Richard Shaw's  Instablog

The S&P 500 appears to have made the transition from aging rally to beginning of correction. As we have said before, something like 800 is a likely support level that could be the end of the correction (down a bit more than 10%), unless confidence is shaken so much that lows may be tested or exceeded.

We’d take an unscientific guess that there is a 20% chance of a continuation of the rally, a 60% chance of a correction to the 800 area, and a 20% chance of testing March lows. We have no particular logic to present, just a gut level opinion on that.

The following YTD daily chart of the S&P 500 draws horizontal lines on what seems to have been an important trading range for most of the year so far.

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This next monthly chart of the S&P 500 from March 1980 (with 12-mo and 6-mo moving averages and 12-mo price channel highs and lows) shows the comings and goings of the index. We think the right-most data suggest we are not yet at a turning point from bear to bull. We’d like to see the 6-mo average cross the 12-mo average at the least, and preferably see the 12-mo average actually turn up before declaring a bull.

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Looking across several key asset categories over 6 months, we see US stocks and EAFE stocks rolling over in and arc, and emerging stocks bouncing in a downward direction.  US REITS continue their fall re-established a few weeks earlier. Commodities generally and oil in specific are in significant declines.  Aggregate bonds and intermediate-term Treasuries are rising.  The Dollar is down, but trading sideways.  Gold is up, but trading sideways.

The next YTD daily charts look more closely at a more granular list of securities on a YTD daily basis, each plotted on a percent performance scale for side-by-side comparison.

BONDS:

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Treasuries are down for the year, but turning up as the stock rally fades and green-shoots seem more like a mirage, or government attempts to jawbone the economy up, than a reality. High high yield bonds have been the year’s winners, but are most hurt by fading confidence.  The relatively greater decline of high yield bond prices versus investment grade corporate bond prices is an important inter-market indicator confirming the weakness in US stocks.

INTERNATIONAL BONDS:

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Local currency denominated developed market sovereign debt and US Dollar denominated emerging market sovereign debt have substantially outperformed intermediate US Treasuries and aggregate US bonds YTD.  They are still in pretty good shape.

STOCKS:

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US, EAFE and emerging market stocks all rallied strongly since early March, but each has had weak performance since the beginning of June.  As were bonds, emerging markets were the strongest performers, and are still up the most, but declining.

EMERGING MARKET STOCKS:

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Emerging markets generally substantially outperformed US stocks.  Russia, Brazil and India substantially outperformed emerging markets overall.  China, while up a good deal, did not rise as much a emerging markets generally.  The higher they rise, the harder they fall, as Russia in particular is demonstrating.

COMMODITIES:

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Commodities are basically flat for the year.  Agriculturals and gold were bland performers.  Copper, metals generally, and oil were star performers, but are now in decline, particularly copper.  The price rises may have been impacted by resource inventory stocking by China which bought a great deal and increased industrial production, but experienced a major decline in exports — raw materials and finished goods inventory build-up.  That may be done now with prices of oil and metals settling.  The fierce iron ore negotiations ongoing now probably show demand is not outstripping supply.

US REAL ESTATE:

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Domestic US real estate and non-US real estate were up strongly from March, but stopped there advance by the end of May.  Non-US real estate is still positive but trading sideways to down.  US real estate is trading down.

CURRENCIES:

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The US Dollar is somewhat down against a basket of major currencies.  The Australian Dollar and British Pound Sterling are the big winners so far.  The Canadian Dollar was a top performer, but fell out of bed in June.  The Euro rose since March to be flat for the year. The Yen is down and trading sideways.

Securities named in this article: SPY, VTI, EFA, EEM, VNQ, DJP, AGG, IEF, UUP, USO, GLD, BND, TIP, MUB, LQD, HYG, BWX, EMB, VT, VEU, VEA, VWO, EWZ, RSX, IFN, FXI, DBA, DBB, VNQ, ICF, FIO, RTL, REZ, RWX, UUP, FXE, FXY, FXB, FXA, FXC.

Disclosure: We have positions in some of the named securities at this time, and may have positions in any or all of them from time-to-time.

Richard Shaw
QVM Group LLC