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Summary Comments S C t
Below we examine current market conditions. Majority opinion is calling for a correction or using the industry’s most over used term, “overbought.” The current street banter seems to center on the theme equities are overbought, overbought speculation is rampant and it’s a stock love fest However our experience is that we have never seen a it s fest. However, significant correction when everyone is talking about how “overbought” the market is or how stocks are way “too extended.” We find it hard to believe that after hiding under a rock for nearly five years, that a few months of equity inflows means investors have gone from petrified to exuberant. That process in our opinion is a longer arc, not a singular event. While clearly markets can and will have pullbacks. We think the overbought chatter comes from many investors rationalizing aloud why they are under invested under‐invested. As evidence to refute these claims of speculation, we look at historical mean allocations to equities. Currently equity allocations, are still below their 26 year mean of 60 %. If investors are giddy, and speculation is rampant we wonder, how can allocations to equities be below their mean ? A corrective wave will come at some point, maybe brought on by profit taking ahead U S deficit reductions battles or a flair up in Europe however when everyone is looking for it U.S. Europe, it, as is presently the case, it typically doesn’t come. Hence the phrase the market rewards the minority and confounds the majority. Market internals remains strong, and robust fund flows into equities suggest the liquidity back drop will remain supportive to equities Additionally we expect the rotation away from fixed income into equities will keep a bid equities. equities, under the market for stocks, thus we remain constructive on the markets at present – even if we are overbought !!
Quote of the Day … The way we look at it if you are constantly prepared and reviewing your
risk management plan on a regular basis then obsessing about market direction should be less of a concern. Returns following seasonal pattern. The Month of May continues to be sticky. b i k
“By failing to prepare, you are preparing to fail preparing to fail”
Ben Franklin kl
The Majority Crowd Opinion
– The consensus is we are overbought and that everyone is overly bullish. Yet anecdotally I hear more comments like the ones below. This leads me to believe many are under‐invested, talking their positioning, and attempting to rationalize their low equity commitment levels.
“Stocks Are Extended”
“A pullback would be “A pullback would be healthy” “The VIX is too low” “Th VIX i t l ”
% Positive Returns Dow Jones by Month ‐ (1900 to Present) y ( )
A minor corrective wave could come 71% this month as Returns following seasonal pattern. The Month of May continues 65% February is hit or 62% 62% 62% 61% to be sticky. b i k miss historically 56% 56% 52% with only 50 % of 50% 49% February’s being 42% positive. However as the saying goes, so goes January so goes the year. Thus, while corrective waves may occur, January typically sets the tone for positive 12 month returns. Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Source: Bloomberg/Ned Davis/FusionIQ
So goes January so goes the year … (1950 – Present)
They reason they say so goes January so goes the year is because there is a high correlation between January being positive and the full year return being positive and vice versa. There have only been a handful of occasions when January was positive and the full year wasn’t.
Source: Dorsey Wright
Full Year Performance
AAII Asset Allocation Stocks vs. 26 Year mean (Monthly Chart)
5.00% 0.00% ‐5.00%
If the consensus opinion currently is excessive bullishness towards equities, d then why are today’s equity allocations a few % points below p their 26 year mean of 60 % ?
Nov 1987 7 Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov Ju ul Mar v Nov July y
CBOE Volatility Index (VIX) Daily Chart CBOE V l tilit I d (VIX) ‐ D il Ch t
Volatility for equities can stay low for a while and not be a problem, as evidenced by 2003 to 2007 period. Thus the cries that the VIX is too low in our opinion is just lazy analysis and something to say for the sake of saying something.
NYSE Stocks Only Cumulative Advance‐Decline Line ‐ Daily Chart y y
NYSE Stocks only A/D line @ new highs is a good thing
Bloomberg European Financial Conditions Index (BFCIEU) Daily Chart Bloomberg European Financial Conditions Index (BFCIEU) ‐ Daily Chart
For all the gloom and doom about Europe th Bl E the Bloomberg Fi b Financial i l Conditions Index recently hits is best levels since 2007 and move back above the zero line.
Dow Jones Transportation Index (TRAN) ‐ D il Ch t D J T t ti I d (TRAN) Daily Chart
The transports have broken out to news high from a long base and of course people are squawking they are too extended ? However as the slide on the next page suggests it’s all a matter of perspective.
Dow Jones Transportation Index (TRAN) ‐ M thl Ch t D J T t ti I d (TRAN) Monthly Chart
On the monthly chart, the Transport breakout looks like it is just getting started ….
S&P 500 Index (SPX) Daily Chart S&P 500 I d (SPX) ‐ D il Ch t
10 Year Yields have to get over 4 % to change the secular trend
S&P 500 trend is up, minor support @ 1,495 – big support 1 475 – 1 465 area 1,475 1,465
10 Year Treasury Yields ‐ D il Ch t (2007 t 10 Y T Yi ld Daily Chart (2007 to present) t)
10 Year Yields testing 2 % ‐ a breakout above this level may get people talking and could cause a minor corrective wave to equities, however as the longer term chart below shows – we are a long way away from a secular change in rates.
10 Year Treasury Yields ‐ M thl Ch t (1962 t 10 Y T Yi ld Monthly Chart (1962 to present) t)
10 Y Year Yi ld are still i a multi‐decade d Yields till in lti d d down trend. We think worrying about a significant rise in rates is a way off and could coincide with the 10 year taking out 3.75 %.