By Bob Hoye
Markets Know Rate Deferrals Cannot Last Forever
When does treading carefully lead to falling behind? Federal Reserve officials signaled last week that they expect to raise interest rates twice this year, while investors see only one move. If economic theory is any guide, even the central bank’s more hawkish outlook would still leave the target for the benchmark policy rate way too low.
Conditions Will Never Be Perfect
At last week’s meeting the markets were not expecting the Fed to raise rates. However, markets were expecting the Fed to send some signals regarding the distinct possibility of a rate hike in June. Instead, the Fed delivered another vague statement regarding the timing of any future interest rate hikes. From CNBC:
By Bob Hoye
A Guy to Have a Drink With (pdf)
NAAIM Exposure Index Highest In A Year
April 22, 2016
The rally off of the February 11 low for the SP500 has been called “the most hated rally” by some in the financial media. But it does not appear to be hated according to a lot of the sentiment indicators.
The National Association of Active Investment Managers (NAAIM) publishes its NAAIM Exposure Index weekly, and is a survey of its members concerning their average exposure to US equity markets. In theory, it could range from -200 to +200, if all managers were leveraged short or leveraged long. In practice, however, its lifetime range (since 2006) is 3 to 104.
This week, it jumped up to its highest reading since April 2015, showing that these market-timing managers are now at the most fully invested in a year. The SP500 has equaled the magnitude of its move off of the low following the August 2015 minicrash, but these managers are more bullish on this rebound than they were on the last one.
This matches the rapid swing we have seen in the Investors Intelligence bull-bear spread:
It too has now eclipsed the high it saw in November 2015, although it is a long way from getting back to the high range which persisted from 2013 to early 2015.
When sentiment swings rapidly from one extreme to another, it can leave a bit of a vacuum in its wake, opening up an opportunity for prices to move back against that trend just to run the overly tight trailing stops, and create a bit more fear. That can be a healthy development for the uptrend. Having everyone get too bullish too fast exhausts all of the fuel needed to keep an uptrend going.
Last November I entered the crash-forecasting business. As explained in a blog post at the time, my justification for doing so was the massively asymmetric reward-risk associated with such an endeavour. Whereas failed crash predictions are quickly forgotten, you only have to be right (that is, get lucky) once and you will be set for life. From then on you will be able to promote yourself as the market analyst who predicted the great crash of XXXX (insert year) and you will accumulate a large herd of followers who eagerly buy your advice in anticipation of your next highly-profitable forecast. Furthermore, since a crash will eventually happen, as long as you keep predicting it you will eventually be right.
My inaugural forecast was for the US stock market to crash during September-October of 2016. The forecast was made with tongue firmly planted in cheek, since I have no idea when the stock market will experience its next crash. What I do know is that it will eventually crash. My goal is simply to make sure that when it does, there will be a written record of me having predicted it.
That being said, when I published my crash forecast last November I gave a few reasons why it wasn’t a completely random guess. One was that stock-market crashes have a habit of occurring in September-October. Another was that the two most likely times for the US stock market to crash are during the two months following a bull market peak and roughly a year into a new bear market, with the 1929 and 1987 crashes being examples of the former and the 1974, 2001 and 2008 crashes being examples of the latter. The current situation is that either a bear market began in mid-2015, in which case the next opportunity for a crash will arrive during the second half of this year, or the bull market is intact, in which case a major peak will possibly occur during the second half of this year. A third was that market valuation was high enough to support an unusually-large price decline.
A fourth reason, which I didn’t mention last November, is that if the bull market didn’t end last year then it is now very long-in-the-tooth and probably nearing the end of its life. A fifth reason, which I also didn’t mention last year because it wasn’t apparent at the time, is that the monetary backdrop has become slightly less supportive.
So, I hereby repeat my prediction that the US stock market will crash in September-October of this year, but if not this year then next year or the year after. My prediction will eventually be right, at which point I’ll bathe in the glow of my own prescience and start raking in the cash from book sales.
Eurodollar COT Throws a Curveball
April 08, 2016
This week I revisit one of my favorite indicators. But “favorite” does not mean perfect.
In 2010, I figured out that the net position of commercial traders of eurodollar futures gave a great leading indication for what stock prices would do a year later. Subsequent research showed that this has been going on since around 1997, which is when the eurodollar futures contract really started to come into prominence as a financial product. The only explanation I have for why it “works” is that somehow the big-money commercial traders of these interest rate futures products somehow are detecting and manifesting future liquidity flows that will affect stock prices a year later. Beyond that loose explanation, I cannot decipher the nuts and bolts of why this works.
The media keep giving them the Mic, and they keep gulping it down to the tune of dissonant views that keep market participants suspended in a state of to and fro, on a boat listing from side to side, spinning in a Time Tunnel; pick your metaphor, it’s a lot of noise and confusion.
Of course he does. A couple weeks ago Hawks-in-Drag (HiD) hit the circuit and now out pops a Dove after a downer of a day yesterday in the stock market. Wouldn’t want any sort of consensus for the market to over react to, would we? After all, if we went all Yellen we could be looking at a manic upside extension and the HiD could inspire nasty things like yesterday.
It seems obvious that they think they can massage the market indefinitely with this wax on/off routine. At some point this market, black boxes, machines, quants, casino patrons, substance abusers and all, is going to shake this off and go where it was going anyway, because… REASONS!!
By Doug Short
S&P 500 Snapshot: Erasing Yesterday’s Selloff
Our benchmark S&P 500 erased yesterday’s entire -1.01% slump, the worst selloff in 19 sessions, with today’s 1.05% gain. The index, however, is still down 0.30% for the week at the close of the mid-week session. The S&P 500 rallied at the open, gave back some of the gains with the 2 PM ET release of the FOMC’s March minutes but then recovered and resumed its pre-Fed trend. It closed the day fractionally off its 1.08% intraday high shortly before the final bell. The larger influence on today’s equity action was the surge in oil prices in light of the substantial decline in crude inventories. WTI was up over 5% for May futures.
The yield on the 10-year note closed at 1.76%, up three basis points from the previous close.
Here is a snapshot of past five sessions in the S&P 500.
Here is a daily chart of the index. Despite the drama of the FOMCE minutes and surge in crude futures, volume was light. The market’s lull may soon be broken as we shift to Q1 earnings next week.
Continue reading at TalkMarkets…
By Jesse Felder
Don’t Buy The Greatest Fools’ Theory Of Investment Value
We are now entering earnings season once again. Pre-announcements have been the second-worst seen over the past decade.
— Jesse Felder (@jessefelder) April 1, 2016
This has analysts lowering estimates. In fact, they’ve been lowered so far quarterly earnings now look to fall all the way back to 2009 levels.
— Jesse Felder (@jessefelder) April 2, 2016
For the trailing twelve months earnings are now back to 2011 levels…
Continue reading at TalkMarkets…
Cyclicals Have Lost Their Confident Look
We can learn a lot from the chart below, which shows the performance of economically-sensitive stocks relative to the S&P 500. After the S&P 500 bottomed on February 11, cyclicals (XLY) took the lead off the low as economic confidence started to improve. Notice the steep slope of the ratio off the recent low (see green text). The confident look has morphed into a more concerning look as the S&P 500 has continued to rise over the last month (orange text), which tells us to keep an open mind about a pullback in the stock market.
A similar picture emerges when we examine the high beta stocks (SPHB) to S&P 500 ratio below.