Market Outlook April 15

Despite the fact that last week saw a series of weaker than expected economic data releases, stocks managed to push higher still, closing the week at an all-time if we look toward the S&P 500.  While the up-trend remains intact, as I have pointed out throughout last week in this column, traders and investors would be wise to respect the onslaught of corporate earnings releases over the coming weeks.

As of last Friday, the S&P 500 measured by the SPDR S&P 500 SPY was higher by 12% year to date or 19.45% over the past twelve months and up 2.35% last week alone.  The front and center thought in my cranium that I must reiterate again this morning is whether this steep run into the first quarter earnings season has enough momentum to keep going at this rate.  While the trend higher remains in tact despite weakening internals and signs of slowing global growth, bulls likely won’t wait for too many companies to disappoint on their earnings outlook before taking profits from the great run higher.

A quick look at the S&P 500 reveals not much damage with the possible exception of a doji candle on Friday and negative divergence between price and the stochastics momentum oscillator.  Purely looking at this index it is not worth getting all beared-up for.

Last week’s stock performance was led by healthcare, consumer goods, services and financials while utilities and basic materials lagged.  As such last week’s picture was mixed.  If we look out over the past month however the out-performance of defensive sectors versus cyclical sectors  is noticeable.  The defensive posturing of investors was also again seen on Friday, despite a marginal intra-day recovery.

In short, earnings season should make things at least somewhat more interesting as investors get a better reading on corporate performance and outlook and will be able to mix that into the picture of weakening global economic data.

With that in mind I took a look at the SPDR S&P 500 index sector etfs and scanned for the steepest slopes.  Why? Because if and when we were to get a correction, I will want to consider shorting or at least not being caught overweight the most overextended/steepest slopes in the S&P 500 sector universe.

The below chart highlights the four S&P 500 sectors that I found to be the most overbought as defined by their steep slopes.  The sectors are: consumer discretionary, utilities, consumer staples, and health care.

With Friday’s sell-off in gold I would be remiss not to discuss the commodities universe.

On April 10 I last mused my thoughts on gold and said any near-term bounce likely fail and lead to lower prices, playing into my longer-term bearish outlook for gold.  Needless to say, the near-term bounce, the long-side trigger point that I discussed would have been a close above $154.50 on the SPDR Gold Shares (NYSE:GLD), did not materialize as gold significantly broke below a multi-year support level.   More broadly however, commodities as a theme are in a continued downtrend if we look at the Ipath Dow Jones UBS Commodity inded (DJP).  This on-going trend is deflationary and thus I question whether the divergence between stocks and commodities can continue for much longer without at least somewhat of a mean-reversion move.

Stay tuned as this week is sure to bring about some surprise moves in stocks that likely will also dictate the direction of the broader stock market for the coming weeks.

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