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.

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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.

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US equities rose for a third week in a row this week, although the gains were minor (from  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.

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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.

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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.

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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.