At the end of April, for supporters of “following the trend” in terms of long-term tactical asset allocation, no changes have occurred. The graph above shows the relative dynamics of different asset classes versus the S & P-500. Schedule for 20 years, monthly. Despite the fact that individual asset classes can grow in absolute terms (such as Europe in April), compared to the US stock market, they consistently remain in downtrends and under 4-year (48-month) averages. This, of course, does not mean that these assets cannot be speculatively attractive in the short term. But this is a topic for other posts. And here we clearly see that so far no «competitor» is becoming more attractive than US stocks. For this I would like to see how the ratio «Active / S & P-500» goes above the 4-year average. This would change the direction of the “big flow” for an asset. So far, Gold and Emerging Markets look the closest to the implementation of this task, but even they may need a few more months to confirm the reversal.
Before the long weekend is not a very complicated schedule from the intermarket analysis. It is no secret that one of the main beneficiaries of a strong and steadily growing market are the companies that serve it, that is, the “broker-dealer group”. They, due to a number of reasons, begin to grow and fall earlier than the wide market, and the ratio XBD / SPX steadily grows during periods of a “healthy market”. It is interesting to look at the current situation in this context. We see that the Brokers / Market ratio (above), despite the historical highs on the S & P-500, has been trading in a downtrend for a year and is still below the 200-day moving average. For some reason, this «insider sector» is in no hurry to rejoice with the broad indexes. We would keep this in mind in the place of the bulls, but without panic. For some reason, because the XBD index in the absolute (below) was able to go above 200 days and is now testing resistance at 274. Its breakdown (if confirmed) will probably pull the relative dynamics of XBD / SPX along with it, which will eventually turn down the trend. growth of the rest of the market.
Investors in bonds, focusing not on credit quality, but on duration, may be useful this schedule. It shows how the absolute dynamics of the US dollar index against the basket of world currencies (above) and the relative dynamics of long US government bonds and the rest of the world (in the middle) interact. It can be seen with the naked eye that in the long-term period (and this is the weekly schedule for 10 years), the directions of these series coincide. The 13-week (this is 1 quarter) correlation between them is shown below. Despite the infrequent short-term periods of divergence, most of the time the correlation is in the range of 0.25 to 1, confirming a high level of interconnection. This means that while the dollar is growing, it is better to keep the risk of duration through long US Treasuries (for example, TLT). Given that the dollar index now draws a breakdown of consolidation at 97.5, there is reason to assume that the TLT tactically returns attractiveness.
As expected, the leadership of the semiconductor sector has become a precursor to new local maxima in the broad market. Since our first mention of the sector ETF (SOXX), it has risen in price already by 15% (S & P-500 for the same period, less than 4%). Is it possible to pause after such growth? Of course, and even likely. But the fact that the recent local maxima in the wide market are confirmed by similar maxima in terms of the SOXX / SPY ratio, increases the likelihood that the market remains in the «risk on» mode. In practice, this means that, despite possible setbacks and corrections, they are likely to buy back and bring the indices to new historical highs (the SOXX / SPY ratio is already there and with a large margin). And you can seriously start worrying about the “bearish” phase when a negative divergence forms between the absolute and relative dynamics of the semiconductors (the same as the one marked by green arrows at the end of December, but in the opposite direction).
Continuing the topic of market statistics, we want to share a chart from Pension Partners. It shows the history of the S & P-500 index from 1942. Gray marked «bull» markets, and pink — «bear». What is there to pay attention to? Firstly, the average result of the bull market (+ 172%) in amplitude is 5 times more than the average result of the bear market (-33%). Secondly, the «bullish» markets are much longer in time, and the current one, in general, is a record holder. Thirdly, the current “bullish” market still gives + 300% on the S & P-500 index and, as we see, the record of the 1990s (+ 400%) is still far away. Therefore, the argument about the exceptional overheating of the market does not make sense.
IMPORTANT: this information is very useful, but only for long-term investors. Speculators can ruin any of these red squiggles, because, in fact, a decrease from -30% to -50% on the index for 1-2 years. In general, this is another argument in favor of the claim that investment is a marathon, not a sprint. And how to use this knowledge, everyone decides for himself.
The dynamics of the US stock market sectors is still fully consistent with the characteristics of the «healthy» market. The RRG (Relative Rotation Graph) diagram clearly shows that with respect to the S & P-500 index, there are just three sectors in the leading right upper quarter that are the beneficiaries of the growing cycle phase: XLY (Consumer Discretionary), XLI (Industrials) and, of course , XLK (Technology). And inside XLK (here it is not shown) the most powerful papers are representatives of the Semiconductors group, whose leadership role we have already written. On the other hand, in the left lower quarter, that is, the weakest, are the «protective» sectors: XLP (Consumer Staples) and XLV (Healthcare). In my opinion, such an alignment of forces indicates that momentum is still on the market, and it is still premature to talk about some kind of serious medium-term top. Probably, in April there is a chance to see the new historical high on the S & P-500.
An interesting fact that demonstrates one of the advantages of ETF to mutual funds for an investor operating in the US market. Tax implications (peeped by Meb Faber).
If one investor decides to sell, for example, an ETF on the S&P-500 index, he passes through a broker to the secondary market and sells it to the buyer. Accordingly, the tax consequences arise directly from the investor-seller (if there is profit). Thousands of other owners of the same ETF are not affected.
If the investor decides to return his stake in the mutual fund, the fund manager will have to sell part of the fund’s shares in order to free up cash to pay the investor. In this case, in the case of profit, the tax will apply to the entire fund. Accordingly, each shareholder of the fund will feel a negative impact on the profitability of even a long-term “buy and hold” investor, who did not even think of selling anything. This effect will not be very noticeable, since the share of an individual investor in a large fund is microscopic. But, first, why pay extra, even if it is a penny, and secondly, on long horizons «pennies» can turn into a noticeable amount.
This does not mean that mutual funds should not be considered as a tool at all. Simply put, their choice should be approached more responsibly and understand that the alpha of active controls must be high enough to cover the possible negative infrastructure. If there is no such understanding, then working with ETFs can be beneficial to most ordinary investors.
The “wave” continues on the S&P-500 index, which we talked about recently.
This wave of growth has already led the index close to the level of 2600, around which we expect the formation of resistance. It’s too premature to talk about the change of «current». But this does not mean that it will not change later, after another attempt to reduce.
In favor of the fact that the year, in general, will be positive, says the historical pattern. After World War II, there were only two periods when the S&P-500 index closed at minus more than 1 year in a row. Both times it happened during a recession: 1973/74 and 2000/02.
If we consider that the probability of a recession in 2019 still looks very low, the statistics speak in favor of a positive year for the US stock market. Unfortunately, this does not mean «smooth.»
The dynamics of the S&P-500 index on the first trading day of the year is very indicative in the sense that it reflects what is happening in the heads of market participants. In the morning, there is extreme pessimism (“everything is gone”, -1.5% on futures), which is replaced by optimism in the middle of the day (“not so bad”, + 2% from daytime lows), and indecisive closing (“tomorrow is a new day», + 0.1% at the end of the day).
It does not matter at all what kind of news flow caused such a dynamic. Now it is impossible to follow the news in an attempt to find a hint to our actions on the market — the headlines change every hour, swinging the «pendulum of emotions» of players with large amplitudes. And it will probably continue this way all year or at least the first half of the year. That is, you need to get used to living in conditions of high short-term volatility.
The most correct decision for the majority of non-professional investors is to determine their strategic portfolio and look there no more than once a week or a month. It’s not for nothing that they say that the most reliable way to reduce the volatility of your portfolio is to look into it less often. Save your nerves and money.
Traders and speculators, of course, more difficult. This approach does not work with them, they are trying to ride even short-term trends. But we must not forget that, in the marine terms, there is “flow”, but there are “ebbs / flows” and “waves”. So, even if we assume that the economy is still in the growth phase, that is, the “current” is directed in the right direction, then after all the major indices closed confidently below their long-term averages (200-day, 12-month) , came the «ebb». And it’s far from a fact that it has already ended. If you remember, at the end of December there was a series of posts about some extremely oversold indicators: the share of stocks in the index is above 50-day averages, a change in the index over 13 weeks, the sentiment of individual investors. All this is true, and it is precisely because of this set that the “wave” probably arose — the index has fallen down by -20%, and there has been an increase in the last few sessions. But you can not lose vigilance. Looking at the S & P-500 index, our subjective opinion is that while for him serious resistance lies in the zone of 2600-2650. The wave, which appeared after the sale, may well bring the index there, but then it may run out and the initiative will again turn to «ebb.»
Do not forget that no matter how attractive this or that action looked, its dynamics by 2/3 is determined by the dynamics of the whole market. And even if now something looks quite cheap, in the case of a «low tide» in 2-3 months it may become even cheaper (the company itself will not get worse). Therefore, it may be useful for speculators to leave a portion of the «powder» just dry for such a development.
The degree of oversold US stock market increases. The share of stocks in the S&P-500 index, trading above the 50-day average, is one of the lowest in all time.
Now about the technical argument that increases the likelihood of a quick reversal (final or corrective — no one will say that in advance). The graph above shows the weekly chart of the S & P-500 index from 1999 versus the share of index papers that are trading above their 50-day averages.
At the close of the week on Friday, the value of this indicator was 6.2% (that is, 31 out of 500 stocks in the index are trading above the 50-day average). As you can see, over the past 20 years, this is the 4th value from below. The share was lower in 2002, 2008 and 2011. Moreover, it was only in 2008 that the fall in the market did not stop at this, and finally at least the index happened only after 5 months (the index fell by another 20% during this time).
Of course, on the basis of such a small sample it is impossible to draw valid conclusions and build a strategy. By itself, the low value of the indicator can not be a signal for immediate purchase. It’s not about that. But the fact is that such a situation can still help in making a decision. How?
For speculators who are trying to engage in timing, you need to ensure that after such an extremely low value the indicator can quickly show a return to values above 70-80%. This would be a reflection of the fact that at first the index papers tried to go below the 50-day averages (thus, unfolding their medium-term trends), but then suddenly came back abruptly and again above the average. If we see such a drastic change in the “regime” (a quick return from extreme oversold to overbought), this could be the beginning of a new medium-term growth cycle.
For investors, the interpretation is somewhat different. Investors who are trying to make the right balanced portfolios are often concerned about when to start building a portfolio. That is, even realizing that on the long-term horizons, not timing is important, but the composition of the portfolio and its rebalancing, such investors, all the same, try to guess the best moment (that is, in fact, do the same timing). They can be pleased by the fact that extremely low indicator values occur close to pivot points in terms of time. I repeat: time, but not the price level, which in the end may be much lower.
In general, as an observation (not a recommendation!), We can say that while the index is in the long-term uptrend since 2009 (red line), any extreme oversold has more chances to be realized. But how to use it is a matter of subjective preferences and risk appetite. You can act on the principle of «buy and pray,» hoping to successfully catch the falling knife. And you can safely observe some time aside and begin to act only when long-term oversold will be supported by short-term confirmation of a reversal. There will be signs of confirmation of a reversal, we will definitely consider them here.