Wednesday, February 21, 2018

How We Work. And A Thank You To Everyone Who Contributes

Our mantra has always been to 'read widely but form your own opinion.' Your investment decisions reflect your risk tolerance, your demographic and financial profile and your personality. Be well informed and take responsibility for the decisions you make.

This blog borrows heavily from those whose research we value. 30 years ago, analysts worked primarily in silos. The information technology age revolutionized the collection and dissemination of data. Work that took weeks can now be done in hours. Original research is quickly amplified, modified and personalized. The Fat Pitch would not exist if it were not for the generosity and intelligence of those around us, to all of which we owe enduring thanks.

We attribute every source. If they are mentioned in these pages, it is because we read their work every week and value their insights. Readers are recommended to go to these sources directly. We can only scratch the surface of their excellent analyses.

Data is no longer very unique. Almost any chart or table we have shown here can easily be found on-line from multiple sources. Original analyses certainly exist, but are rare; in almost every case, the author learned from others generous to share their work. This is exactly how the level of discourse becomes elevated over time.

30 years ago, data alone was an edge, but not any longer. We believe (and hope) that interpretation of the data provides differentiation. We often reach a different conclusion than other analysts looking at the exact same data. How you collect, frame and interpret a pool of analyses is the difference between data and information.

Readers are welcome to copy, modify and personalize any data on this blog. Please retain the attribution to the original source, as we have done. This is a courtesy, not a legal requirement, as the analysis and representation (in a chart, table or graph) of data and facts is not subject to copyright laws, regardless of the effort required to present them (explained here). "Fair use" laws also allow for the reproduction of copyrighted material without the permission of the author for the purposes of commentary, criticism, scholarship, research or news reporting (explained here).

Charts and tables are building blocks. Make what you do with them value added. That makes all of us smarter (below from Ben Carlson).



A partial list of market-related websites we value can be found here.

Not everyone maintains a website, so two recommended Twitter Finance lists are here and here.


If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.

Monday, February 19, 2018

Weekly Market Summary

Summary:  After falling into their first correction in two years, US equities regained half of their loses in just 6 days. The rebound has been strong enough and persistent enough to suggest that it has further to run. Sentiment and volatility backwardation support that view. However, a low retest over the coming weeks is still a viable risk.

* * *

In just one week, US indices regained about half of their losses during the prior two weeks. SPX gained more than 4% and NDX more than 5% (from Alphatrends). Enlarge any chart by clicking on it.


Monday, February 12, 2018

After a 10% Drop, Will Equities "V Bounce" or Double Bottom?

Summary:  Corrections during bull markets have had a strong propensity to form a double bottom. Since 1980, only 16% of corrections have had a "V bounce" where the low was never revisited.

The current bull market has been different. Since 2009, about half of the corrections have had a "V bounce." So what happens this time?

Sentiment can be reset through both time and price. It's a good guess that if price recovers quickly, sentiment will again become very bullish, making a retest of the recent low probable. A slower, choppier recovery will keep investors skeptical, increasing the odds that the index continues higher.

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Our weekend article summarized the outlook for US equities following the first 10% correction since early 2016 (read it here).  Prior swift falls of this magnitude have led to quick recoveries that eventually retested prior highs. That view is further supported by the washout in breadth, volatility and several measures of sentiment. Overall, risk/reward appears heavily biased towards upside in the near term. The strong rally today seems to support that view.

But our article also showed that while equities sometimes "V bounce", they more often form a double bottom as the strong down momentum is worked off over time.

This article provides 25 examples of roughly 10% falls in SPX over the past 38 years to demonstrate the strong propensity of the index to form a double bottom. We have not been a slave to the fall being at least 10% and we have deliberately excluded examples from the four bear markets where equities were clearly trending downward.

In the charts below, a red arrow is the initial 10% fall and the green highlight is the retest of the low in following weeks. 84% of the corrections have had a low retest (or a lower low).

There are 4 cases (16%) marked with a green arrow showing the initial 10% fall to also essentially be the low (a "V bounce").

While the "V bounce" has been rare, it's notable that 3 of the 4 cases since 1980 have taken place during the current bull market. If you just consider the past 9 years, the odds of a "V bounce" are a coin toss.

So which happens this time?

Sentiment turned very bearish during the past two weeks. It's a good guess that if equities now quickly recover, and if sentiment also quickly becomes very bullish, then a retest of the recent low is probably ahead. A slower, choppier recovery will keep investors skeptical, increasing the odds that the index continues higher. Enlarge any chart below by clicking on it.

1980-84.


Saturday, February 10, 2018

Weekly Market Summary

Summary:  After gaining more than 7% by late January, US stocks have fallen into a 10% correction. It's the quickest decline of that magnitude from an all-time high in 90 years. While a fall in stocks was not a surprise, the speed and severity certainly were.

So what happens next? Prior falls like this have led to quick recoveries. That likelihood is further supported by a washout in breadth, volatility and several measures of sentiment. Moreover, the fundamental backdrop remains excellent. Risk/reward is heavily biased towards upside in the near term.

That said, strong down momentum normally reverberates into the weeks ahead. Equities sometimes "V bounce" but more often form a double bottom. A low retest in the not too distant future remains a greater than 50% probability. The longer term outlook for US equities is unchanged and favorable.

* * *

Two weeks ago, all of the US indices made new all time highs (ATHs). SPX and DJIA were up 7% and NDX was up 10% YTD. VXX, the ETF based on the VIX, was down for the year (the next two charts from Alphatrends). Enlarge any chart by clicking on it.

Friday, February 2, 2018

February Macro Update: Employee Compensation Rises To A 9 Year High

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 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 a year 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.


Saturday, January 27, 2018

Weekly Market Summary

Summary:  US equities have already gained more in the first few weeks of January than they do in many full years. The recent trend is being termed unprecedented, but these types of gains have happened before. The current trend is also being called unsustainable, but in most prior cases, equities have continued higher. The equity market is undeniably hot, and that can often lead to a period of retracement and decline, but trends weaken before they reverse, and this one has not shown any sign of weakness. The longer term outlook remains favorable.

* * *

All of the US indices made new all time highs (ATHs) again this week.  This includes the very broad NYSE (composed of 2800 stocks) as well as the small cap index, RUT. The dominant trend remains higher.

US markets have started the year like a rocket. SPX and DJIA are up 7.5% and NDX is up 9.7% YTD (from Alphatrends). Enlarge any chart by clicking on it.


Thursday, January 18, 2018

Fund Managers' Current Asset Allocation - January

Summary: Global equities rose 22% in 2017. Throughout almost that entire period, fund managers held significant amounts of cash and were, at best, only modestly bullish on equities. All of this suggested lingering risk aversion following a recession scare in 2016.

As 2018 begins, cash levels have fallen to the lowest level in 4 years. Allocations to global equities have risen to the highest level in nearly 3 years. In most respects, investors are now bullish.

In the past 6 months, US equities have outperformed Europe by 12% and the rest the world by 2%. Despite this, fund managers remain underweight the US. US equities should outperform their global peers.

Fund managers are underweight global bonds by the greatest extent in 4 years. Only 4% of fund managers believe global rates will be lower next year, a level at which yields have often fallen, at least temporarily.

* * *

Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.

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 equities and underweight bonds. Cash is neutral. Enlarge any image by clicking on it.
Within equities, the US is significantly underweight while Europe, Japan and emerging markets are all significantly overweight. 
A pure contrarian would overweight US equities relative to Europe, Japan and emerging markets, and overweight global bonds relative to a 60-30-10 basket. 


Saturday, January 13, 2018

Weekly Market Summary

Summary:  All of the US indices made new all-time highs this week. Equities outside the US are performing even better. The dominant trend remains higher, underpinned by strong economic data, earnings that are being revised higher and equity breadth that is expanding.

After just two weeks, the SPX is already within 2% of Wall Street's year-end target. By at least one measure, momentum is at a more than 20 year high: in prior instances, short-term risk/reward has been poor but longer term returns positive. Sentiment, which is exceedingly bullish, has also most often led to positive returns 3-6 months later. Net, the longer-term outlook for equities remains favorable.

* * *

All of the US indices made new all time highs (ATHs) this week.  This includes the very broad NYSE as well as the small cap index, RUT. For Dow Theorists, both the industrial sector and the transport sector made new ATHs this week. The dominant trend remains higher.

US markets are off to a fast start in 2018. SPX and DJIA are up 4% and NDX is up 5.5% (from Alphatrends). Enlarge any chart by clicking on it.




Friday, January 5, 2018

January Macro Update: Home Sales, Retail Sales and Manufacturing Surge Higher

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 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 a year and in several instances as long as 2-3 years. On this basis, the current expansion will last into late 2018 at a minimum. Enlarge any image by clicking on it.