What We Are Watching
This Week’s Stock Market Outlook:
Relative Trends Point To Large-Cap U.S. Leadership – Small-caps failed to seize the leadership mantle when they had the chance. U.S. large-caps are gaining strength not just against U.S. small-caps, but against the rest of the world as well. While absolute price volatility appears to be rising, these relative price trends could be more persistent.
Already Cautious Investors Turning Pessimistic – Investor optimism usually runs high in December/January, but that has not been the case this year. Now, rather than optimism, we are seeing evidence of excessive pessimism — enough perhaps to provide some support to stocks over the near-term.
Broad Market Unable To Help Sustain Rally – Most of market breadth indicators have shown a marked deterioration in recent weeks. This has now become more significant than just a suggestion that the popular averages have recovered more quickly than the broad stock market. After an initial bounce in early Q4, the recovery in market breadth stalled, weighing on the near term stock market outlook. It has now begun to reverse and overall market breadth now looks bearish.
Stock Market Indicators – Indices & Sectors (click to enlarge)
We saw hints of small-cap leadership in the fourth quarter of 2015, but they failed to produce any follow-through and now the long-term trends (on both an absolute and relative basis) are being tested. That small-caps were unable to seize the advantage at a time when they have historically enjoyed a seasonal tailwind adds to our caution. It looks now like the long-term trend is breaking in favor of large-caps stocks.
From a global perspective, U.S. stocks continue to trend higher versus the rest of the developed world (and even more strongly versus emerging markets). While momentum favoring U.S. leadership has cooled, the overall price trend remains robust.
Investor sentiment has turned more favorable in recent weeks. Active investment managers began reducing equity exposure (which was not excessively high to begin with) in early December. Active managers were relatively under-invested ahead of the recent stock market weakness and appear not to be panicking (this week actually brought a slight up-tick in exposure from 48% to 50%). If this continues it could help keep selling contained and provide some support for stocks.
continue reading on the next page…
