Market Outlook - Sector, Style & Sentiment 1st Quarter Analysis

Apr. 1.13 | About: SPDR S&P (SPY)

Well, it took two weeks' worth of effort to get over the hump, but the S&P 500 finally broke past the ceiling at 1564, closing at 1569.19 on Friday. That's also the best close ever for the S&P 500 (SPX) (NYSEARCA:SPY), though it's not hit its all-time high yet. That mark is 1576.09, reached in October of 2007. The SPX only hit a high of 1570.28 on Friday. Still, there's no way to deny that the bulls are pressing again. On that note, a word of caution…

As exciting as the prospect of breaking through to new all-time highs is, this is a perfect opportunity for the market to yank traders' chains. By that, we simply mean if the bears were looking for a place to start selling into some short-term strength, the best way they could make that happen is to pull stocks just a tad above that all-time high mark. On the surface it would feel bullish, and inspire a whole new wave of buying. Under the surface, though, it may be the perfect opportunity for all the would-be profit-takers to start piling out - just when all the remaining suckers start to pile in.

It's just a thought. We'll look at the idea in detail below, right after we slice and dice last week's economic data. Before we got to that, though, let's recap first quarter's results, by sector, and by market cap.

Quarter-End Stats

When it was all said and done, the best sector to own last quarter was one nobody was really talking about… Healthcare (IYH, XLV). These stocks gained an average of 15.4% over the past three months. At the bottom of the pile was Telecom (IYZ, XTL), with barely even a measurable gain; no surprises there. All told, the S&P 500 advanced 10.0% during the first quarter of 2013.

Sector Performance, Q1-2013
Click to enlarge

Of course, a lot can happen - and change - in three months. Just because a sector ended the quarter with a certain gain (or loss) doesn't mean it's going post a repeat performance as we head into the second quarter. There's just one problem with that caveat; as it turns out, this time around, the winners ended the first quarter on a high note, and the losers ended the quarter still heading south. As it turns out, it does look like sectors are looking to pick up in Q2 where they left off in Q1.

Sector Progression, Q1-2013
Click to enlarge

As for market cap and style, mid-cap value names led the way with a 14.3% advance, while large cap growth was the biggest laggard; the S&P 500 Growth Index only advanced 8.8%. We saw a bit of an oddity during Q1 though. Where we normally see broad leadership from value or from the growth grouping, this time around the leadership came from mid-caps. And, large caps (NYSEARCA:DIA) as a whole were the weakest spot.

Cap/Style Performance, Q1-2013

Unlike the sector analysis, the progression analysis the market cap and style says all these groups are still going strong, save one…small cap (NYSEARCA:IWM) value stocks have been struggling since mid-March, but really took a turn for the worst late last week while the other groups were starting to rally.

Cap/Style Progression, Q1-2013
Click to enlarge

Economic Calendar

Last week's economic data was mostly good, with last quarter's (Q4-2012) being the most encouraging data nugget of all. Though the final annualized GDP growth rate of 0.4% is tepid, that's much better than the original estimate of -0.1%. Durable orders also grew 5.7% for February when counting transportation items (planes, trains, automobiles). Though orders actually fell 0.5% without transportation factored in, the overall number is what matters most.

New home sales and pending home sales both slumped a little, though both were also following strong showings from January. Pending home sales fell 0.4%, and new home sales fell from an annual pace of 426,000 to 411,000 in February.

Everything else is on the calendar below.

Economic Calendar

This week is going to be about as busy as the prior one, though the focus is going to be on one thing… jobs (or lack thereof).

ADP says to expect 197,000 new payrolls for March, which roughly jives with the expected 198,000 new private payrolls the government is expected to report on Friday. That won't be enough to bump the unemployment rate from its current reading of 7.7%, however, and it may even be seen as a problem. Not only will that rate be weaker than February's ADP payroll growth of 198,000 and the government figure of 246,000 private payrolls, but it's well short of the 400,000 new jobs that economists say we need to create to put economic growth into high gear.

Stock Market

Given that the S&P 500 finally broke above a major ceiling, you'd think there'd be a ton to talk about. But, everything that really needed to be said was already said above - the S&P 500 pushed past that key ceiling at 1563 last week, but didn't move above its all-time high of 1576.09. As long as we're in that middle ground, we can't trust anything.

Here's the rub… there may be an army of bears waiting to sell when and if the S&P 500 moves to 1576.09 (or maybe just a tad above it).

It sounds unbelievable that the market (NASDAQ:QQQ) could be that conniving and calculated, but it has a funny way of saying one thing and then doing another, especially when the majority of traders are convinced there's only one possible outcome. That's what happened back in October of 2007 anyway, in spades. And, that's why the best move for right now is to be an observer from the sidelines while the bulls and the bears are forced to play their hands.

S&P 500 & VIX - Daily

For what it's worth, here's a look at the monthly chart of the S&P 500. The potential triple top becomes pretty clear here.

S&P 500 - Monthly

All of that being said, what may really drop a critical hint for us next isn't the S&P 500, but a tool that's not getting much attention right now…. the CBOE Volatility Index (VIX) (NYSEARCA:VXX). As of right now it's simply in the middle of its Bollinger band range and just a tad under its key moving averages. However, its Bollinger bands are contracting again, and it's close to that lower band at 10.97. If the market starts to act squirrelly when and if the VIX reaches its lower band line, just be ready for a sharp plunge. Only time will really tell if we get that plunge (or how big it will be), but the vulnerability is built into the current "near new highs" situation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Rapid Options Income clients have an open SPY options position.