Sunday, July 26, 2015

The Current Set Up in Gold

Summary: There's a tradable set up in gold. Sentiment, seasonality and the price pattern (especially the 2% intraday reversal on Friday) are all favorable. Importantly, there is a clear stop if price fails to rally. An even better set up exists on further weakness in gold under $1000.

* * *

Gold has been a protracted bear market for exactly 4 years. This qualifies as one of the longest bear markets for gold since 1980. It also follows a 10 year bull market for the metal, the longest during this time period.

Saturday, July 25, 2015

Weekly Market Summary

Summary: What looked like the promising start of a new uptrend reversed hard this week. There's a plausible scenario for SPX to fall under 1980 in the weeks ahead. Most of the indices ended the week oversold and on support. For now, it's reasonable to assume that the multi-month trading range pattern will predominate, but a bigger correction very likely still lies ahead.

* * *

As the week began, it looked as though the markets were beginning a sustained uptrend. Among other things, the market was impulsing higher. New uptrends make it hard to get long by moving quickly higher. NDX rose 8 days in a row and made a new bull market high. SPY made a new ATH on Monday.

What made this scenario further credible is that breadth had washed out at the July low. This is how recent uptrends have started (blue shading).

Wednesday, July 15, 2015

Fund Managers' Current Asset Allocation - July

Summary: Overall, fund managers' asset allocations in July provide a confused view.

On the one hand, fund managers raised cash to a 6 1/2 year high. It hasn't been this high since the height of panic in late 2008. This is normally contrarian bullish.

Note, however, that allocations to equities rose over the past month. Most of the rise in cash came from fund managers further reducing their exposure to emerging markets, Europe, commodities and bonds; allocations to US equities rose.

Moreover, fund managers remain very overweight "risk on" sectors: allocations to discretionary, banks and technology are high and rose further over the past month. Allocations to defensive sectors, like staples, are near all-time lows.

Net, this is not the profile of a market where investors are fearful.

Regionally, allocations to the US and emerging markets are at low levels from which they normally outperform Europe and Japan on a relative basis.

* * *

Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b 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 2014, and stocks have subsequently sold off each time. Contrariwise, there were some relative bearish extremes reached in August and October 2014 to set up new rallies. We did a recap of this pattern in December (post).

Let's review the highlights from the past month.

Fund managers increased their cash levels to a 6 1/2 year high of 5.5%. This is an extreme and it's normally very bullish for equities. Note that cash levels haven't been much below 4.5% since early 2013.  

Tuesday, July 14, 2015

July Macro Update: The Majority of Macro Data Trends Positive

Summary: This post reviews the main economic data from the past month.  Highlights:
  • Employment: The average monthly gain in employment during the past year was 245,000, the highest since the 1990s. Annual growth in employment is the best in 15 years. 
  • Wages: Hourly earnings growth in April and May was the highest since the recession; it fell to 2% in June. Sustained wage growth remains elusive.
  • Demand: 1Q15 real GDP grew 2.9%, the second highest rate in the past 5 years. Real personal consumption (70% of GDP) grew 3.4% in May, the highest rate of growth in 8 years.  
  • Housing: Housing starts in April rose to a new 8 year high. New home sales in May rose to a new 7 year high.
  • Inflation: However, the core inflation rate remains under 2%. It is near its lowest level in the past 3 years  
Bottomline: the trend for the majority of the macro data remains positive.

* * *

A year ago, we started a recurring monthly review of all the main economic data (prior posts are here).

For most of that time, the consensus view has been that growth in wages and employment would soon accelerate and that this would lead to a meaningful increase in inflation above the Fed's 2% target. Our monthly review of the data has consistently shown this expectation to be premature.

The irony now is that economic data has seemingly turned negative over the past four months, to the point where many talk about a recession or QE4. We think this weakness is temporary, mostly driven by the huge drop in energy prices which has lowered inflation and depressed "nominal" price growth. "Real" growth remains positive.

More importantly, the fact that the consensus swings between extremes underscores how focused too many are on monthly data points, with the effect that underlying trend in the data is missed.

Bottomline: the trend for the majority of the macro data remains positive.

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 is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels.

Let's review each of these points in turn. We'll focus on four categories: labor market, inflation, end-demand and housing.

Employment and Wages
The June non-farm payroll was 223,000 new employees. Prior to March (a disappointing 119,000), NFP had been above 200,000 12 months in a row, the longest streak since 1993-95. April, May and June were therefore a bounce back to trend.

In the past 12 months, the average gain in employment was 245,000, the highest since the 1990s.

Monthly NFP prints are normally volatile. Since 2004, NFP prints near 300,000 have been followed by ones near or under 200,000. That has been a pattern during every bull market.  So while the March print of 119,000 was lower than expected, it fits the historical pattern. A low print was long overdue.