Technical Take: In a Pickle

Tuesday, July 10th, 2012

by Guy Lerner, The Technical Take

Last week’s comments will certainly  suffice to explain how sentiment is impacting the current price action, so here they are: “From a sentiment perspective, the data remains consistent with a market top rather than the next launching pad to a new bull market or even a sustainable bull run. For several weeks, I have been of the opinion that whatever bounce develops would not carry too far because sentiment really wasn’t too bearish at the bottom. Large rallies usually start with real extremes in investor sentiment and consensus among the sentiment data, which we did not see despite the SP500 dropping about 10% over 8 weeks from the April highs. Although the “dumb money” was bearish (i.e., bull signal), corporate insiders were neutral. Throw in the fact that investors have been primed to front run anything that sounds like quantitative easing or bail out, you can understand why investors weren’t too concern. Don’t worry some central banker has your back.”

What I find fascinating is that investors know what is exactly driving this market.  It is bailouts,  quantitative easing, asset purchases or whatever you want to call it.  These plans can be real or just come from the mouths (i.e., jawboning) of central bankers.  I was listening to CNBC earlier in the week, and the disappointment of the hosts over the market’s response to the European Central Bank’s rate cut was palpable.  With the pre-market futures down about 0.5%, they immediately understood that some entity (i.e., Federal Reserve) would need to step in and do more.  Mind you this is pre-market action, and the SP500 is still only a couple of percent below the recent cyclical highs!  No reason to hope for a good jobs report or better earnings.  Maybe that is asking for too much.  Or maybe investors understand that positive data points takes more QE off the table.

The promises to fix the economies (i.e., equity markets) of the world with more debt are coming almost daily now.  The market’s response to each of these “fixes” seems to be getting less and less.  In addition, whether QE is the right policy still remains in doubt.  After all, it hasn’t turned the US economy around yet and some would argue, asset purchases and debt creation have put the US economy on a weaker foundation.  It would seem that investors are in a pickle.  More of the same is not working, and it just may require lower equity prices for investors to get what they really wish for.

The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator is neutral.

Figure 1. “Dumb Money”/ weekly

Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Insider trading volume began a seasonal decline last week. Companies generally close trading windows for insiders 10-14 days prior to quarter’s end and reopen them following their subsequent earnings announcement. Volume will continue to dissipate over the next few weeks and getting a macro read will be difficult because of the limited number of insiders who are free to trade.”

Figure 2. InsiderScore “Entire Market” value/ weekly

Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 63.72%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 71%.

Figure 3. Rydex Total Bull v. Total Bear/ weekly

Tags: Asset Purchases, Cnbc, Corporate Insiders, Cyclical Highs, Disappointment, Dumb Money, Extremes, Federal Reserve, Guy Lerner, Investor Sentiment, Launching Pad, Market Futures, Mouths, Pickle, Pre Market, Qe, Quantitative Easing, Rallies, S&P500, Sentiment Data
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Stocks: More Room to Run

Tuesday, March 20th, 2012

March 19, 2012

Stocks Rise to New Cyclical Highs

Equity markets around the world continued to advance last week, again thanks to continued improvements in economic growth and an overall sense that macro risks have been receding. In the United States, stocks rose to new post-credit-crisis highs, with the Dow Jones Industrial Average advancing 2.4% to 13,232, the S&P 500 Index rising 2.4% to 1,404 and the Nasdaq Composite gaining 2.2% to end the week at 3,055.

At the same time, bond prices sank as yields moved sharply higher, with the yield on the 10-year Treasury jumping to close to 2.3% after trading at around 2.0% for several months. Meanwhile, oil and gasoline prices rose again, gold prices fell and the US dollar gained some strength.

Economic Growth Shouldn’t Be Derailed by Higher Oil Prices

As we have been saying for the past several weeks, it appears the US economy is improving to the point that it is entering a self-sustaining cycle, helped in large part by advances in the labor market. We have recently been seeing improvements in retail sales (with January’s figures up by 1.1%) and we are expecting that gains in employment will translate into faster income appreciation and additional consumption. One cautionary note is that jobless claims have stopped falling in recent weeks, which suggests that the future pace of jobs growth may be more subdued than we have seen in the past few months. It is possible that the warm winter weather may have skewed jobs growth to the upside.

At the beginning of the year, two of the main risks to global economic growth appeared to be the ongoing European credit crisis and the possibility of a hard landing in China. While those risks seem to have receded since that point, a new one has emerged: rising oil prices. Since December, oil prices have advanced by roughly $20 per barrel. Our assessment is that roughly half of that comes from growing optimism about the prospects for global growth as well as some supply shortfalls. The other half can be attributed to the risk premium coming from noise in the Middle East and concerns about Iran. Quantifying the exact impact of the “Iran premium” is extremely difficult since there is a near-limitless range of possible developments that could impact oil prices. The worst-case scenario would be for some sort of military conflict that could disrupt the flow of oil through the Straits of Hormuz, but at this point that seems unlikely.

In any case, it is important to remember that the current run up in oil prices is still only about half of what occurred around this point last year, and at present we do not believe oil prices have risen to the point that they represent a significant threat to the pace of global growth.

Treasury Yields Rise: What Does It Mean for Stocks?

An additional development that drew attention last week was the dramatic rise in Treasury yields. The rise in yields came at the same time that the Federal Reserve held its regular interest rate policy meeting. At that meeting, the Fed confirmed that economic growth is clearly not weakening and may be strengthening, and the central bankers retained their commitment to keeping rates low for the foreseeable future. At this point, markets appear to be signaling that an additional round of quantitative easing is not in the cards, which (along with improved growth) helps explain the advance in yields.

The selloff in bonds does raise the question of how much further it can go before higher yields represent a threat to equity markets. In our view, current macro conditions warrant additional increases in yields. We believe a fair value for the 10-year Treasury is currently around 2.5% or higher. It is important to remember that before last week, we saw several months of improved economic data without a corresponding rise in yields, so in many respects, last week’s moves represent a sort of “catch-up” effect for the bond market. We believe the current trend of rising yields signals an acknowledgement of growing optimism around the economy and, as such, is a positive for stocks.

Stocks Likely to Grind Higher From Here

While it is important to remain cognizant of the risks facing the markets, our overall view toward stocks remains constructive. Since the current rally began last autumn, we have seen some market pullbacks, but they have been brief and shallow, likely because many investors remain underweight equities and have been using pullbacks to buy on price dips. Now that bond prices are falling, we believe investors as a whole will finally begin to move out of Treasuries and into stocks. As such, as long as the macro fundamentals remain reasonably good, we believe equities should grind higher from here.

About Bob Doll

Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock^® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.

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Tags: Bond Prices, Cautionary Note, Credit Crisis, Cyclical Highs, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Gasoline Prices, Global Economic Growth, Global Growth, Gold Prices, Jobless Claims, March 19, Nasdaq Composite, Optimism, Prospects, Retail Sales, Rising Oil Prices, Supply Shortfalls, Warm Winter Weather
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