Happy 7th Birthday Bull Market

Congratulations US markets, now in their 3rd longest bull market ever as the Dow gains 159% over more than 2,000 days without a 20% drop.  Exactly 7 year ago today the S&P 500  closed at 683, bottoming intraday at 666.  Things have certainly changed from when there were calls for privatizing the entire banking sector during the ides of March 2009.

Treasury Volatility

The influence of high-frequency traders in the Treasury market is growing. About 60 percent of Treasury securities trades are expected to be transacted on electronic platforms by the end of next year, an increase from 40 percent in 2013, according to Tabb Group LLC, a New York-based research firm. Of those trades, 10 percent were executed by robots in 2010, a share that will probably grow to 20 percent next year, according to Tabb (Bloomberg).  So much depends on Treasury Yields; fluctuations from robotic trading like that on October 15 could ripple across the broader economy.

Pending Gloom?

Throughout history there have always been naysayers.  Gamblers fallacy strengthens as bull markets continue, and shorts can never stay liquid longer than a bull market can stay irrational.  But the WSJ points out that it has been 700 trading days since the Dow closed 10% below its previous high, the fourth longest run of that size.  Here are some others to gain perspective:

Jan. 1991 – October 1997
1,705 days
May 2003 – Nov. 2007
Aug. 1984 – Oct. 1987
Nov. 2011 – Present
Dec. 1943 – Aug. 1946
Jan. 1963 – June 1965
Oct. 1953 – Oct. 1955

A Widening Rift

Both Bond and Equity markets roared to life in August.  The Dow posted its biggest gain since February (+3.2%) while the 10-year Treasury had its best month since January, pushing its yield to a 14-month low Thursday.   Equity investors root for a recovering US as the S&P 500 hits an all time high even as bond investors retrench from a deflationary Europe and crisis in Ukraine.  Bonds and stocks cannot both rally indefinitely; one must fall.  The smart money always flows to fixed income, just like in 2007.

DJ Transportation Average: Red Alert

DJ Transports

Founded in 1884, the Dow Jones Transportation average is the oldest of the major stock market averages in the US, preceding its counterpart the Down Jones Industrial Average by a dozen years.  The average (blue) has recently reversed its outperformance with the Dow (green), threatening the broader rally.  While the Dow and S&P 500 rest only 1% off its yesterday’s peak, the DJ transports are now down 3.5%, Russell 2000 down 2.7% and S&P 400 down 2.4% so far in April.  These averages all rocketed higher through the first quarter, but now fall harder as a new risk-of trade emerges.

This is not the first time the DJ transports have flashed sell signals this year.  Two weeks ago the index had rallied 18.2% since the start of the year and 19% above its 200-day moving average.  Such outstanding relative performance historically precede a market pullback:

Above 200-day mov. avg. Next 2 months return
2 Weeks ago: 19% ?
May 2010: 19% -18%
January 2010: 19% -4%, 1 month: -12%
May 2006: 21% -11%

similarly YTD emerging market like Shanghai, Boevspa and Russia’s RTS are negative while copper is down 9%.  All portend the development of risk-off trades.

Dow’s Record Calls For Pullback

The Dow has only rallied for 10 or more days, 15 times since 1900.   This occurrence therefore warrants reflection; a uniquely psychological event providing historical precedence.  At first glance market returns after long Dow rallies are essentially normally distributed in the weeks and months following, nevertheless some instances show previous large rallies consolidating quickly over the next 10-15 days.  Coupled with the 3 high volume selloffs over the past 2 weeks (March 12,15,19) and large DJ transports spread (see March 15 brief), a market drop looks inevitable.  In 1996 stocks dropped 5.2% from their peak over the following 10 days.  Currently the S&P rests only 1% below its peak.

10-days in a row

Forbes 3/18/13

2013 S&P 500 Forecasts

On the heels of positive US economic data and record highs, the street ramps up full year performance expectations.  Coincidentally released over the same weekend a Cyrpus bailout threatens markets.  New S&P 500 targets are over 100 points higher (Goldman was 1575, Morgan Stanley 1434 and Deutsch Bank 1600).

▪    Goldman Sachs: 1675
▪    Credit Suisse: 1640
▪    Citi 1615
▪    Deutsche Bank: 1615
▪    BofA 1600
▪    Morgan Stanley: 1600
▪    Oppenheimer: 1585
▪    JP Morgan: 1580
▪    BMO: 1575
▪    UBS: 1425
▪    Wells Fargo: 1390