Weekly Market Summary

Barring a 50 point drop next week, SPX will close July higher. This will the 6th month in a row that SPX has closed up.

Investors are used to higher US indices. In the past 27 months, SPX has had only 4 down months. That's an 85% win rate.

It's easy to believe, then, that this is unexceptional. Yet it is. It's not the streak itself that's so remarkable, it's the context in which it has been achieved.

Below is SPX since 1980, with every win streak of 5 months or greater marked. There have been 16 during this period.

Fund Managers' Current Asset Allocation - July

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.

An extreme in bullish equity sentiment has been reached.  In July, fund manager equity weightings increased to +61% overweight. This is the highest since February 2011 and the second highest since the survey began in 2001.

In the past, when near 60% overweight, the risk/reward for equities has been unfavorable over the next several months (yellow shading). In 2011, SPX rose 2% versus falling 6% over the next 6 months. This culminated in a 20% fall in August 2011. The other prior examples of excessive bullish sentiment also resulted in poor risk/reward over the following months (chart from Short Side of Long).

As we have continually noted, what has been remarkable is how long managers have been highly overweight equities (virtually since the start of 2013). This is longer than any period during the 2003-07 bull market (yellow shading). In the past, after massive overexposure like that seen in the past 18 months, a washout low would be marked by an equity weighting under +15% (green circles). By that measure, equities are highly over owned.

Weekly Market Summary

SPY (daily) remains firmly in its up channel. That's the big trend to keep firmly in mind.

That said, it's 13-ema inflected downward yesterday for the first time since mid May (bottom panel). We have noted this many times in the past: after the first inflection, there's often a bounce and then a lower low, or at least a period of sideways trading (yellow shading). Often, the 50-dma either catches up to price or price declines towards the 50-dma. In other woods, the shorter term trend is weakening.

Weekly Market Summary

There are things to be concerned about and things to not be concerned about.

With an improvement in macro data in the past quarter, there is a concern that high interest rates are both imminent and a threat to equities. This should not be a concern.

The 10-year yield is currently 2.65%. A rise in yields from a low level like this has not, in the past, been a headwind for equity appreciation.  The chart below shows a positive correlation between rising rates from a low level and equity appreciation (top left corner; chart from JPM).

July Macro Update: Employment and Housing Brighten

In May we started a recurring monthly review of all the main economic data (prior posts are here). Our key message has so far been that (a) growth is positive but modest, in the range of 3-4% (nominal), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.

This post updates the story with the latest data from the past month. The overall message remains largely the same, with caveats: employment and housing are recent bright spots. Sustained improvement in these measures bear a close watch in the months ahead.

We'll focus on four categories: labor market, inflation, end-demand and housing.


Employment and Wages
The June non-farm payroll (288,000 new employees) was at the upper of a 10-year range. This follows prints of 84,000 in December and 217,000 in May. Moving between extremes like these is nothing new: it has been a pattern during every bull market. Since 2004, every NFP print near or over 300,000 has been followed by one near or under 100,000 (circles).