Diary of a Financier

SPY update: Downgrading to NEUTRAL

In Capital Markets on Thu 3 Dec 2015 at 16:40

After witnessing two consecutive, material intraday selloffs, I wanted to crystallize my S&P 500 ($SPX) outlook…

First, SPY has followed my base case expectation, as laid-out in my last update.  Henceforth, I had expected a YE rally — primarily rooted in sentiment, seasonality, and the Chinese Yuan ($CNY).

That December surge remains my base case, but we’ve reached that point in the normal seasonal pattern in which the rally tests investors’ faith with a drawdown before the Santa Claus rally.

Historically speaking, the December drawdown averages ~85bps.  So, the magnitude of this current drawdown (-2.7%) is clearly idiosyncratic, with a host of potential drivers behind it (e.g. geopolitics, global macro, central bankers, etc.).

With that background, here are the technicals governing SPY’s short-term undulation…

$SPY (205.0)

Primary pattern:SPY daily/weekly 2015.12.03
Daily ST fulcrum top
– 1st support ~205 (50 & 200DMA convergence)
– R shoulder support < 201.0
– Neckline resistance < 210.0

15-min LT complex fulcrum top breakdown
1-min ST ascending wedge w 2x bull divergence

Daily LT H&S topSPY 1min/15min 2015.12.03
– Neckline support @ 182.0
– R shoulder resistance @ 202.0

The chart technicals signal a ST recovery rally tomorrow, likely succeeded by the primary pattern’s assertion-of-will.  In other words, SPY’s daily ST fulcrum top will find support ~201, after which the market’s fate will be determined upon a test of its neckline resistance < 210.0.


However, that’s only one factor in my multifactor model.  Most of the other inputs are getting picked-off, giving me the objective evidence to downgrade my market outlook to “NEUTRAL,” as everything has slowly deteriorated throughout this year…

1. Economy (NEUTRAL)
– GDP: Bullish
– Inflation: Bullish
– PMI: Bullish
– Wages: Neutral
– Consumer confidence: Neutral
– Retail sales: Neutral
– Housing: Neutral
– Durable goods: Neutral

2. Credit (NEUTRAL)
– Corporate credit: Bearish¹
– Household credit: Bullish
– Commercial lending: Bullish

3. Fundamentals (NEUTRAL)

4. Valuation (BULLISH)
– FwPE NTMe (16.25): Neutral²
– FwPE 2016e (16.16): Neutral
– PEG 2016e (1.89): Bearish
– PB/ROE NTMe (11.52): Bullish
– Earnings yield spread (+80bps): Bullish³

5. Sentiment (NEUTRAL)
– Retail sentiment: Neutral
– Retail allocations: Neutral
– Institutional allocations: Neutral
– Strategist allocations: Bullish

6. Technicals (NEUTRAL)
– Charts: Neutral
– Seasonality: Bullish


¹Spreads & supply

²Using SPX Operating EPS

³Using SPX E/P NTMe less Baa Corporate Bond yield

  1. Update…


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