TD Waterhouse’s Ryan Lewenza: U.S. Equity Strategy Quarterly (July 4, 2011)

Tuesday, July 5th, 2011

TD Waterhouse Vice President and U.S. Equity Strategist, Ryan Lewenza, shares his outlook and strategic direction on U.S. stocks. In particular, Lewenza cites 4 causes for the markets’ recent weakness – Greek debt crisis, China’s monetary tightening bias, the end of QE2, and normal seasonal trends. On an absolute basis, stocks are now undervalued, and there is still the possibility markets could experience more weakness, with the S&P ranging lower to 1225-1175 if the important 1250/65 level doesn’t hold.

He/they “continue to recommend an overweight in the energy, information technology and health care sectors. We remain market weight on financials, materials, industrials, and consumer staples. We recommend an underweight in the telecom, utilities and consumer discretionary sectors.”

Here are highlights from the report (page 1; you may read the whole report in the slidedeck below (click fullscreen for larger view), or download a copy by clicking on the cloud/arrow button):

- Q2 was the ying to Q1’s yang. Outside of the Japan sell-off in mid-March, Q1 saw decent gains with generally lower volatility, while Q2 posted negative returns on the back of higher volatility. Thanks to a late-June rally, the S&P 500 Index (S&P 500) declined a modest 0.4% in Q2, erasing some of the gains realized in Q1 (5.4%). The NASDAQ declined a similar 0.3%, while small-caps fared the worst, with the Russell 2000 falling 1.9% in the quarter. Large-caps outperformed small-caps by 150 bps, while growth outperformed value by 70 bps.

- The reasons behind the recent weakness are manifold, but we believe the following factors were most at play: 1) mounting concerns over a Greek default and potential contagion effects, 2) continued monetary tightening by Chinese authorities, 3) the end of Quantitative Easing in June, 4) a deceleration in global economic growth, and 5) normal seasonal trends.

- We continue to believe that the U.S. economy is recovering, albeit at halfspeed, and maintain our below-trend view of 2.5% U.S. GDP growth for 2011.

- With the Q2 weakness, the U.S. equity market has become more attractive with the S&P 500 forward P/E dropping to 13.5x – roughly 3 multiple points below its ten-year average of 16.5x.

- U.S. equities are attractively valued on an absolute basis, as well as relative to bonds. With the S&P 500 earnings yield (inverse of P/E) at roughly 7.5% and the 10-year U.S. Treasury yield at just over 3%, the gap is almost 450 bps in favour of stocks.

- We see the potential for more near-term weakness, and see the S&P 500 possibly retesting the important 1,249.05 level (March 2011 low). With the 200-day moving average at 1,265 we believe the S&P 500 needs to hold this important 1,250/65 range, or it could decline further with the next technical support range coming in at 1,225-1,175. However, we believe we are getting closer to a technical bottom, which is likely to be achieved over the next few months.

- In trying to isolate the bottom for U.S. equities, we will be closely monitoring the following: 1) a bottom in the Shanghai Index and copper prices, 2) a peak in US. Treasury bond prices, and 3) a large decline in bullish investor sentiment.

- We continue to recommend an overweight in the energy, information technology and health care sectors. We remain market weight on financials, materials, industrials, and consumer staples. We recommend an underweight in the telecom, utilities and consumer discretionary sectors.

US Equity Strategy Q2 11

Tags: Absolute Basis, Arrow Button, Bps, Chinese Authorities, Consumer Staples, Contagion Effects, Debt Crisis, Deceleration, Energy Information, Equity Strategy, Global Economic Growth, Health Care Sectors, Mid March, Qe2, Russell 2000, Seasonal Trends, Small Caps, Td Waterhouse, Telecom Utilities, Underweight
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Technical Talk: Balance bullish breadth with weak seasonal trends

Wednesday, August 5th, 2009

The comments below were provided by Kevin Lane of Fusion IQ.

Almost like a broken record, for the past two weeks we have proposed the idea that the market would keep working higher because investor sentiment was more cautious or doubting than embracing, suggesting that many investors still had not deployed a lot of capital.

Over the last several trading sessions this thesis has played out. However, what is even more encouraging now is this rally has started to broaden out more. Originally it was predominantly tech- and commodity-based names leading the charge; however, in the last few sessions the banks and the cyclicals have started to catch a bid again, as are the transports.

The recent breakout in the S&P 500 above the 960 level (green line) looks like it can now trade up to its next resistance level near 1,070 (orange dotted line). This resistance level also happens to coincide with the upper end of a rising bullish price channel (blue lines).

As mentioned above we don’t really see any resistance on the S&P 500 again until the 1,070 area. With investor sentiment by and large remaining cautious yet sideline liquidity and price momentum continuing to be strong, we believe there is a high probability the S&P 500 will touch 1,070 before seeing the recent breakout spot again near 960.

As the rally has accelerated more aggressively of late the total equity/index put-call ratio has slipped, suggesting more calls are being purchased than puts. This is not an overly bullish backdrop; however, it is a shorter-term indicator as opposed to a more secular indicator. Additionally AAII Bull

Sentiment also rose recently to a reading of 47% last week. While neither of these numbers is alarming just yet, as they continue to rise so does the probability of a pullback.

However, the overwhelmingly positive market breadth figures and bullish sideline liquidity trump sentiment for the time being and pullbacks remain buying opportunities until sideline cash dries up.

While bullish, we continue to try to balance the need to respect the historically weak seasonal trends that late summer typically brings about while at the same time being cognizant that market breadth remains extremely bullish regardless of the seasonal cycle.

For now, long and strong seems to be the best mantra.

Kevin Lane, Fusion IQ, August 3, 2009.

Tags: Backdrop, Breakout, Commodities, Cyclicals, Dotted Line, Equity Index, Investor Sentiment, Iq, liquidity, Market Breadth, Price Momentum, Probability, Pullback, Pullbacks, Rally, Resistance Level, Seasonal Trends, Term Indicator, Trading Sessions, Trump
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Technical talk: Seasonal trends less bullish

Tuesday, June 23rd, 2009

The comments below were provided by Kevin Lane of Fusion IQ.

As seen in the chart below, the S&P 500 Index bounced off its uptrend line near 900 a few sessions ago and managed a slight rally. However, that rally stalled at what is now new minor resistance near 925. So the S&P 500 is currently between an uptrend line and resistance. Above 925 the rally has a chance to resume, whereas a move below 900 will result in the current correction deepening.

The next stop down on any break of 900 would be the 875-880 support zone. This is a more critical support area and the area the S&P definitely needs to hold. Any break below that and the S&P 500 would see a much deeper correction.

Typically, as we enter the mid- to latter summer, seasonal trends also tend to become less bullish as the summer rally is replaced by the summer doldrums. So, after an S&P 500 rally that went up 43.41 % from its trough to the recent peak, to expect a corrective wave during the seasonally weak mid- to late summer is not a far stretch.

At this point in the game we would suggest tightening up stop-loss levels and being less patient with pullbacks in names on the long side that are not performing well.

Source: Kevin Lane, Fusion IQ, June 22, 2009.

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Tags: Cape Town, Corrective Wave, Critical Support, Far Stretch, Fusion, Game, Investment, Iq, Postcards, Pullbacks, Resistance, Seasonal Trends, Sessions, Stop Loss, Summer Doldrums, Summer Rally, Support Zone, Target, Trough, Uptrend Line
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Stock market performance round-up: At mercy of grim data

Monday, February 2nd, 2009

An avalanche of worse-than-expected economic and earnings data again put pressure on Wall Street during the past month, resulting in four straight down-weeks and the worst performance of the major US indices for January on record.

“As January goes, so goes the year” is one of the most frequently quoted sayings about seasonal trends in the stock market. With the Dow Jones Industrial Index down by 8.8% and the S&P 500 Index 8.6% lower, the year is not off to a promising start.

Despite frantic actions by the Fed and other central banks to unclog credit markets and restore confidence in the world’s financial system, the MSCI World Index and MSCI Emerging Markets Index fell by 8.8% and 6.6% respectively during January.

The performances in the table below are given in local currency terms for different measurement periods ended January 31.

Click on the image for a larger table.

From the highs of late October 2007 until the November 20 lows, mature markets have outperformed developing markets, as shown by the declines of 54.1% for the MSCI World Index and 65.3% for the MSCI Emerging Markets Index. The relative-strength graph below clearly shows this outperformance (i.e. declining trend), but the period since the November lows has witnessed emerging markets reclaiming lost ground (i.e. rising trend).

In local currency terms, the best-performing bourses since the November 20 lows have been Russia (+23.8%), Oslo (+18.8%) and Brazil (+17.7%). However, the two markets still in the red – Helsinki (-2.2%) and France (-0.2%) – have had much less to cheer about.

Considering the month of January, the top three performers were all BRIC countries, namely China (+9.3%), Brazil (+4.7%) and Russia (+2.5%). Although India closed the month on a strong note (up 8.6% during the fourth week), the Bombay Sensex 30 Index still lagged its BRIC counterparts for the month. The year-to-date performances of these countries, together with the MSCI Emerging Markets Index, are shown in the graph below.

Source: StockCharts.com

It should be noted that the Chinese stock market has been closed over the past few days in celebration of the Lunar New Year. It will be interesting to see how this market starts the Year of the Ox on Monday as the chart pattern shows arguably the best base formation of the major market indices. The Shanghai Composite Index (1,991) is also challenging its three-month highs and is within close reach of the roundophobia level of 2,000 for the Shanghai Composite Index.

The gains/declines mentioned above are all in local currency terms. However, converting the movements to US dollar shows a somewhat different picture for the non-dollar countries (see table below). Over the one-month period (US Dollar Index up by 5.8%), the European and emerging-market indices fared considerably worse in dollar terms than in local terms.

Click on the image for a larger table.

With the Russian ruble falling out of bed, the Russian Trading System Index declined by 15.3% in dollar terms over one month, whereas it recorded a gain of 2.5% in local currency terms. (Since the November 20 low, Russia has swung from the first position (+23.8%) in local currency terms to the last place (-4.7%) in dollar terms.

Back to the US stock market, the bar chart below (courtesy of Bespoke) shows the performance of the ten S&P 500 sectors in January. Financials were a large part of the overall declines, as the sector had fallen by 26.5%. On the other hand, Utilities and Health Care were the best-performing sectors, declining by only 0.8% and 1.3% respectively.

Source: Bespoke, January 30, 2009.

Notwithstanding the improvement since the November lows, it remains too early to tell whether a secular low has been recorded. The chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (or momentum) indicator (blue line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the level of the indicator is grossly oversold.

Stock markets are still caught between the actions of central banks furiously fending off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. Failing stronger market breadth and further evidence of the thawing of the credit markets and the world’s financial systems starting to function normally again, investor confidence will probably remain depressed. While I remain distrustful, I am not averse to selective stock picking – picking out the choice morsels, so to speak.

Tags: Bombay Sensex, Bourses, Brazil, BRIC, Bric Countries, BRICs, BSE 30, Central Banks, China, Credit Markets, Currency Terms, Dow 30, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Earnings Data, Emerging Markets, financial systems, France, Helsinki, India, Lows, major US indices, Mature Markets, Month Of January, Msci Emerging Markets, Msci Emerging Markets Index, Msci World, Msci World Index, New Year's Day, Oslo, Relative Strength, Russia, Russian Trading System, S&P 500, Sayings, Seasonal Trends, SSE 50, Stock Market Performance, United States, Us Federal Reserve
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