Saturday, May 25, 2013

Weekly Market Summary

"The persistency of the uptrend over the past few months has gone from impressive to remarkable to historical. In the process, it has defied all sorts of fundamental, technical and sentiment concerns that acted as barriers during previous uptrends even over the past few years" - SentimenTrader

As Ryan Detrick notes, the Dow has gone more that 100 days without a 3 day losing streak, breaking the prior record of 95 days from 1927. COMPQ had 17 days in a row with higher highs for the first time since the 1999 tech frenzy. SPX has now gained an uncorrected 26% since its November low, the longest comparable streak in more than 30 years.

Wall Street has responded by raising their forward price targets (chart). Goldman raised their YE13 SPX target to 1750, YE14 to 1900 and YE15 to 2100. The firm gets there by assuming some tremendous growth (chart).

What makes this striking is that the tear in SPX has already heavily discounted future growth. A look at EDITDA shows little growth so far (chart). Similarly, Ed Yardeni points out that revenues correlate with global GDP, and neither is growing (1Q13 revenues, in fact, fell). This is a significant headwind to earnings (chart). 

As a result, what we have seen in the past several months is almost entirely multiple expansion (chart).  Current multiples are now well above average and, in fact, above the 2007 high (chart). Ditto for price to sales

These are the fundamental concerns to which SentimenTrader refers. As for sentiment concerns, consider that Ned Davis' current measure is at among the most bullish extremes of the past 10 years (chart), yet SPX has not responded as it has in the past (red arrow).

So, what's going on? 

First, it seems that 'smart money' (informed buyers) have been selling to 'dumb money' to a degree last seen at peaks in April and September 2012 (chart). That would not be surprising, since insiders see the same fundamental, technical and sentiment concerns as we have noted recently. 

Second, hedge funds, which missed this rally, are also having to chase (article). And of course there are substantial corporate buy back programs taking place.

Third, the last leg of this rally has likely been driven by investors buying trash. Goldman notes that the SPX companies with the most debt, the least cash and the least earnings have gone up 27% in 2013, twice that of higher quality companies. 

Saturday, May 18, 2013

Weekly Market Summary

"The S&P has been up 56 of the 88 trading sessions so far. That rate of success is not only extremely rare, it is, borderline, unprecedented. Fifty years of experience suggests streaks ultimately end. For now, stay very nimble." - Art Cashin

The markets are at a surreal moment, one where even the optimists are confounded by how bullish things have become. - Jim Cramer

In less than a month, SPX has run up more than 8%, nearly equal to an average full year of gains. In the process, over the past two months, SPX has dodged a stunning number of obstacles: a break down in ex-US markets, lagging domestic growth stocks, weakness in breadth, deteriorating macro worldwide, strong outperformance by treasuries, sentiment in which fund managers had a near record exposure to equities, and revenue and earnings downward revisions.

SPX has now gained an uncorrected 24% since its November low. This is the longest comparable streak in more than 30 years. SPX is up 17% for 2013, over 50% more than its average annual gain. Nasdaq is on pace for a 7th consecutive month higher, an occurrence with just a 3 in 100 probability. The only times when SPX has been this strong for so long is after a major low, but 2012 was also a strong year (13% gain). 

In short, as Cashin and Cramer note, there is no precedent for the current market. 

What's next?

If your timeframe is long, the current strength should be followed by further gains in 2013 and probably 2014. New highs like those being achieved now are rarely the end of the trend. That should be your long term bias.

Friday, May 17, 2013

Fund Managers' Current Asset Allocation - May

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. These managers oversea a combined $661b in funds.

During 4Q12 and 1Q13. fund managers were reducing cash, overweighting equities and underweighting bonds to levels that are close to the bullish extremes seen at prior equity tops. Equity exposure in March, for example, was the second highest since the survey began in 2001. 

Overall, fund managers are still bullish on risk, but less so than in March and April.  In April, cash levels rose to 4.3%, in the middle of the range; they remain there in May. Equity allocations were reduced to 41% overweight; still near the high end of the range. Bonds remained underweight at a net 38%. 

Recall that these are global fund managers, so reducing some risk in the past two months reflects deterioration in European and emerging markets, especially China. The US market has been diverging higher. In response, fund managers have maintained their overweight bet on the US at 20%. They were 3% underweight the US in January, for comparison. Europe was reduced to 8% underweight in April and May; it had been 15% overweight in January. Managers are now more overweight Japan (31%) than at any time since mid-2006.

You can see from the data that it should be looked at from a contrarian perspective. Fund managers were overweight EEM more than any other market at the start of the year, and it has been the worst performer so far. They are now becoming bearish EEM (3% overweight), so keep it on your radar. They are also more underweight commodities (29%) than at any time since 2008. In comparison, they were 20% underweight Japan in December and it has been the best equity market by far in 2013. 

Survey details are below.

Wednesday, May 8, 2013

The Annual Mid-Year Counter-Cycle Is Strongly Odds-On

This is an impressive rally. Not only has SPX been up six months in a row but it has risen 21% from the November low and 14% YTD. In comparison, the average annual gain in SPX is 9.5%. Moreover, there has not been a single 5% correction in all those six months. Trend, cyclical leadership, breadth and low volatility all argue in favor of further highs.

Is there precedence for SPX to significantly continue its uncorrected move higher?

Putting the current rally in perspective, the 21% uncorrected gain in SPX since November is now equal to the largest such rally in the last 13 years outside of those following the 2009 low and the Flash Crash.

Sunday, May 5, 2013

Weekly Market Summary

SPX entered the 2000-07 resistance zone the week of March 11. In the 8 weeks since, it has traded an equal distance (2%) above and below this level. That all changed on Friday, when SPX not only ran through the top of the resistance zone but gapped nearly 1% above it. Is this a game changer?

There are a number of positives that support this move. Most importantly, $COMPQ and $SOX seem to be leading, having broken higher early in the week. More generally, the past week was led by cyclicals; not just technology, but financials and industrials as well as discretionary sectors made new uptrend highs. And ex-US markets, that were sitting on YTD lows just 10 days ago exploded to new YTD highs. As impressive as the US market was this week, ex-US markets have recently been even more so.

The improvements in trend were also supported by breadth. McClellan has been positive for two weeks and more than 80% of SPX components are above their 50-dma. On Friday, a net 775 NYSE companies made a new 52-week highs.

Objectively, the two most important factors we track, trend and breadth, support higher prices. Add in low volatility and a dividend yield well below the yield on 10 year treasuries and you have the foundation for continued gains in 2013.

Moreover, strong advances usually continue higher. We noted in February that a 7-week in a row advance was typically followed by a higher high in the weeks ahead. That was fulfilled when the subsequent advance took SPX to the start of the resistance zone by March 11. Similarly, the now 6-month in a row advance in SPX should be followed by higher prices by the end of the year. That's the longer term set up.