Sunday, February 24, 2019

Weekly Market Summary

Summary:  NDX, RUT and DJIA have all risen 9 weeks in a row. Long win streaks like these have a very strong propensity to continue higher over the next several months, although an interim period of consolidation and retracement is frequent. That SPX is now back at the top of its trading range from October to early December perhaps makes that outcome likely now as well. But years that start as strongly as 2019 have almost always (more than 90% of the time) added sizable gains the rest of the year.

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Since Christmas Eve, SPX is up 19%, NDX 20% and RUT 25%. NDX, RUT and DJIA have each risen the past 9 weeks in a row (table from Enlarge any chart by clicking on it.

Tuesday, February 19, 2019

4Q Corporate Results: Margins Fall. A Watch Out for 2019

Summary: Overall, corporate results in the fourth quarter of 2018 were good, but not great. S&P sales grew 6% and earnings rose 32%, but profit margins fell to 10.9% from a high of 12.1% in the third quarter. This was the first substantial fall in margins since the "profit recession" in 2015.

Fundamentals have been 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 (meaning, valuations contracted). The strong growth in company profits is not due to a net share reduction (e.g., buybacks) either.

Looking ahead, expectations for 10% earnings growth in 2019 have already been revised down to 5%. This still looks too optimistic: if margins in 2019 remain at the same level as in 4Q18, then earnings growth will be 0%. Dollar appreciation and declining oil prices are additional headwinds that could cause earnings to fall this year.

Valuations are now back to their 25-year average. They are not cheap, but the excesses from early 2018 have been worked off: if investors once again become ebullient, there is room for valuations to expand. However, with earnings growth likely to negligible, the key for share price appreciation in 2019 is likely to hinge entirely on valuations expanding.

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85% of the companies in the S&P 500 have released their fourth quarter (4Q18) financial reports. The headline numbers were good, but not great. Here are the details:


Quarterly sales reached a new all-time high, growing 6% over the past year. On a trailing 12-month basis (TTM), sales are 9% higher yoy, among the best growth in 12 years (all financial data in this post is from S&P). Enlarge any image by clicking on it.

Sunday, February 17, 2019

Weekly Market Summary

Summary:  SPX has now gained 19% since Christmas Eve, while the Nasdaq is up 20% and RUT is up 23%. NDX, RUT and DJIA have all risen 8 weeks in a row.

SPX is now back to within 1% of the top of its trading range from October to early December. It would be very surprising if SPX did not encounter some resistance as it nears 2790-2810. That is made more likely by the fact that consecutive weeks of gains, while bullish longer term, have most often been followed by a period of consolidation and retracement.

The longer term outlook continues improve. Equal weighted indices, which remove the influence of a few, large companies, are outperforming their traditional market capitalization weighted peers. The Nasdaq index, normalized to reduce the influence of FAANG, is just 1.5% from a new all time high (ATH). If those big companies kick into gear, the traditional indices will likewise move back to their ATHs.

The primary characteristic of this rally has been broad participation. This week, the cumulative advance/decline line for the very broad NYSE made a new ATH . This did not happen during any bear market rally over the past 40 years.

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Since Christmas Eve, SPX is up 19%, NDX 20% and RUT 23%. NDX, RUT and DJIA have each risen the past 8 weeks in a row (table from Enlarge any chart by clicking on it.

Wednesday, February 13, 2019

Fund Managers' Current Asset Allocation - February

Summary: Fund managers came into 2018 very bullish, with cash levels at 4-year lows and allocations to global equities at 3-year highs. Global equities ended the year 15% lower.

Since Christmas, global equities have rebounded 10%. How have fund managers responded?

In most respects, fund managers remain very bearish:
They are overweight cash by the highest amount since January 2009, the month before the bear market low.
Their global equity allocations are now the lowest in 2-1/2 years. This is a bearish extreme, similar to 2010 and 2016. 
Their profit expectations are the most bearish in 10 years, and below levels which marked equity lows in 2010, 2011, 2012 and 2016. 
Their global macro growth expectations are the most pessimistic in 10 years, more than at the major equity bottoms in 2011 and 2016.  
They view the US dollar as the most overvalued in 16 years, which has a very good track record of marking a turn to dollar weakness, a tailwind for US multi-nationals as well as ex-US equities.
Their global bond allocations are the highest since the Brexit vote in June 2016,  
US equity allocations are at a 9 month low. European equity allocations are coming off a 6-1/2 year low in January. Emerging markets have become the consensus long.

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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 very overweight cash and very underweight equities. Enlarge any image by clicking on it.
Within equities, the emerging markets are overweight while Europe, in particular, is underweight. The US is neutral.
A pure contrarian would overweight equities relative to cash, and European equities relative to emerging markets. 

Saturday, February 9, 2019

Weekly Market Summary

Summary:  SPX has now gained 16% since Christmas Eve, while the Nasdaq is up 19%. NDX, RUT and DJIA have all risen 7 weeks in a row. Large, uncorrected gains like these are typically near the outer limit before a period of consolidation/retracement. That period may have started this week.

The persistence of trend like this is typically followed by higher highs ahead. Breadth reached another milestone this week, a condition which in the past 20 years has not occurred during a bear market and has not occurred until after the correction low was already in. This adds further evidence that Christmas probably marked the low for the recent swoon.

The pullback this week started from a backtest of the 200-day MA, the  4th attempt to regain the 200-d since early October. Importantly, the slope of the 200-d is flat, a condition which is unlike those during bear markets; this is typically when SPX is best able to break higher.

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From Christmas Eve to its high this week, SPX gained more than 16% while NDX is up 19%. They have since given back about 2%. NDX, RUT and DJIA have each risen the past 7 weeks in a row. Enlarge any chart by clicking on it.