Last week’s 90%-down day and TRIN (market-breadth) above 2.0 provided the ammunition for an oversold bounce but as BofAML notes, there is plenty of resistance to limit upside. With 1658 as critical resistance (S&P 500 cash traded 1651 this morning), the following charts show the weight of evidence suggests deeper downside risk to the June lows around 1560.
Notwithstanding the rebound from last week’s low, we remain cautious on US equities given bearish readings and/or divergences for the Net Tab, Volume Intensity Model, new 52-week highs, daily and weekly momentum…
And the Negative divergence for % of NYSE stocks > 200dmas
The % of NYSE stocks above their 200-day moving averages has a strong bearish divergence similar to the divergences that preceded pullbacks in mid-2010 and mid to late 2011. This points to diminishing momentum for market breadth
The big downside gap is an overhang…
Margin debt is still contrarian bearish…
The March 2000 peak in NYSE margin debt of $278.5m preceded the August 2000 monthly closing price peak in the S&P 500 at 1517.68. The July 2007 margin debt peak of $381.4m preceded the October 2007 monthly closing price peak of 1549.38 for the S&P 500. Margin debt reached a record high of $384.4m in April and the S&P 500 continued to rally into July/August. This is a similar set up to 2007 and 2000.
Margin debt: the long-term overlay
Going back to January 1959, margin debt and the S&P 500 have moved together for the most part. But leverage is a double edge sword and can exacerbate selloffs, leading to deeper than expected market pullbacks.
- Margin debt and the S&P 500 have moved together for the most part since 1959.
- Margin debt formed higher lows as the S&P 500 formed lower lows at the 1974 and 2009 generational lows – in our view this supports the case that the 2009 low is a generational low that does NOT need to be retested.
- Margin debt broke out in 1977, which was well ahead of the S&P 500 breakout in 1980.
- Margin debt contracted as the S&P 500 pulled back into the 1982 low.
In addition, seasonals…
Going back to 1928 September is the weakest month of the year and is down 60% of the time with an average drop of 1.1%.
… and the Presidential Cycle are positioned to become a market headwind moving into September
If the US equity market continues to follow the Presidential Cycle, the risk is for lackluster returns in the last four months of 2013 and well into 2014, which is the mid-term election year. Based on the cycle, a strong bottom and rally occur after the mid-term year low. This low tends to form in September of the mid-term year.
2013 has followed the front-end loaded Presidential Cycle Year 1 Pattern. This pattern calls for a July/August peak in Year 1 (2013) ahead of a pullback into September of Year 2 (2014) or the Midterm year.
The September Year 1 through September Year 2 period is the weakest part of the Presidential Cycle. The average decline over this 13-month period is 4.31% vs. an average 13-month period return for the S&P 500 of 8.0% going back to 1928.
And with the plethora of headline-positive macro data recently, the Fed is losing its ability not to Taper even in the face of a market decline.