With the rather volatile action in global equities over the past few weeks, it’s worth checking in on where market breadth is tracking. We take a unique approach in breadth analysis for global equities in that we look across a country-level rather than individual stock level. The benefit of this is that you can pickup early warning signs e.g. as certain groups of countries start to come under pressure e.g. as a result of some underlying macro issues. Aside from warning signs and risk management, it can also be useful in identifying opportunities, and this is well highlighted in today’s blog.
The key conclusions and observations are:
-50DMA country breadth looks to be giving an oversold signal.
-On the “Death Watch” the proportion of countries with ‘death cross’ has tapered off after a previous steady increase.
-On the bear market monitor, of the 70 countries we track, none have entered into a bear market’.
1. 50-day Moving Average Breadth: 50DMA breadth for global equities (across 70 countries) collapsed to oversold levels in the wake of the stockmarket correction (which sent the MSCI All Countries World Index in local currency terms down just over -8% top to bottom), and has since rebounded – usually a bullish signal. Interestingly this comes off the back of a classic bearish divergence which was initially resolved through a blow-off top.
A July 2013 See-It-Market post outlined the three steps required for a trend change. The S&P 500 recently broke the downward-sloping trendline below (step 1), made a higher low relative to the previous low (step 2), and went on to print a higher high (step 3). The completion of these three steps tells us the odds of the correction low being in place have improved.
Here’s why our mountainous $67 trillionof public and private debt matters. To wit, it has caused the historic relationship between trends on main street and Wall Street to go absolutely haywire.
A week or so back, they reported January industrial production at 107.24, which was only a tad higher than it had been three years earlier in November 2014 (106.61), and just 1.8% above where it had been at the pre-crisis peak way back in November 2007 (105.33). If you cotton to CAGRs, that’s a microscopic 0.18% per annum growth rate over the course of a full decade, and during the third longest business cycle expansion in history, to boot.
By contrast, the S&P 500 at the January 26th peak (2873) was up by 84% from its November 2007 level (1560). And let us make haste to squeeze out the inflation component so as to conform on an apples-to-apples basis that sizzling gain with the volume-driven industrial production index. As it happened, the GDP deflator rose by 17% over the same period, so in real terms the S&P 500 is up by 58%.
And that’s not from the horrid March 2009 bottom, but from the tippy-top of the “goldilocks” stock market fantasy a year before the roof fell in. Accordingly, the question at hand already has the benefit of the doubt factored in: Namely, how can the stock market rise by 58% from the dubious pre-crisis high, while the industrial economy has only expanded by 1.8%?
Yes indeed ladies and gentlemen, it’s that wonderful time of the year again and in time-honoured style IKN offers up its traditional turkey and stuffing PDAC Bingo Card for your edification and enjoyment at the big Toronto bash next week. As always, instructions are simplicity incarnate:
1) Print off your copy
2) Walk around PDAC next week and when you overhear one of the phrases, cross it off.
3) As soon as you fill your card, send it in to IKN Nerve Centre for your fabulous prize*.
So without further ado, here’s the 2018 edition of PDAC Bingo:
Vote early and often!
Morgan Stanley Goes Rogue, Is Bullish On Bonds Because Frankly, Consensus Is ‘Usually Wrong’
As you know, the ongoing debate about where 10Y yields are heading and about what the bond selloff presages for equities is, well, it’s ongoing.
And when I say “ongoing” I mean it’s devolved into a veritable obsession. Over the weekend, Goldman “stress tested” the economy for the impact of a rate shock that would theoretically drive 10Y yields to 4.5% by the end of the year. That note came a week (give or take) after they upped their year-end forecast for 10Y yields to 3.25%. Other banks have followed suit.
Part of Goldman’s stress test involved projecting a 20-25% decline in U.S. equities, a precipitous dive that would feed through to the real economy by way of tighter financial conditions.
One thing to note about this whole debate is that last year, consensus was also overwhelmingly bearish USTs and we all know how that turned out. So it’s at least worth considering whether everyone might be wrong.
“Pershing Gold Begins Preliminary Construction Activities at Relief Canyon”
…to start the guffaws and yoks. Seriously folks, what the blinking flip is a “preliminary construction activity”? Carrying some sacks of concrete over to a site? Putting the kettle on to make some tea before getting down to business? Putting on overalls? Ah wait, it’s this:
“On February 13, 2018, Ames Construction began initial land clearing in preparation for potential construction at Relief Canyon, including future heap leach pads, haul roads and waste rock storage facilities.”
We then get a photo of this preliminary construction activity and it turns out to be…
Divergent: It’s Dalio (And Asness) Versus Everyone Else as Money Flows to Europe Stocks (Fed Tightening As ECB Maintains Accommodating?)
Money is following to European stocks as jitters struck the US stock markets and The Federal Reserve continues to slowly normalize its monetary policy.
(Bloomberg) — Billionaire Ray Dalio has $18.45 billion in bets against Europe’s biggest stocks. Most of the rest of the investing world is headed in the other direction.
U.S. stocks lost $9.7 billion in investment so far this month while Eurozone shares have gained $3.2 billion, according to data compiled by Bloomberg. Peers of Dalio’s firm, Bridgewater Associates, are mostly wagering that Eurozone equities will rise.
“I’m surprised. That’s a big bet. Dalio and his team are very confident,” said Rick Herman, managing director of asset allocation who helps oversee about $30 billion at BB&T Institutional Investment Advisors Inc. “That’s definitely out of consensus. European stocks are cheaper, and they also have stronger earnings growth.”
Dalio has always marched to the beat of his own drummer, so his big short position, especially when other hedge funds are betting in the opposite direction, could be seen in that context.
For a market analyst there is an irresistible temptation to seek out one or more historical parallels to the current situation. The idea is that clues about what’s going to happen in the future can be found by looking at what happened following similar price action in the past. Sometimes this method works, sometimes it doesn’t.
Assuming that the decline from the January-2018 peak is a short-term correction that will run its course before the end March (my assumption since the correction’s beginning in late-January), the recent price action probably is akin to what happened in February-March of 2007. In late-February of 2007 the SPX had been grinding its way upward in relentless fashion for many months. The VIX was near an all-time low and there was no sign in the price action that anything untoward was about to happen, even though some cracks had begun to appear in the mortgage-financing and real-estate bubbles. Then, out of the blue, there was a 5% plunge in the SPX. On the following daily chart this plunge is labeled “Warning shot 1″.
This week the “Chart of the Week” is a rather peculiar indicator on inflation. The global inflation outlook has been gaining considerable interest as the global synchronized economic upturn gathers pace and central banks start to think about normalizing policy. Clearly some (e.g. the Fed) are more advanced on this than others (e.g. the BOJ and ECB). Inflation has become the baby elephant in the room while the big elephant in the room is still the global turning of the tides in monetary policy.
Anyway, on to the chart (which featured in a discussion on the outlook for the US Dollar Index). The dark blue line is a composite of terms from Google Search Trends designed to capture search interest in inflation (e.g. terms such as “higher inflation”, “why are prices so high”, “prices going up”, “inflation protected”, etc). The main point is that there seems to be a surge in interest in inflation, and that could be an harbinger of things to come.
If you had asked me a week ago what I thought the probability was that we’d resume the downtrend and take out the lows of early February, I would have probably said 80%. Last week’s action (augmented by this morning’s) takes that down to more like 20%. It seems that, once again, the BTFD crowd was right. It sucks.
Oddly, the big tumble early in this month took place on pretty much no distinguishable news, and the same can be said for the recent lift. Let’s face it, the Dow has gone up thousands of points in just a couple of weeks, and no one can point to any real reason why. It’s pretty much like the “V-dip” didn’t need to take place at all (except to wipe out the unfortunates who owned XIV).
Anyway, we seem to be back in the godawful up-half-a-percent-every-single-day mode that we had been in before all the excitement began, and if we cross above the blue horizontal below, then we’ll just grind out way into the “DMZ” (tinted green) leading up to all the overhead supply. Simply stated, for me, the market has become boring and nauseating once again.