Back in February it was argued based on the underperformance of international stocks and cyclicals that a correction in the major indices, such as the S&P 500 (SPY) might occur. Now it is May and the market never corrected, however, if you have been watching the performance of stocks more tied to global growth you will note that they have significantly underperformed from February until the end of April and are now beginning to strengthen.
Figure 1: The Performance of Cyclicals Versus Consumer Staples (click to enlarge)
Analyzing the graph above, weakness was identified around the end of March, based on the long-term moving average convergence divergence indicator (MACD). The pullback from March to the end of April appears to have reversed itself and a new buy signal is close at hand.
It is worth making the point that even though the sell signal I observed did not correctly predict
Monday’s scheduled report on US retail sales for April is projected to remain unchanged vs. the previous month, according to The Capital Spectator's average econometric forecast. That compares with a 0.4% decline reported by the Census Bureau for March. Meanwhile, the Capital Spectator's average projection for April is slightly above a consensus forecast based on a recent survey of economists.
Here's a closer look at the numbers, followed by brief definitions of the methodologies behind The Capital Spectator's projections:
R-2: A linear regression model that analyzes two data series in context with retail sales: an index of weekly hours worked for production/nonsupervisory employees in private industries and the stock market (S&P 500). The historical relationship between the variables is applied to the more recently updated data to project retail sales. The computations
While I do not build portfolios around sectors of the stock market, it is important to review sectors ETFs as it provides another view of market conditions. We examine the Bullish Percent Index information as shown in this article, to see where the market as been and is it over-bought or under-sold. When the BPI values are above the 70% line, as most are today, we argue the market is too high to be an aggressive buyer. When the BPI values are below the 30% line, it is time to back up the "securities truck" and load up the portfolio with equities. This does not happen too often, but it certainly was the case in late winter of 2009.
The "Delta Factor" information is quite different from Bullish Percent Index information in that it attempts to peer into the future. We are looking for the slight probability