Macro Wrap – Is This 2012-2013 All Over Again?

by Enis February 25, 2014 7:16 am • Commentary

I wrote the following in a Macro Wrap post on Sept. 17, 2013:

The S&P 500 index makes a new high.  Numerous divergences exist.  The market continues higher, rendering those divergences meaningless.  Eventually, there is a short-lived correction.  The S&P 500 retests its prior high on a bounce.  There are more cross-market and internal divergences.  The market continues higher, rendering those divergences meaningless.

Rinse, repeat.

That’s been the story of 2013 for U.S. stocks.  So I’m more than a bit wary to present more divergences as the S&P 500 retests its early August highs.

Sounds a lot like today, doesn’t it?  The post was titled, Divergences be Damned!  We have seen this movie many times over the past couple years.

Divergences are numerous once again, even as the S&P 500 reached a new all-time high yesterday.  Whether it’s cross-market indicators (like price action in riskier currencies, credit spreads, or lower yields in the bond market), internal stock market measures such as breadth or sector-specific strength, or geographic differences (the U.S. was the only major market to reach a new all-time high), many financial market measures suggest a less favorable environment than the major stock indices.

But throughout late 2012 and all of 2013, U.S. stocks have ignored warning signs from other markets, and powered higher on each subsequent advance.  The real question is whether 2014 entails a different market environment, or more of the same of the past 2 years.

One crucial difference so far in the new year is that the S&P 500 is still only flat on the year.  The entirety of 2014 has been spent in the red for the flagship U.S. stock market index.  As a result, portfolio managers have less of an incentive to chase performance on the upside.  If the S&P 500 can hold above 1850 for an extended period of time (rather than just a few hours, like yesterday), then the calculus for fund managers might change.

Another major difference has been the sector performance so far in 2014.  The best performing sectors in 2014 are health care and utilities, both up more than 6% year-to-date.  Both of those sectors have historically been defensive (though parts of health care are much more growth oriented these days).  Tech is the only other major sector that is positive on the year, up around 1% after yesterday’s gains.

Perhaps more concerning in the short-term is the price performance on the recent roundtrip in the indices from 1850 to 1750 and back to 1850.  Bespoke had a nice graphic yesterday illustrating the sector performance since January 15th:

Screen Shot 2014-02-25 at 4.21.34 AM


Utilities’ outperformance has really come in the past month, which is not exactly a bullish sign for overall risk appetite.

Nevertheless, years of head fakes among traders paying attention to such divergences makes one skeptical of relying too much on bearish evidence.  That might be precisely when it matters the most, of course, but we’ll only know that in hindsight.  For now, the winner of the short-term battle for the 1850 level in the S&P 500 is likely the best indication of whether bulls or bears will rule price action in the weeks to come.