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~~~ Urban Carmel: Weekly Market Summary

* February 25, 2017

Summary: All of the US equity indices made new all-time highs again this week. Treasuries were the biggest winner. A drawdown of at least 5-8% in SPX is odds-on before year year end, but there are a number of compelling studies suggesting that 2017 will probably continue to be a good year for US equities.

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On Friday, SPX and DJIA made new all-time highs (ATH). During the week, COMPQ, NDX, RUT and NYSE also made new ATHs. All the indices moving to new highs together suggests that this is a broadly based rally. The trend remains up.

For the week, SPX and DJIA gained 1%. NDX notched a 0.4% gain and RUT closed lower. The biggest gain came from treasuries, with TLT gaining 1.4%. We continue to like the set up in treasuries, as explained in detail last week (here).

Little has changed from last week's summary. Instead of repeating those the same messages, we'll highlight four new studies that show a favorable longer term outlook for US equities.

First, SPX has now gone 76 days since the last 3% drawdown ended on November 4, right before the US election. That is the longest streak since July 2006 to February 2007, when the SPX went 150 days without a 3% drawdown. The chart below shows the duration and magnitude of the current rally relative to other long streaks in the past 14 years (yellow highlighting equals the current rally). Enlarge any chart by clicking on it.



The message from this chart is twofold.

First, the current uninterrupted rally is rare and extended from a historical perspective, but these periods can last much longer.

Second, when the current uptrend ends, it is not likely to lead directly into a more significant downturn. Momentum like this weakens before it reverses. In each of the cases highlighted above, after a 3-5% drawdown, SPX either continued higher or retested the prior high before falling lower. Mid-2011, 2012 and 2014 are recent examples of the latter case (shown below). That would be our expectation now as well. . .



* * *

In summary, there are a number of compelling studies suggesting that 2017 will probably continue to be a good year for US equities. In addition to the four such studies reviewed in this post, add in rebounding equity fund flows and positively trending macro data. All of that said, a drawdown of at least 5-8% in SPX is odds-on before year year end. Our summary last week suggests that drawdown could happen sooner than many investors current believe is likely (read further here).

The calendar is heavy for the week ahead. Durable Goods on Monday; GDP on Tuesday; and Personal Consumption on Wednesday. NFP is the following Friday, March 10.

http://fat-pitch.blogspot.com/2017/02/weekly-market-summary_24.html

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