Monday, October 15, 2018

Weekly Market Summary

Summary:  Equities fell 4-5% last week and have given up most of their 2018 gains so far in October. This might feel like the start of a bear market, but that is the least likely outcome.

* * *

US equities fell 4-5% last week. The nearly 10% gain in 2018 at the end of September for SPX has been reduced to just 3%. Small caps have been hit the hardest and are now barely above their level at the start of the year (table from alphatrends.net).  Enlarge any chart by clicking on it.



Friday, October 5, 2018

October Macro Update: Economic Data Suggests US Equity Bull Market Will Continue

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.


Friday, September 21, 2018

Fund Managers' Current Asset Allocation - September

Summary: Fund managers came into 2018 very bullish, with cash levels at 4-year lows and allocations to global equities at 3-year highs.

9 months later, global equity allocations are nearly the lowest since November 2016. Moreover, cash balances are high. Globally, investors are relatively bearish. How can this be?

The reason is mostly outside of the US. While US equities are at all-time highs, both European and emerging markets are down in 2018. That has impacted investors' regional allocations in an important way.

After being out of favor for 17 months, fund managers are now overweight US equities by the most since January 2015. It's at an extreme, and the US should underperform.

Fund managers are now underweight emerging market equities by the most in 2-1/2 years; the region is now a contrarian long.  Europe is neutral, as are global bonds.

* * *

Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.

Our sincere gratitude to BAML for the use of this data.

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. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are overweight cash and underweight equities. Enlarge any image by clicking on it.
Within equities, the US is overweight while emerging markets in particular are underweight. This is a significant change from the past year.
A pure contrarian would overweight emerging markets equities relative to the US and underweight cash. 


Monday, September 17, 2018

Weekly Market Summary

Summary:  Mid-way through September, US equities are flat to lower for the month. The longer term trend is positive but the near-term outlook is unfavorable. It seems unlikely that any equity weakness will be substantial or long lived, but investors should remain on alert to heightened risk over the next several weeks. We believe that will be a good set up for gains into year end.

* * *

Mid-way through September, US equities are flat to lower for the month (table from alphatrends.net).  Enlarge any chart by clicking on it.



Friday, September 7, 2018

September Macro Update: A New 49 Year Low in Unemployment Claims

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.


Tuesday, September 4, 2018

Weekly Market Summary

Summary:  SPX, NDX, small caps as well as broad measures like the Russell 3000 - which equals 98% of total US market capitalization - made new all-time highs (ATHs) last week. Even when indices are adjusted for the dominant FAAMNG companies, the remaining 99% of stocks also at new ATHs. The trend is clearly higher, and several new momentum studies suggest that equities are likely to gain more before year-end.

If there is a reason for caution, the risk is mostly short-term (within the next month) and probably not very significant, as explained in this post.

* * *

US equities rose for a 5th month in a row in August, gaining 4-6%. Through the first 8 months of the year, SPX is up 9% while the Nasdaq-100 is up 20% (table from alphatrends.net).  Enlarge any chart by clicking on it.



Sunday, August 19, 2018

Weekly Market Summary

Summary:  US equities have returned to, and in some cases exceeded, their January all-time highs. The trend is clearly higher and several new momentum studies suggest that equities are likely to gain more into year-end.  Recent macro and corporate results data also support the ongoing equity bull market. Despite the gains over the past 5 months, investor sentiment is not frothy.

What's new is that US equities now have a topping pattern in place: the momentum high in January has been followed a price high in August. This is how every major top in the past 40 years has started. On it's own, this doesn't suggest a major top is near. But in January, not even a topping pattern was visible in US stocks. That's no longer true.

Trade war rhetoric continues to provide sharp, interim market volatility. This week, the US and China resume trade talks for the first time in two months.

* * *

Halfway through August, US equities are on pace for a monthly gain of 2-4% (table from alphatrends.net).  Enlarge any chart by clicking on it.



Tuesday, August 14, 2018

2Q Corporate Results: All-Time High Sales, Profits and Margins

Summary: Overall, corporate results in the second quarter were excellent. S&P sales grew 11%, earnings rose 27% and profit margins expanded to a new all-time high of 11.4%.

Fundamentals are driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself. The strong growth in company profits is not due to the net reduction in shares through, for example, corporate buybacks.

The outlook in 2018 looks solid: the consensus expects earnings to grow 21% this year. Rising energy prices and the tax reform law are tailwinds.

Expectations for 10% earnings growth in 2019 looks too optimistic and will likely be revised downward;  the substantial jump in margins this year is unlikely to be sustained, especially with labor and interest expenses rising.

Valuations are back to their 25-year average. They are not cheap, but the excess from 2017 and early 2018 has been worked off. If investors once again become ebullient, there is room for valuations to expand.

* * *

90% of the companies in the S&P 500 have released their second quarter (2Q18) financial reports. The headline numbers are very good. Here are the details:


Sales

Quarterly sales reached a new all-time high, growing 11% over the past year, the best sales growth in 7 years (since 2011). On a trailing 12-month basis (TTM), sales are 9% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.


Friday, August 3, 2018

August Macro Update: Recession Risk Remains Low

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into early 2019 at a minimum. Enlarge any image by clicking on it.


Thursday, July 26, 2018

The Top 5 Stocks Are Big. And They're Outperforming. This Is Normal

Summary:  The 5 largest stocks comprise about 16% of the S&P 500. That's normal. In fact, the importance of the top 5 stocks was far greater in the 1970s than anytime in the past 5 years.

It's true that today's top 5 stocks - known by the acronym FAAMG - have largely outperformed most other stocks. That's how they became today's top 5. Over time, stock indices have typically been driven higher by a small number of stocks. And over time, those leaders have continually changed. This is the story of the stock market. Only one of today's top 5 was also in the top 5 in 2013. At the height of the tech bubble in 2000, the top 5 were companies like GE, Exxon, Pfizer, Citigroup and Cisco.

Right now, most stocks are doing fine: an index in which non-FAAMG stocks have a 99% weighting closed at the second highest level in its history today. It's on pace for a 10% gain in 2018.

* * *

The 5 biggest stocks in the S&P 500 - known by the acronym FAAMG - are equal to the smallest 282 stocks.  Enlarge any chart by clicking on it (from Michael Batnick).


Sunday, July 22, 2018

Weekly Market Summary

Summary:  US equities have gained every month since April, and are up over 3% so far in July. Our long term view remains that SPX will make a new all-time high in the months ahead. That is now just 2.5% away.

The short term is less clear. SPX has gained 3 weeks in a row; most often, these streaks are followed by a higher high without too much interim give back. Sentiment and volatility data mostly supports further gains.

But, while July is typically a strong month, that strength has often been realized by the end of last week. The rest of the month is usually flat, at best, and seasonality is typically a headwind in August and September. Right now, that tendency is further supported by weakening breadth momentum.

Earning data pushes to the forefront this week: 35% of the companies in the S&P will report their 2Q earnings in the next 5 days. The advanced estimate of 2Q GDP will be released Friday.

* * *

US equities rose for a third week in a row this week, although the gains were minor (from alphatrends.net)  Enlarge any chart by clicking on it.



Friday, July 20, 2018

The Most Useful Accounts For Finance Twitter: 2018

This week, Bloomberg announced that it is launching a Twitter feed that is optimized for trading, a "real-time feed of curated Twitter data, so that enterprise clients can incorporate the most financially relevant content into their trading algorithms." Read their announcement here.

“Our customers tell us that Twitter data is a vital part of their information-driven trading strategies, helping them uncover early trends and changes in sentiment,” said Tony McManus, Bloomberg Enterprise Data CIO.

“People come to Twitter for breaking news, and this new, real-time Twitter data feed gives finance professionals an increased ability to find meaningful and relevant news with the speed, quality, and accuracy they expect from Bloomberg,” said Bruce Falck, Twitter’s Revenue Product Lead.

If you want to create your own feed of the most useful financial content on Twitter, Jason Goepfert of Sentimentrader has created a list of the 200 most useful accounts (read further here). His list uses data from SparkToro that measures "engagement", i.e., accounts on the most lists whose content generates the most likes, retweets, comments and shares, since these are "more influential, get more visibility, and have more impact."

Here are the top 50, which includes professional traders and investors, financial advisors, fund managers, financial journalists, securities analysts and major news publications.


Thursday, July 19, 2018

Emerging Markets Might Be Ready To Outperform

Summary:  Emerging markets equities have lagged in 2018 and throughout most of the last decade. Recent fund outflows have been extreme. Fund managers are underweight the region. Their currencies and commodities are not liked. The region is now "cheap" and it might be ready to outperform.

* * *

2018 has been a tough year for emerging market equities. The index is down nearly 8% while the S&P is up more than 5% and US small caps are up 10%.   Enlarge any chart by clicking on it.


Wednesday, July 18, 2018

Fund Managers' Current Asset Allocation - July

Summary: Fund managers came into 2018 very bullish equities, with cash levels at 4-year lows and allocations to global equities at 3-year highs. Our view at the time was that "this is a headwind to further gains" in equities. That post is here.

7 months later, global equity allocations have fallen to the lowest level since the November 2016 election, and cash balances are relatively high. Investors are no longer bullish, although the global equity correction has not made them outright bearish by most measures.

The US has been the best performing region of the world in the past year, yet fund managers have been consistently underweight. That has now changed; in July, US allocations rose to a 17-month high. It's not yet extreme, but a big tailwind behind US outperformance is now gone.

Emerging markets have massively underperformed since April when allocations to the region rose to a 7-year high. In July, allocations fell to the lowest since January 2017. This region is now a modest contrarian long again.

Fund managers' are close to neutral on bonds, but their inflation expectations remain near a 14-year high and their commodity allocations are near an 8-year high. This has previously led US 10-year yields to stagnate or fall.

* * *

Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.

Our sincere gratitude to BAML for the use of this data.

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. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are overweight cash and commodities, underweight equities. Enlarge any image by clicking on it.
Within equities, the US is now overweight while emerging markets in particular are now underweight. This is a significant change from the past year.
A pure contrarian would overweight emerging markets equities relative to the US and underweight cash. 


Friday, July 6, 2018

July Macro Update: The Economy Is Fine. Trade War Rhetoric Is The Main Risk

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.


Sunday, July 1, 2018

Weekly Market Summary

Summary:  US equities are up three months in a row and positive for the year. Historically, equities have a very strong propensity to end the year higher under these circumstances. That remains our long term view.

Shorter-term, the S&P remains in a 5 month consolidation/trading range. These periods can last 6-12 months. July is a seasonal tailwind, and several sentiment indicators suggest a bias higher (to the top of the range) is warranted. On strength this month, beware; it is followed by the two worst months of the year.

* * *

US equities rose for a third month in a row in June. SPX and small caps gained 0.5% and NDX gained 1.1%. The laggard in the US is the Dow, which lost 0.5% in June.

The picture is not much different on YTD basis. At the year's mid-point, SPX is up 2.5%, NDX is up 10% and small caps are up 7%. The Dow is down almost 2%. Part of these results are explained by the upward bias in the dollar, which favors domestic-focused small caps relative to internationally-weighted large caps.  Enlarge any chart by clicking on it.


Friday, June 29, 2018

The Money Gods' Price For Achieving High Returns

Summary:  During their lifetime, most investors will likely endure another decade-long bear market like the ones in the 1970's and 2000's. Younger investors will probably suffer through at least two.

When thinking about the last 20 years, investors easily recall the tech bubble, the financial crisis and the flash crash in 2010 that together form the most recent lost decade for equities. These negative events dominate our decision making. The (more important) 300% return from equities during this time does not.

For all the time spent worrying about bear market risks, the overwhelming majority of short term traders and professional fund managers haven't found a way to avoid it. And if they have, it has been at the expense of also missing out on the gains during bull markets.

If you are going to do better than most, it won't be by continually anticipating a market crash. That has invariably been an exit ramp onto a dead end street. Tuning out noise and consistently following investment rules and hard data is far more challenging than it sounds, but the performance of those that who do it can be in the top 5%, maybe the top 1%.

* * *

If you are in your 40's or 50's, you will probably endure another lost decade like the 2000's, where stocks did not appreciate on a net basis. If you are in your 20's or 30's, there's a good chance you will endure at least two such periods in your lifetime.

The future could turn out different than the past, but the pattern over the past 120 years is that expansions alternate with long periods where equity markets churn sideways. That's true even if you include dividends and assume dollar-cost averaging (DCA). The chart below shows the length of time US equities have spent getting back to breakeven from a peak (from Lance Roberts; read his recommended article here). Enlarge any chart by clicking on it.


Thursday, June 28, 2018

Interview on Real Vision Television

We were interviewed on Real Vision Television on May 29th. During the interview, we discuss our long term equity market view, the current macro-economic environment and market technicals.

Our thanks to Real Vision for the opportunity to share our thoughts. Click here to become a subscriber.

To watch the interview, click here.



If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.

Monday, June 11, 2018

Time To Not Freak Out About Debt Again

SummaryDebt is a perennial worry.  It's a natural human tendency is to think of debt as bad, that by incurring debt we are living beyond our means. But much of what you hear about debt in the US is hyperbole. Here are the facts:

Household debt has fallen in the aftermath of the Great Recession: on a per capita basis, it's back to the same level as 14 years ago. Households' debt relative to their net worth is as low now as in 1985. For all the consternation about the threat posed by student loans, their default rates are actually falling.

Corporate leverage today is not materially different than it was in 1993 or 2003, i.e., early in two expansion cycles. The delinquency rate on corporate loans is lower than at any time during the prior three expansion cycles. High yield spreads are falling and default rates are well below average.

The "tax reform" bill signed in 2017 is forecast to further expand the federal debt.  But examples from around the world do not show a strong correlation between federal debt and economic growth over the next 5-10 years. For all the hand wringing about high federal debt, the interest cost of that debt is just 1.3% of GDP, as low as during the halcyon days of Eisenhower and Elvis.

* * *

Like most people, you're probably worried about the amount of debt in the US.  We seem to be going broke. Enlarge any chart by clicking on it.



Tuesday, June 5, 2018

Weekly Market Summary

Summary:  US equities are up two months in a row and positive for the year. They are outperforming the rest of the world, despite ongoing Quantitative Tightening here and QE abroad. In the past few days, the Nasdaq has joined the small cap indices at new all-time highs. With expanding breadth momentum and a solid macro backdrop, the outlook for (still rangebound) large caps is positive.

The upcoming weeks could test investors' resolve. Options expiration, an FOMC rate decision, the DPRK Summit and weak mid-June seasonality are all on deck for next week. The early June gap ups in SPX are very likely to fill.

* * *

US equities rose for a second month in a row in May. SPX gained 2.5%, NDX gained 5.7% and small caps gained 6.1%.

Increased volatility has given 2018 has the feel of disappointment, but YTD, SPX is up 2.5% and NDX is up over 11%. Enlarge any chart by clicking on it.


Friday, June 1, 2018

June Macro Update: Unemployment Claims at a 49 Year Low

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.


Friday, May 25, 2018

Separating an Innocuous Correction From the Start of a Sinister Bear Market

Summary: It's true that equities fall before the start of most recessions. So why bother following the economy; why not just follow the price of equities?

"Market corrections" occur every 20 months, but less than a third of these actually becomes a bear market. Recessions almost always lead to bear markets, and bear markets outside of recessions are uncommon.  For that reason, discerning whether a recession is imminent can help determine when an innocuous correction is probably the start of a sinister bear market. Volatile equity prices alone are not sufficient.

The future is inherently unknowable. We can never say with certainty what will happen in the month's ahead. But the odds suggest an imminent recession in the US is unlikely at present and, barring a rogue event like 1987, a bear market is not currently underway. That means equities are most likely on their way to new highs in the coming months.

* * *

Why bother following the economy? Why not just follow the price of equities?

It's true that equities fall before the start of most recessions. Take the last 50 years as an example. There have been 7 recessions and the S&P has peaked and started to fall ahead of all except one (the S&P peaked with the start of the recession in 1990). On average, the S&P has provided a 7 month "heads up" that a recession is on the way. That's enough for even the slowest investor to get out of the way. Enlarge any chart by clicking on it.


Thursday, May 24, 2018

New Highs In The A-D Line and the Small Cap Index Are Not Necessarily Bullish

Summary:  The conventional wisdom is that "healthy breadth" is necessarily bullish. This sounds  intuitively correct: a broader foundation - where more stocks are ticking higher - should equal a more solid market, but it is empirically false. Equities can continue to move higher when breadth is healthy, but new highs in the advance-decline line or in the small cap index have also preceded drops of 10, 20 or even 50% in the equity market.

* * *

The conventional wisdom is that "healthy breadth" leads to higher equity prices. This sounds intuitively correct: a broader foundation - where more stocks are ticking higher - should equal a more solid market. Conversely, a narrowing market should be a warning of a likely market top.

But it is empirically false. Consider some recent research into this issue.

The Russell small cap index (RUT) has been making new highs even as the large cap indices have not. Because there are four times as many stocks in RUT as in SPX, many infer that breadth is broadening and that this must be bullish for all equities. "When the troops lead, the generals will follow."

Yet, as Mark Hulbert points out, small caps have peaked after the major stock indices in more than half of the 29 bull markets since 1926. If the conventional wisdom was correct, small caps should lead by peaking before the major indices, but this happened only a third of the time (Mark's article is here).


Sunday, May 20, 2018

Weekly Market Summary

Summary:  Equities are 2-5% higher so far in May, trying to add to their small gains from April and put behind a rough winter. This week, small caps closed at a new all-time high (ATH) and NDX broke to a 7 week high near its March ATH. This is constructive for the broader market. But new uptrends are defined by persistent strength; it's time for large caps to reveal the true character of this market.

* * *

US equities fell slightly last week. SPX and DJIA lost about 0.5%. But May, so far, is tracking positive. Large caps are up 2.5%, tech stocks are up 4% and small caps are up more than 5%. The volatility index, Vix, has been crushed. Enlarge any chart by clicking on it.


Friday, May 18, 2018

Demographics: The Growing Prime Working Age Population

Summary: Demographics is a key driver of economic growth (and, thus, the stock market). Many investors fret over the aging of the Boomer generation.

But the Millennial and Gen X birth cohorts are almost twice as large as the Boomers. Behind the Millennials is Gen Z, a group almost as large as the Boomers. The mid-point of these three generational groups does not enter retirement age until 2055. This prime working age group heavily consumes housing and other goods as they pass through their reproductive and household formation years. "The movement of these younger cohorts into the prime working age is a key economic story in coming years."

* * *

Starting around the year 2000, many investors began obsessing over the aging demographic profile in the United States. The concern seemed reasonable. The working age population in Japan had peaked in 1995, 5 years after the Nikkei stock index. The stock market had halved by 2000 as the working population declined (by 13% from 1995 to 2018).  Enlarge any chart by clicking on it.


Wednesday, May 16, 2018

Fund Managers' Current Asset Allocation - May

Summary: Fund managers came into 2018 very bullish equities. Cash levels had fallen to the lowest level in 4 years. Allocations to global equities had risen to the highest level in nearly 3 years. Bond allocations were at a 4 year low. Our view at the time was that "this is a headwind to further gains" in equities. That post is here.

Since then, global equity allocations have fallen and cash balances have risen. Investors are no longer at a bullish extreme, although the equity correction has not (yet) made them outright fearful.

In the past 9 months, US equities have outperformed Europe by 6% and the rest the world by 5%. Despite this, fund managers remain underweight the US. US equities should continue to outperform their global peers on a relative basis.

Fund managers' inflation expectations are near a 14 year high; in the past, this has corresponded with a fall in US 10 year yields in the months ahead. Commodity allocations are at a 6 year high.

* * *

Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (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. Our sincere gratitude to BAML for the use of this data.

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. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are overweight cash and commodities, underweight bonds and neutral equities. Enlarge any image by clicking on it.
Within equities, the US is significantly underweight while Europe, Japan and emerging markets are all overweight. 
A pure contrarian would overweight US equities relative to Europe and emerging markets and underweight cash. 


Tuesday, May 8, 2018

1Q Corporate Results Were Excellent, But Margins May Be Peaking

Summary: Overall, corporate results in the first quarter were very good. S&P sales grew 10%, earnings rose 24% and profit margins expanded to a new all-time high of 11.6%.

Fundamentals are driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself.

The outlook in 2018 looks solid right now: the consensus expects earnings to grow 19% this year. Rising energy prices and the new tax reform law are tailwinds.

Expectations for 9% earnings growth in 2019 will probably to be revised downwards;  the substantial jump in margins this year is unlikely to be sustained, especially with labor and interest costs rising.

With the correction in equities over the past 3 months, valuations are back to their 25-year average. They are not cheap, but the excess from 2017 and early 2018 has been largely worked off. If investors once again become ebullient, there is room for valuations to expand.

* * *

84% of the companies in the S&P 500 have released their first quarter (1Q18) financial reports. The headline numbers are very good. Here are the details:


Sales

Overall quarterly sales are 10% higher than a year ago, the best sales growth in 6 years (since 2011). On a trailing 12-month basis (TTM), sales are 8% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.


Friday, May 4, 2018

May Macro Update: A Recession in 2018 Looks Increasingly Unlikely

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.


Wednesday, May 2, 2018

Trading The "Worst 6 Months" and the Presidential Cycle

Summary: There are two seasonal patterns currently in play for investors: the weak "mid-term election cycle" and the weak "summer months." Is the next half year a landmine for investors? The short answer is no.

Since 1982, the average mid-term year has gained 9%. In fact, mid-term years have been better than the supposedly awesome Year 3 of the presidential cycle more than half the time in the past 36 years.

The same point can be made about summer seasonality. While it's true that returns and the odds of gains are typically lower over the next six months than in winter, seasonality still favors longs. If you sell in May, you should expect to buy back higher in November.  For most investors, that's all that matters.

For swing traders, seasonal patterns suggest a general strategy to keep in mind. A swoon in May-June often sets up a bounce higher in July. Likewise, a swoon in August-September often sets up a bounce into October and the end of the year. That also corresponds with the mid-term cycle, which typically has a seasonal low point in September before a ramp into 4Q and into Year 3.

* * *

There are two seasonal patterns currently in play for investors: the "mid-term election cycle" and the "summer months." Neither points to negative returns but both point to lower than average returns. There is also some nuance to the patterns that suggest a potential strategy for swing traders to keep in mind.

First, the mid-term election cycle: The second year of a president's term is generally considered the weakest of the four year cycle for stocks. To make matters worse, that seasonal weakness is most pronounced from now until October (red box; from BAML).


Saturday, April 28, 2018

Weekly Market Summary

Summary:  US equities have been in a consolidation phase for most of 2018.  In the past, these consolidation periods have lasted a half year or longer - so this might continue into summer - although some measures of sentiment are already near a washout.  New highs are very likely to still lie ahead in 2018.

US corporates continue to do well. In 1Q18, they are likely to post sales growth of 9% and a new high in margins. Those profits are being reinvested for future growth.

Investors are worried about rising interest rates. They shouldn't be. Especially from current (low) levels, rising rates have coincided with rising equity prices. That has been the case as far back as the 1940s. The FOMC is very likely to raise rates again in June; since 1980, equities have peaked after the final rate hike.

* * *

After rising two weeks in a row, US equities fell gain this week. April ends on Monday and barring a massive drop, the month will close higher for the first time since January (from Alphatrends.net). Enlarge any chart by clicking on it.


Sunday, April 8, 2018

Weekly Market Summary

Summary:  Trade war rhetoric is driving US equities. This week, for the third time in the past month, the start of a sustained rally was clobbered by administration threats. Conversely, every interim recovery has come on the heels of conciliatory language. Long story short, what happens next in the equity market is very much a function of which trade posture the administration adopts next. Longer term, it's unlikely much of the current rhetoric will make into actual policy as it suits no one's economic interests.

Volatility has shot up in the past two months. Remarkably, investors now view volatility as the "new safe haven" and a "dependable bet." To that end, speculators are now positioned net long Vix futures to a near record extent; in the past decade, that has reliably coincided with at least a near term top in volatility.

This past week, SPX closed below it's 200-dma for the first time in over 400 days. The end of prior long streaks have not coincided with the start of bear market since 1962. Returns after the end of these long streaks have been exceptionally strong.

* * *

US equities gained three days in a row last week for the first time in a month but a massive gap down on Friday and further follow through selling turned the markets negative for the week and (mostly) for the year (from Alphatrends). Enlarge any chart by clicking on it.


Friday, April 6, 2018

April Macro Update: Markets Might Be Wobbly But The Economy Is Fine

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.


Wednesday, March 21, 2018

Interview With Financial Sense on What To Look For Ahead of an Equity Market Peak

We were interviewed by Cris Sheridan of Financial Sense on March 13th. During the interview we discuss the macro-economic environment, the housing market, current market technicals and the financial performance of US companies. One theme of our discussion is what to look for ahead of the next bear market in US equities. Another theme is a potentially bullish set up for US treasuries over the next several months.

Our thanks to Cris for the opportunity to speak with him and to his editor for making these disparate thoughts seem cogent.

Listen here.



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Tuesday, March 20, 2018

Fund Managers' Current Asset Allocation - March

Summary: Fund managers came into 2018 very bullish equities. Cash levels had fallen to the lowest level in 4 years. Allocations to global equities had risen to the highest level in nearly 3 years. Bond allocations were at a 4 year low. Our view at the time was that "this is a headwind to further gains" in equities. That post is here.

Since then, global equity allocations have fallen and cash balances have risen. Investors are no longer at a bullish extreme, but the equity shakeout certainly did not make them fearful.

In the past 8 months, US equities have outperformed Europe by 13% and the rest the world by 5%. Despite this, fund managers remain underweight the US. US equities should outperform their global peers on a relative basis.

Fund managers remain underweight global bonds by the greatest extent in 4 years. US 10 year treasuries have outperformed US equities (NYSE) by nearly 400bp in the past two months.

* * *

Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (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. Our sincere gratitude to BAML for the use of this data.

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. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are overweight equities and cash and underweight bonds. Enlarge any image by clicking on it.
Within equities, the US is significantly underweight while Europe, Japan and emerging markets are all significantly overweight. 
A pure contrarian would overweight US equities relative to Europe, Japan and emerging markets, and overweight global bonds relative to a 60-30-10 basket. 


Sunday, March 11, 2018

Weekly Market Summary

Summary:  The Nasdaq closed at a new all-time high (ATH) on Friday. It has risen 6 days in a row. A number of studies suggest that it should continue to rise further, and that SPX should follow it, probably also to a new ATH. That is the near term set up as equities enter March options expiration week.

* * *

Last Friday's 2% intraday turnaround continued this past week. US equities gained 4% (from Alphatrends). Enlarge any chart by clicking on it.


Friday, March 9, 2018

March Macro Update: Nine Years Into the Recovery, Recession Risk Remains Low

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.


Sunday, March 4, 2018

Weekly Market Summary

Summary:  The long term trend in US equities remains firmly higher. Expectations should be for equities to rise in the months ahead. The near term directional edge is more muted. Worldwide, equities are in the process of retesting their February lows. The US is being held up mostly by technology and financial stocks. Whether the US follows the rest of the world lower is largely dependent on politics: specifically, whether trade war rhetoric evolves from saber rattling to reality. March and the upcoming OpX week are a strong seasonal tailwind.

* * *

After falling 12% from their January high, and then bouncing 10% from their February low, equities fell 5% during the past week. A 2% turnaround on Friday eased some of the losses, with SPX closing down 2% for the week (from Alphatrends). Enlarge any chart by clicking on it.


Friday, February 23, 2018

Earnings Growth Matched The Rapid Pace of Equity Appreciation in 2017

Summary: S&P sales grew 9% over the past year, the best growth in 6 years. Earnings rose 23%, the best growth in 7 years. Profit margins expanded to a new all-time high of 10.8%. Overall, corporate results in the fourth quarter were very good. Earnings during 2017, in fact, rose as much the SPX index itself.

The outlook for 2018 appears to also be strong. "Baseline" economic growth is about 4-5%. The dollar is depreciating, which could add another 3 percentage points to growth. The new tax reform law, passed in late 2017, is expected to add another 7 percentage points. Finally, rising oil prices are a tailwind for the energy sector. As a consequence, the consensus expects earnings to grow 18% this year.

Where critics have a valid point is valuation: even excluding energy, the S&P is now more highly valued than anytime outside of the late 1990s. With profit margins already at new highs, it will likely take excessive bullishness among investors to propel equity price appreciation faster than earnings over the next few years.

Bearish pundits continue to repeat several misconceptions. In truth, 90% of the growth in earnings in the S&P over the past 8 years has come from better profits, not share "buybacks." The S&P's price appreciation has been primarily driven by better earnings (60%) not higher valuations (the remaining 40%). The trend in "operating earnings" is the same as those based on GAAP.

* * *

86% of the companies in the S&P 500 have released their fourth quarter (4Q17) financial reports. The headline numbers are very good. Here are the details:


Sales

Overall quarterly sales are 9% higher than a year ago. This is the best sales growth in 6 years (since 2011). On a trailing 12-month basis (TTM), sales are 7% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.


Wednesday, February 21, 2018

How We Work. And A Thank You To Everyone Who Contributes

Our mantra has always been to 'read widely but form your own opinion.' Your investment decisions reflect your risk tolerance, your demographic and financial profile and your personality. Be well informed and take responsibility for the decisions you make.

This blog borrows heavily from those whose research we value. 30 years ago, analysts worked primarily in silos. The information technology age revolutionized the collection and dissemination of data. Work that took weeks can now be done in hours. Original research is quickly amplified, modified and personalized. The Fat Pitch would not exist if it were not for the generosity and intelligence of those around us, to all of which we owe enduring thanks.

We attribute every source. If they are mentioned in these pages, it is because we read their work every week and value their insights. Readers are recommended to go to these sources directly. We can only scratch the surface of their excellent analyses.

Data is no longer very unique. Almost any chart or table we have shown here can easily be found on-line from multiple sources. Original analyses certainly exist, but are rare; in almost every case, the author learned from others generous to share their work. This is exactly how the level of discourse becomes elevated over time.

30 years ago, data alone was an edge, but not any longer. We believe (and hope) that interpretation of the data provides differentiation. We often reach a different conclusion than other analysts looking at the exact same data. How you collect, frame and interpret a pool of analyses is the difference between data and information.

Readers are welcome to copy, modify and personalize any data on this blog. Please retain the attribution to the original source, as we have done. This is a courtesy, not a legal requirement, as the analysis and representation (in a chart, table or graph) of data and facts is not subject to copyright laws, regardless of the effort required to present them (explained here). "Fair use" laws also allow for the reproduction of copyrighted material without the permission of the author for the purposes of commentary, criticism, scholarship, research or news reporting (explained here).

Charts and tables are building blocks. Make what you do with them value added. That makes all of us smarter (below from Ben Carlson).



A partial list of market-related websites we value can be found here.

Not everyone maintains a website, so two recommended Twitter Finance lists are here and here.


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Monday, February 19, 2018

Weekly Market Summary

Summary:  After falling into their first correction in two years, US equities regained half of their loses in just 6 days. The rebound has been strong enough and persistent enough to suggest that it has further to run. Sentiment and volatility backwardation support that view. However, a low retest over the coming weeks is still a viable risk.

* * *

In just one week, US indices regained about half of their losses during the prior two weeks. SPX gained more than 4% and NDX more than 5% (from Alphatrends). Enlarge any chart by clicking on it.


Monday, February 12, 2018

After a 10% Drop, Will Equities "V Bounce" or Double Bottom?

Summary:  Corrections during bull markets have had a strong propensity to form a double bottom. Since 1980, only 16% of corrections have had a "V bounce" where the low was never revisited.

The current bull market has been different. Since 2009, about half of the corrections have had a "V bounce." So what happens this time?

Sentiment can be reset through both time and price. It's a good guess that if price recovers quickly, sentiment will again become very bullish, making a retest of the recent low probable. A slower, choppier recovery will keep investors skeptical, increasing the odds that the index continues higher.

* * *

Our weekend article summarized the outlook for US equities following the first 10% correction since early 2016 (read it here).  Prior swift falls of this magnitude have led to quick recoveries that eventually retested prior highs. That view is further supported by the washout in breadth, volatility and several measures of sentiment. Overall, risk/reward appears heavily biased towards upside in the near term. The strong rally today seems to support that view.

But our article also showed that while equities sometimes "V bounce", they more often form a double bottom as the strong down momentum is worked off over time.

This article provides 25 examples of roughly 10% falls in SPX over the past 38 years to demonstrate the strong propensity of the index to form a double bottom. We have not been a slave to the fall being at least 10% and we have deliberately excluded examples from the four bear markets where equities were clearly trending downward.

In the charts below, a red arrow is the initial 10% fall and the green highlight is the retest of the low in following weeks. 84% of the corrections have had a low retest (or a lower low).

There are 4 cases (16%) marked with a green arrow showing the initial 10% fall to also essentially be the low (a "V bounce").

While the "V bounce" has been rare, it's notable that 3 of the 4 cases since 1980 have taken place during the current bull market. If you just consider the past 9 years, the odds of a "V bounce" are a coin toss.

So which happens this time?

Sentiment turned very bearish during the past two weeks. It's a good guess that if equities now quickly recover, and if sentiment also quickly becomes very bullish, then a retest of the recent low is probably ahead. A slower, choppier recovery will keep investors skeptical, increasing the odds that the index continues higher. Enlarge any chart below by clicking on it.

1980-84.


Saturday, February 10, 2018

Weekly Market Summary

Summary:  After gaining more than 7% by late January, US stocks have fallen into a 10% correction. It's the quickest decline of that magnitude from an all-time high in 90 years. While a fall in stocks was not a surprise, the speed and severity certainly were.

So what happens next? Prior falls like this have led to quick recoveries. That likelihood is further supported by a washout in breadth, volatility and several measures of sentiment. Moreover, the fundamental backdrop remains excellent. Risk/reward is heavily biased towards upside in the near term.

That said, strong down momentum normally reverberates into the weeks ahead. Equities sometimes "V bounce" but more often form a double bottom. A low retest in the not too distant future remains a greater than 50% probability. The longer term outlook for US equities is unchanged and favorable.

* * *

Two weeks ago, all of the US indices made new all time highs (ATHs). SPX and DJIA were up 7% and NDX was up 10% YTD. VXX, the ETF based on the VIX, was down for the year (the next two charts from Alphatrends). Enlarge any chart by clicking on it.

Friday, February 2, 2018

February Macro Update: Employee Compensation Rises To A 9 Year High

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.


Saturday, January 27, 2018

Weekly Market Summary

Summary:  US equities have already gained more in the first few weeks of January than they do in many full years. The recent trend is being termed unprecedented, but these types of gains have happened before. The current trend is also being called unsustainable, but in most prior cases, equities have continued higher. The equity market is undeniably hot, and that can often lead to a period of retracement and decline, but trends weaken before they reverse, and this one has not shown any sign of weakness. The longer term outlook remains favorable.

* * *

All of the US indices made new all time highs (ATHs) again this week.  This includes the very broad NYSE (composed of 2800 stocks) as well as the small cap index, RUT. The dominant trend remains higher.

US markets have started the year like a rocket. SPX and DJIA are up 7.5% and NDX is up 9.7% YTD (from Alphatrends). Enlarge any chart by clicking on it.


Thursday, January 18, 2018

Fund Managers' Current Asset Allocation - January

Summary: Global equities rose 22% in 2017. Throughout almost that entire period, fund managers held significant amounts of cash and were, at best, only modestly bullish on equities. All of this suggested lingering risk aversion following a recession scare in 2016.

As 2018 begins, cash levels have fallen to the lowest level in 4 years. Allocations to global equities have risen to the highest level in nearly 3 years. In most respects, investors are now bullish.

In the past 6 months, US equities have outperformed Europe by 12% and the rest the world by 2%. Despite this, fund managers remain underweight the US. US equities should outperform their global peers.

Fund managers are underweight global bonds by the greatest extent in 4 years. Only 4% of fund managers believe global rates will be lower next year, a level at which yields have often fallen, at least temporarily.

* * *

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. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are overweight equities and underweight bonds. Cash is neutral. Enlarge any image by clicking on it.
Within equities, the US is significantly underweight while Europe, Japan and emerging markets are all significantly overweight. 
A pure contrarian would overweight US equities relative to Europe, Japan and emerging markets, and overweight global bonds relative to a 60-30-10 basket.