Pink Tickets on QT Days

By Kevin Muir

I know I have told this story before, but it bears repeating. Way back in 2011 I was watching the S&P like a hawk. Trading each squiggle, I tried to understand what was driving the markets at every point. I focused on technical levels, monitored the news and spent way too long staring at the screens.

But on some days, the stock market would get mysteriously strong. It would usually occur mid-morning. Often stocks would sag near the open, look like they wanted to break lower, when all of a sudden – out of the blue – stocks would go bid. I couldn’t understand it. There was no “reason” why they should be rising. Yet they did.

It took me a while, but eventually, I figured it out.

Although it flies directly in the face of Dr. Malkiel’s Random Walk Down Wall Street, the days when the Fed expanded their balance sheet through bond purchases resulted in outsized stock market gains. These bond buys were conducted through Permanent-Open-Market-Operations (POMO) and the great thing about a transparent Federal Reserve is that they listed the schedule in advance, so it was easy to measure the relationship between POMO operations and stock market performance.

Continue reading Pink Tickets on QT Days

Problems Are Emerging

By Heisenberg

Well, first thing’s first.

Donald Trump sent 11 tweets by 3:00 p.m. ET, a truly impressive “covfefe” tally, that included this batshit ramble about Lisa Page and Peter Strzok:

Yes, “what a total mess.” And for Christ sake, will someone please teach him what a proper noun is or, more to the point, what a proper noun isn’t?

But this was the one that mattered:

Continue reading Problems Are Emerging

Old Roach Motel

By Doug Noland

One hundred and six months. The current expansion, having emerged in the aftermath of the collapse of the mortgage finance Bubble, is now the second-longest on record (lagging only the 120-month 1990’s Bubble period). The unemployment rate dropped to 3.9% last month, the lowest level since the 3.8% print in April 2000. Corporate earnings are at unprecedented levels and stock prices only somewhat below records. Home prices in most markets are at all-time highs. U.S. GDP is forecast to expand 2.8% this year, just below 2015’s (2.9%) 12-year high.

We should be leery of prolonged expansions. The longer a boom, the greater the opportunity for deep-rooted structural impairment. Back in 2013, I proposed the concept of “Government Finance Quasi-Capitalism.” This was updating previously updated Hyman Minsky analysis. Minsky’s “Stages of Development of Capitalist Finance” seems especially relevant these days:

Minsky: “In both Keynes and Schumpeter the in-place financial structure is a central determinant of the behaviour of a capitalist economy. But among the players in financial markets are entrepreneurial profit-seekers who innovate. As a result these markets evolve in response to profit opportunities which emerge as the productive apparatus changes. The evolutionary properties of market economies are evident in the changing structure of financial institutions as well as in the productive structure… To understand the short-term dynamics of business cycles and the longer-term evolution of economies it is necessary to understand the financing relations that rule, and how the profit-seeking activities of businessmen, bankers and portfolio managers lead to the evolution of financial structures.”

Continue reading Old Roach Motel

Macro Changes for Gold and Stocks

By NFTRH

Since early 2016 we have been carrying forward a theme illustrating that until the macro trends in place since 2011 change, the situation would be as is, stocks trending up and the precious metals in consolidation/correction. The current trends were kicked off symbolically, and functionally to a degree, by the Fed’s concoction of Operation Twist, a plan with the expressed goal of manipulating the macro (or in the Fed’s word, “sanitizing” inflation signals). Until this year it has been the gift that keeps on giving to unquestioningly bullish stock market participants.

We have also carried a theme forward that in order for a bull view to be widely recognized in gold, a bear view or at least a relative bear view will need to come about on the stock market, whether that means stocks rise nominally or not (ref. 2003-2007 when stocks rose nominally, but declined in terms of gold).

Gold does not move. It does not do much of anything other than mark its holders’ place, while the asset world goes in motion (up and down). Gold is a stable asset and its perceived value will diminish in the eyes of the average market participant during the risk ‘on’ good times, as instigated by the Bernanke and Yellen Fed and its perceived value will increase in line with a shift in other assets from risk ‘on’ to ‘off’.

Most recently we highlighted the following…

Gold and the Stock Market; It’s Not the Best of Both Worlds

In short, the general conditions of our handy Macrocosm graphic need to come into place.

macrocosm, nftrh 363 Continue reading Macro Changes for Gold and Stocks

Investors Becoming More Confident on Risky Assets

By Callum Thomas

The April round of the State Street global investor confidence indexes showed institutional investors appear to be growing more confident on the outlook for risky assets.  The regional indexes showed this uptick in risk appetite has been widespread across the major regions.  It appears as though institutional investors are looking through much of the “noise”, and focusing on the reset in sentiment and valuations against the backdrop of decent earnings and economics.  With this group of investors controlling large sums of money it will be interesting to see if this increased confidence translates into higher stock prices.

The key takeaways from the latest State Street investor confidence index results are:

-Global institutional investors are increasing allocations to risky assets.

-The uptick in investor confidence is widespread across the major regions.

-The investor confidence indexes are quantitative indicators, and take account of actual changes in allocations across State Street’s $30 trillion global custodian business.

-As the Euphoriameter shows, there has been a reset in ‘investor euphoria’ driven by lower valuations, higher volatility, and less bullishness in the surveys.

1. Global Institutional investor Confidence Index:  The April reading of the State Street global investor confidence index showed a further rise, +3pts to 114.5, which is the strongest reading since March 2016 – which coincidentally was just after a substantial stock market correction.  Basically institutional investors are feeling fairly confident on the outlook for risky assets, and appear to be looking through the noise (trade wars, geopolitics, etc) and focusing on the reset in valuations, decent earnings results, and solid global macro pulse.

You Haven’t Missed It

By Michael Ashton

A question I always enjoy hearing in the context of markets is, “Have I missed it?” That simple question betrays everything about the questioner’s assumptions and about the balance of fear and greed. It is a question which, normally, can be answered “no” almost without any thought to the situation, if the questioner is a ‘normal’ investor (that is, not a natural contrarian, of which there are few).

That is because if you are asking the question, it means you are far more concerned with missing the bus than you are concerned about the bus missing you.

It usually means you are chasing returns and are not terribly concerned about the risks; that, in turn – keeping in mind our assumption that you are not naturally contrary to the market’s animal spirits, so we can reasonably aggregate your impulses – means that the market move or correction is probably underappreciated and you are likely to have more “chances” before the greed/fear balance is restored.

Lately I have heard this question arise in two contexts. The first was related to the stock market “correction,” and on at least two separate occasions (you can probably find them on the chart) I have heard folks alarmed that they missed getting in on the correction. It’s possible, but if you’re worried about it…probably not. The volume on the bounces has diminished as the market moves away from the low points, which suggests that people concerned about missing the “bottom” are getting in but rather quickly are assuming they’ve “missed it.” I’d expect to see more volume, and another wave of concern, if stocks exceed the recent consolidation highs; otherwise, I expect we will chop around until earnings season is over and then, without a further bullish catalyst, the market will proceed to give people another opportunity to “buy the dip.”

Continue reading You Haven’t Missed It

Asset Allocation Trends

By Callum Thomas

This article looks at a couple of key trends in asset allocation.  We look at the evolution of investor portfolio allocations to stocks, bonds, and cash both across time, and more recently.  Importantly, we look at how it ties into the valuation picture against the backdrop of a coming full circle in the global monetary policy experiment.  It seems for investors a brave new world is upon us as we move into a more challenging phase of the cycle.

The key takeaways on the trends (and challenges) in asset allocation are:

-Cash allocations are at almost 20-year lows, which is typically something you see later in the cycle.

-Equity allocations have drifted up at the expensive of cash and bond allocations.

-From the 80’s to the 90’s we saw what looks like a structural shift in portfolio allocations.

-With the major asset classes all looking expensive, and central banks moving into quantitative tightening, it’s a brave new world for asset allocators.

1. Cash Allocations: As regular readers will know, I’ve talked about this chart a lot and I think it does capture a few key issues. It also serves to highlight or contrast with the rest of the charts in this article, particularly the one on valuations at the end.  Firstly, for clarity the chart shows surveyed cash allocations across individualinvestors in America (the AAII survey), and implied allocations (derived from ICI mutual fund statistics).  They both say basically the same thing – that cash allocations are near record lows, certainly at a cycle low.  Investors have been both drifted out of cash (drift = changes in asset allocation driven by market movement), and basically bullied out of cash by central banks.  And as I implied, there is a cyclical element to it – this is usually the type of condition you’d see toward the later stages of the market cycle.

Continue reading Asset Allocation Trends

Sentiment Snapshot: Bonds, Stocks and Macro

By Callum Thomas

The latest results from the weekly surveys on Twitter showed a slight rebound in technicals sentiment, with the all important fundamentals sentiment still holding up well – at least for equities.  This lines up with our optimistic view on the fundamentals and the data pulse which for now is still holding up well.  In contrast to equities, bond market sentiment has seen a notable pullback from extreme bearishness, and ironically this could be just the thing that is required to set up the market for another push higher in bond yields.  With markets in flux, it pays to stay on top of investor sentiment, so check out the charts below and follow us for updates.

The key conclusions on equity and bond market sentiment are:

-Equity “fundamentals” sentiment is still holding up, and now “technicals” sentiment is starting to rebound from deep pessimism.

-Bond market sentiment has seen at least a partial reset both on surveyed sentiment and broader market sentiment.

-The solid readings in the ‘nominal surprise index’ and earnings revisions momentum line up with the optimistic view on the fundamentals outlook, and remains a key swing factor on the overall risk outlook.

1. Equity Fundamentals vs Technicals: The latest weekly survey on Twitter showed a solid rebound in “technicals” sentiment, as investors apparently reassess the risks of a bear market.  Meanwhile fundamentals sentiment has held up fairly steady; not undergoing the same swings as we’ve seen in technicals sentiment.  It speaks to the thesis that this is largely a technical/sentiment driven correction with fundamentals little changed.

Continue reading Sentiment Snapshot: Bonds, Stocks and Macro

One Day to the Next

By Notes From the Rabbit Hole

So yesterday market participants were instigated by the media to get hysterical about interest rates. I saw a prominent headline talking about how a market expert (whose name escapes me) forecast that when 10yr yields go through 3% stocks are going to go down big.

Then today, as risk flies ‘off’ ostensibly due to the Trump/China tariff war, yields tank, Treasury bonds rise and stocks go down anyway. Ha ha ha…

If you click the headline they will tell you all you need to know, and way more than you need to know as a rational and calm market participant.

Meanwhile, the Continuum had indicated that a caution point was at hand long ago.

tyx Continue reading One Day to the Next

Global Equity Winners and Losers

By Callum Thomas

For anyone who has been looking at the detail across sectors, factors, and styles in global equities, there have been a couple of peculiar and extreme standouts.  Relative performance across a select few factors and styles seem to have accounted for much of the new bull market in global equities, and what’s interesting is, the February correction did little-to-nothing to change this stark trend.

The chart comes from a recent edition of the Weekly Macro Themes report, which looked in detail at relativities in global equities, and how the extremes may resolve.

The chart in question shows the average relative performance across momentum, low dividend yield, growth vs value, and cyclicals vs defensives.

 

 The line in the chart is a simple average of the aforementioned styles and sectors.  So basically, it’s high growth, high momentum, low dividend yielding, cyclical stocks that have performed the best, and been the major drivers of the global equity bull market.

The growth/cyclicals aspect probably makes a degree of sense, given how widespread and substantial the acceleration in global growth has been.  But even so, the performance since early 2017 has been simply extreme.

When you see extremes in markets you ought to pay attention. If there’s a rule of thumb that stands the test of time in markets, it’s that extremes don’t last.  Indeed, often times extremes can unwind faster and further than you expect.  I would say there has probably been substantial flows chasing these styles and sectors too and that his remains a key vulnerability for stocks, and a potential nasty surprise for those who jumped on the bandwagon.

This article originally appeared as a submission at See It Market. Follow us on:

LinkedIn https://www.linkedin.com/company/topdown-charts

Twitter http://www.twitter.com/topdowncharts