Saturday, February 28, 2015

Weekly Market Summary

At the end of last week, US equities looked overheated short term and in need of break (post). In the event, SPX lost 0.3%. The other indices were similar.

After a violent January in which equities lost 3%, February had a strong rebound. SPX and DJIA gained 5.5%; RUT gained a bit more. NDX was the leader, gaining 7%.

Two months in to 2015, the market is being led by consumer discretionary, materials and healthcare sectors. Recall that in 2014, defensives were the clear leaders all year long. 2015 is starting off very differently; utilities are the biggest laggard and SPY is outperforming TLT. But there's no clear theme so far, with some defensives and some cyclicals outperforming and others lagging (all charts in this post expand when clicked on).

Tuesday, February 24, 2015

Identifying The Correct Risk Associated With Weak Earnings

Even casual observers of the equity markets know that there is always a multitude of risks which threaten the advance of stock prices. It takes little effort to identify these. Focusing on the correct risk is trickier part.

Let's take corporate earnings as an example.

The French bank Societe Generale (SocGen) is warning clients that weak earnings is a leading indicator that the US economy is headed into an imminent recession. Here's their chart (EPS growth in red and GDP growth in blue).

Monday, February 23, 2015

Financial Bloggers Are Bullish. Does It Matter?

Every week, Birinyi Associates tracks nearly 30 financial bloggers and classifies their views as being either bullish on the market, bearish or neutral. The results are published on Mondays at their Ticker Sense website.

This week, bloggers are extremely bullish to an extent not seen in more than a year. Is this a contrarian signal to be cautious? The short answer is no.

Below, similar levels of bullishness over the past 3 years are marked with a vertical line: a price chart of SPY is in the top panel with the views of bloggers shown in the lower panel. It's a small sample but in the seven previous times bloggers were roughly this bullish, SPY continued higher six times. Bullish bloggers were an excellent contrarian signal just once, in September 2012.

Saturday, February 21, 2015

Weekly Market Summary

US indices have now risen 3 weeks in a row. For the week, SPX, DJIA and RUT all rose 0.7%. NDX continues to lead; it rose 1.3%.

For the first time in at least a half year, all four US indices are simultaneously at new bull market highs. SPX, DJIA and RUT are at all-time highs and NDX is at a 15 year high. Theoretically, at new highs, there are no unprofitable shareholders and thus no forced sellers. The path of least resistance is usually higher until the market becomes overbought.

On weekly timeframes, the indices are not yet overbought; note RSI in the top panel in the chart below. SPX is nearing a 5 year channel top but it's about another 2% higher at roughly 2150. Of course, SPX can travel along the top of that channel for several weeks, as it did at the end of 2014.

Wednesday, February 18, 2015

Fund Managers' Current Asset Allocation - February

Every month, we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $700b in assets.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal.

To this end, fund managers became very bullish in July, September, November and December, and stocks have subsequently sold off each time. Contrariwise, there were some relative bearish extremes reached in August and October to set up new rallies. We did a recap of this pattern in December (post).

Summary: In February, fund managers increased their global allocation to equities to among the highest since the bull market began. Most of the increase was to Eurozone equities, which now has the second highest allocation in the survey's history. US equities fell out of favor, a set up in which they should outperperform on a relative basis.

Let's review the highlights.

Fund managers increased their cash levels slightly to 4.7%. While this is relatively high on a historical basis, note that cash levels haven't been much below 4.5% since 2013. We consider current levels to be neutral.