETF (JNK) vs. SPDR S&P 500 ETF (SPY). TURNING NEAR TERM BEARISH. The rightmost red highlighted area of Chart 5 below shows that JNK has been outperforming SPY since May 17th (note the inverse scale in the upper panel).  History shows that similar periods of outperformance by high yield bonds have coincided with every US broad market decline in recent history.
  6. Options Volume: CBOE Put/Call Ratio. NEAR TERM BEARISH.  Chart 4 of last week’s report showed that the CBOE Put/Call Ratio is stalling/retracting from a least bearish extreme — indicating a low ratio of put volume versus call volume — that, as a contrary indicator, has historically coincided with or closely led most of the near term peaks in the S&P 500 during the past year.
  7. Investor Sentiment: S&P 500 (SPX). NEAR TO INTERMEDIATE TERM BEARISH.  A number of different surveys of investor sentiment continue to warn of US equity prices’ vulnerability to a decline.  The red highlights in Chart 6 below show that a daily survey of individual futures trader bullishness on the S&P 500 is reversing from a previous most bullish extreme, of 81% bullish or greater, that has historically coincided with peaks in the S&P 500 (upper panel).
  8. Chart Patterns: Dow Transportation Average (DJTA), NYSE Composite Index (NYSE), Taiwan Weighted Index (TWII), Bombay SENSEX Index (BSESN), iShares MSCI Emerging Markets ETF (EEM). INTERMEDIATE TERM BULLISH.  Our initial upside targets for these indexes are listed below.  Note that the Taiwan, Bombay, and Emerging Markets indexes are positively correlated to the S&P 500.
    • Dow Transports (DJTA): The September 2016 resumption of the 2009 uptrend targets an additional 9% rise to 9700.
    • NYSE Composite Index (NYSE). The July 2016 breakout from indecision in NYSE targets an additional 6% rise to 12,300.
    • Taiwan Weighted Index (TWII): The July 2016 breakout from a year of investor indecision in TWII targets an additional 2% rise to 10,200
    • Bombay SENSEX Index (BSESN):  Chart 6 of the May 1st Keys To This Week showed that the mid March breakout higher from 2 years of investor indecision targets an additional 17% rise to 35,700.
    • iShares MSCI Emerging Markets ETF (EEM):  The July 2016 breakout higher in EEM targets an additional 4% rise to 43.00.
  9. Seasonality: S&P 500 (SPX). NEAR TO INTERMEDIATE TERM BEARISH.  Chart 7 below shows that May is the 9th seasonally strongest or 5th weakest month of the year for the S&P 500 based on data since 1957.   It represents a a strong one-month decline from April, the 2nd strongest month, and leads into the 2nd weakest month of the year, June.  More charts and detail on annual, quarterly and monthly seasonal trends for 17 global asset prices  including equities, benchmark interest rates, foreign exchange, and key commodity prices based on historical data going back to the 1950s is available in our May Global Seasonal Analysis report.

Chart 1

Chart 2

Chart 3

Chart 4

Chart 5

Chart 6

Chart 7