A Week in Review: Record Volume, Yield Curve, Sectors, Japan, Cash Allocation, & Seasonality 12/4/2017

While Friday made for some interesting trading, the major indices overall remain in up trends and above their short- and intermediate-trend moving average and trend lines. The S&P 500 finished the week up 1.53%, the Dow was up 2.86%, Small caps were up 1.37%, International equities were down 0.37% and Bitcoin saw 12% growth. Here are the charts and news stories I felt were noteworthy from the last week….

Nasdaq Commercial Traders
Typically Commercial Traders are dip-buyers when they’ve previously been this close to holding a net-long position in Nasdaq futures and options. However, over the last several months the Commercial Trader net-position has been inching higher and is now very close to becoming long while Large Traders (funds) are on the other side of that trade, close to becoming net-short.

U.S. Dollar Commercial Traders
What has been a fairly boring chart since the summer as traders have not been moving their net-positions very much in the dollar, until now. As of last week, Commercial traders have now squeaked their position to be net-long, which is some we don’t see happen very often. They have not been long USD since 2013, just before we saw a nice up-trend in the local currency. Before that (not shown on chart) we saw them become net-long in 2012, buying the weakness in the dollar as it got under 80.

Record VIX Option Volume
The CBOE tweeted out this chart on Friday, showing the record number of options traded on the VIX, reaching 3.1 million contracts which exceeds the prior record of 2.6 million contracts traded in a single day that was set earlier this year in September.

Correlation Between Volatility & Equities
Dana Lyons, who constantly produces excellent content on his blog and on Twitter, recently posted this chart on a topic that received a great deal of attention last week – the recent rise in correlation between the $VIX and the S&P 500. In fact, on Friday, as Lyons’ notes, the short-term Volatility Index, which measures expected volatility over a 9-day period compared to the more popular VIX which looks at 30-day vol, rose by the largest percentage amount while the S&P was also up nearly a full percent. As you can see on the chart, short-term volatility is rarely positive on days equities see that level of strength, making Friday’s action quite unique.

Asset Performance When Yield Curve is Flattening
This chart comes from Morgan Stanley and was shared by Dreihaus. There has been a lot of discussion around the impact and implications of the U.S. Treasury yield curve flattening.Based on the research of MS, some of the best relative performance returns during a late-cycle Treasury curve flatting comes from the energy sector as well as financials. Meanwhile, Telecom, Consumer Discretionary have historically under-performed the broader market during late-cycle periods.

Using Volatility and the Yield Curve to Assess the Economy
Speaking of both volatility and the yield curve, the CME put out a really interesting study, looking at the relationship of the long-term trends of both the VIX and the Treasury yield curve as they relate to various stages of economic growth/contraction.What looks similar to a Relative Rotation Graph, the CME compares to the two-year moving averages of the Volatility Index and the yield curve and how they move counter-clockwise; “The cycle has four phases.  As with any circular motion, where to begin is arbitrary, so we will begin at the bottom of the economic cycle and work our way to mid-stage expansion.” The four phases are defined by the CME as:

  1. Recession: yield curve moves from flat to steep (upward slope), equity volatility is relatively high.

  2. Early-stage recovery: yield curve remains steep, equity volatility begins to fall.

  3. Mid-stage expansion: the yield curve starts to flatten, equity volatility remains low.

  4. Late-stage expansion: yield curve becomes even flatter, equity volatility soars as fears of recession dominate investor behavior.

You can see the prior two growth/contraction periods in the U.S. economy move through the above mentioned four stages using the VIX and the yield curve in the two smaller charts below. The current cycle is shown in the third chart. The CME comments they interrupt the data for today’s market as being in “a phase that closely resembles the mid-expansion phases seen during the mid-1990s (1994-96) and the mid-2000s (2005-06).  As already noted, the Fed has commenced removing monetary accommodation.  Yield curves are flattening.  VIX remains unperturbed at extraordinarily low levels. This phase may persist another year or so as the yield curve continues to flatten and the VIX, most likely, remains low for a while longer.”

 

Japan’s Chart Doesn’t Look Great for the Bulls
Looking at the iShares Japan ETF ($EWJ) we can see a potential double top on the daly chart. The re-test of $50 also has come with a lower-high in momentum via the Relative Strength Index (RSI) along with a lower-high in relative performance with the S&P 500 ($SPY). If EWJ continues to move lower I’ll be looking to see we get a test of its 50-day Moving Average which acted as support earlier this year in July and August.

Average Momentum for the S&P 500 Stocks
After experiencing a slight bearish divergence in the average Relative Strength index reading for the stocks in the S&P 500, the composite reading has now moved to a recent new multi-month high, the highest average momentum reading since early 2016.

Sector Relative Rotation Graph
After several weeks of improvement in the energy sector’s relative rotation it’s taken a turn lower, although still in the ‘leading’ category. While the tech sector saw some weakness in several large momentum names, the smoothing of the trend in relative rotation saw an uptick on the RRG for $XLK, along with positive moves in Staples (XLP), Discretionary (XLY), and Utilities (XLU).

Sector Correlation
The correlation of the ten S&P sectors over the last 20 days shows the highest correlated sectors being health care (XLV), industrials (XLI) and materials (XLB) while REITs (VNQ) and Energy (XLE) have been the lowest correlated sectors over the past four weeks.

Sector Performance
Year-to-date most of the S&p sectors are experiencing positive performance, with just the energy sector still seeing red. Only two sectors (staples and energy) are under-performing the S&P 500 through November with technology and health care seeing the strongest growth so far this year.

Narrow Revenue Streams For The Big Five Tech Companies
Barry Rithotlz posted this chart created by BI which looks at the revenue streams of the major five technology companies. Ritholtz notes that the older companies have the most diversified streams, while they narrow as the age drops for each firm; “Microsoft, the oldest and most mature company has the most diversified revenue stream with office the biggest revenue producer at 28%. It follows from there in age: Apple’s biggest line (iPhones) = 63%, Amazon (retail sales) 72%, then Google (Adverts) 88%, and lastly, Facebook(Adverts) at 97%.”

Cash Allocations Continue To Decline
The allocation to cash in Merrill Lynch client accounts has declined to the lowest level in ten years. The prior low, set in ’07 has now been surpassed with August’s cash allocation falling to 10.4% as shown in this chart via John Mauldin.

Positive Returns Through Thanksgiving Setup for a Solid ‘Best Six Months’
This great table shared by Urban Carmel shows that when the S&P 500 posts gains of at least 7% through Thanksgiving, the following six months has seen a positive return 84% of the time. For 2017, the S&P was up 16%, which should setup the next six months for a positive tailwind.

S&P 500 Track Record for December
Dave Wilson shared this chart as his Bloomberg “chart of the day” on November 23rd from Ari Wald, CMT, which shows since 1928, the S&P 500 has never seen its worst month of the year occur in December.

December Is the Least Volatile Month of the Year
According to Jim Bianco, since 1981 the S&P 500 has been the least volatile in December with an average monthly standard deviation of just 3.49%.

Post-Election Year’s in December Also Have Been Bullish
We can’t discuss market seasonality without also mentioned a great point by Jeff Hirsch of the Stock Trader’s Almanac. Hirsch points out that while December has historically been the best month for the S&P and the second best for the Dow since 1950, when looking at post-election years the month of December has been the fifth best for the Dow, the eight best for the S&P 50 and the fourth best for the Russell 2000.

New Home Sales Continue to Climb Higher
The latest data of new home sales in the U.S. shows the strongest sales growth in ten years. Bloomberg notes, “The report showed the U.S. South region continued to recover from a pair of hurricanes. Purchases in other areas of the country, including a 17.9 percent surge in the Midwest, also climbed. The number of properties sold in which construction hadn’t yet started reached the highest level since January 2007, signaling residential construction will accelerate in coming months.”

 

Christmas Trees May Be More Expensive This Year
According to the New York Times, “For anyone who might forget, many people in the United States were not feeling particularly festive in 2008. They bought fewer items as the country slid into its deepest downturn since the Depression. Growers responded by cutting down fewer Christmas trees to sell. That left less space to plant replacements and, ultimately, a smaller-than-usual batch of seedlings. Nearly a decade later, Americans are spending freely again, and the firs, spruces and pines that went into the ground during the recession have reached the seven-to-eight-foot height that makes them ideal for holiday living rooms”

Bitcoin Mining Equates to the Energy Consumption of 159 Countries
With the growing popularity (and price) of the cryptocurrency, the energy used to mine the digital coins has risen 30% over the last month. 0.13% of global energy is now taken up by bitcoin miners, and “uses more electricity than 159 individual countries — including more than Ireland or Nigeria” according to a report by CBS News.

Moody’s Will Now Take Into Account Global Warming Risks For Their Ratings
The rating agency recently released a report that detailed how they will begin involving the impact of global warming on city and state’s when rating their bonds. Bloomberg highlights Moody’s note to clients that “it incorporates climate change into its credit ratings for state and local bonds. If cities and states don’t deal with risks from surging seas or intense storms, they are at greater risk of default.”

Hedge Funds Move Into More Illiquid Investments In Order to Stay Competitive
A recent Financial Times article discussed the latest move by several major hedge funds that have been moving into more less-liquid investment markets in order to seek alpha and produce gains after several years of lackluster performance. With less liquidity obvious comes an increase in risk that could have a negative impact on these funds if turbulence moves into these less trafficked markets.

Off-Topic

Nike Adopts Augmented Reality To Sell Shoes
It’s always interesting to see how retails adjust to new technology in order to increase sales. Nike is the latest retailer to step up their game, adopting AR in order to sell their latest sneakers as reported by the Wall Street Journal, “We saw kids race towards Washington Square Park, phones in hand, to snatch up Jordan 12s. This was an example of a geo-targeted release, where shoppers have to be in a specific location to purchase a sneaker on the app. Footage showed “shock-drops,” another activation in which a push notification randomly flashed on users’ phones, tipping them off to an unannounced sneaker release.”

Mexican Avocado Police
The city of  Tancitaro in Mexico now has an avocado police force. Via Extra Crispy, “BBC News, the avocado force, who carry guns and wear full body armor, are partially funded by a percentage of avocado producers’ earnings—they all contribute a bit of their profits to ensure the safety of their city.”

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Large Cap Stocks Versus Everything Else

I’ve said it numerous times in the last few months, 2017 has been the year of setting records. No one said that trading or investing was supposed to be easy. Albeit some have had the false belief that it is drape around them like a warm blanket during the low volatility year we’ve had. Bitcoins have shot up hundreds of percent, U.S. stocks have refused to put in a material decline and we continue to dance as long as the music keeps playing.

One chart that’s continued to draw my attention and fascination is the strength of large cap stocks versus…. well, just about anything else.

This isn’t the first year by any means that we’ve seen focused strength within the market. Just a few years ago in 2013 if you tried to diversify away from U.S. large or small cap stocks you were penalized. Large cap growth was up 33.5% and small caps rose nearly 40%. Even though other markets had a good year, if you went international you underperformed w/ EAFE gaining just 22%, a “diversified” portfolio rose 20% and heaven forbid you owned bonds, which lost 2% that year. (figures from BlackRock). So a year of large cap strength isn’t anything new and shouldn’t cause too much surprise. But it has because we’ve seen a break from commonly health market believes about relative performance and risk-taking

Turning our attention back to this year and more specifically the last two months. The S&P 500, a cap-weighted index of U.S. stocks has continued to hit new highs as the index most recently moved through 2,600. Meanwhile, many of the other indices that often show positive notes of risk taking have been unable to keep up.

When large caps do well typically the smaller, higher beta/riskier stocks do even better, which we would see in the equal-weighted S&P 500 (RSP) outperforming the cap-weighted $SPX. That hasn’t been the case for the bulk of 2017.

What about high yield bonds? If stocks are doing well then junk bonds should be outperforming aggregate bonds right? Not for the last two months.

How about high beta stocks? When the U.S. stock market are hitting fresh highs and investors are ratcheting up risk then high beta stocks should see strength relative to the index…. not for the last two months, no.

Well if large cap stocks are trending higher then small caps surely are doing even better, because everyone knows that small caps outperform large caps in strong up trends don’t they? Historically yes, but not for the last two months.

As a technician and a follower of price supply and demand I find this truly interesting. The market never ceases to amaze.

But is this a concern? yes and no.

When we dig into the internals of the market and look at the breadth of U.S. equities we still have broad participation in the up trend. The various measures of the Advance-Decline Line are still showing confirmation, which means the majority of stocks are still rising – just not as much as the largest of the large caps. As Ari Wald, CMT of Oppenheimer notes with a chart shared by Josh Brown, “Value Line Geometric index, an equal-weighted aggregate of approximately 1,700 companies, has broken above secular resistance dating back to the year 2000.” Many international markets are still in up trends, we continue to see some degree of sector rotation within U.S. equities, a good sign that the baton is being kept off the ground for the current up trend.

So what’s the takeaway? I think there’s a couple points to draw from the chart above. First, understanding that blindly assuming that if the S&P is doing one thing then X,Y,Z, should also be occurring (i.e. high yield, small cap, high beta outperformaning). Being adaptive to the market environments and the ebbs and flows that come with each year is critical to active management within equities. Second, for the up trend to continue it would really be nice to see these divergences in relative performance resolve themselves. As we’ve seen with sector rotation, strength rotating to these other barometers of risk-taking would be welcomed by many market bulls.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

A Week in Review: Volatility, Momentum, Breadth, Sectors, Taxes & Sentiment 11/20/2017

As we move into a holiday-shortened week, here are the charts and articles I think worth sharing on this Monday morning. Hope you enjoy and have a Happy Thanksgiving!

Volatility Index
For only the third time this year, momentum for the Volatility Index reached ‘overbought’ levels with the RSI indicator climbing above 70 before volatility reversed back lower, finishing the weak just under 12.

Volatility Streak Below 20
A great deal of attention has been paid to the low-level of Volatility this year. If you’ve followed me on social media, read my Charles Dow paper, or blog posts then you know my feeling on low volatility being useful. While interesting, the predictive value is well overblown. However, I think it’s interesting that while so much focus has been paid to the recording setting low levels, we’ve yet to exceed the prior records of the VIX being sub-20 as shown from this chart from @VIXContango. In fact, the VIX didn’t break above 20 the entire year in 2005, stretching 558 days of “low” volatility.

Momentum of NYSE Breadth
While many traders often view momentum and breadth in two difference lenses, a viewpoint can also be obtained by looking at the momentum of breadth, which is what this chart shows. Below is the Relative Strength Index (RSI) indicator, a measure of breadth, for the NYSE Advance-Decline Line. The slight dip in equity prices we saw last week sent the Adv-Dec line’s momentum down to prior lows which have acted as support this year. Breadth, along with large-cap equities, have since bounced after this support test in momentum held strong.

Market Reaction to Tax Cuts
As Congress continues to progress in seeking to pass a tax cut bill, the focus of Wall Street is on the implications of the cut and whether it will stimulative for the economy and what the market’s reaction will be. Historically, the market’s had a below par performance in the years following tax cuts when looking at the past five instances. Bloomberg notes, “Looking at the S&P 500’s performance during the year before previous tax cuts, the market returned more profit than during the year following the bill signing. That applied to returns before and after tax bills signed by Presidents Lyndon Johnson (thought up under Kennedy’s tenure), Ronald Reagan and George W. Bush. The only time this wasn’t the case was following President Bush’s second bill attempt in 2003, when the market performed better after it was signed into law.”

Sector Relative Rotation
While equity indices saw a dip last week we do have some noticeable improvements in several sectors relative rotations. Tech, Materials, Financials and Energy all saw positive moves in the ‘leading’ category. While Consumer Discretionary moved higher, inching closer to the ‘improving’ quadrant. Health Care and Utilities continued their decline, with $XLV moving closer to the ‘lagging’ category.

Average Relative Strength Index for the S&P 500
With some selling flowing into stocks recently, we haven’t really seen much ground given up in momentum compared to the other mini-declines over the last twelve months. Below is a chart of the percentage of S&P 500 stocks with a 50-day Relative Strength Index (RSI) that was below 30, the often used level of being ‘oversold.’ At the tool’s highest point over the last week, the % didn’t even break 25% of S&P stocks being ‘oversold’ compared to prior recent declines getting above 35-40%. While each dip has been at varying severities, it’s worth noting the resiliency of momentum by traders holding up the bulk of the large cap equities.

Tech Sector Drives Q3 Earnings Growth
As has been the case for equities as a whole for large chunks of this year, just a few tech names have driven the bulk of the earnings growth in the third quarter. With most of the S&P 500 stocks having reported earnings, the index saw YOY growth of 7%. The Financial Times reports that “Outside of the energy sector, which is still recovering from the oil collapse in 2014, the technology sector has posted the best performance by far. Tech sector earnings grew 22 per cent, double the rate that analysts forecast. The industry as a whole has accounted for 90 per cent of the S&P 500 earnings beat rate. Perhaps more impressive, though, is that the four largest tech groups — Apple, Alphabet, Microsoft and Facebook — have driven half of the S&P 500 beat.”

Uptick in Risk Taking
This chart got passed around quite a bit last week. It shows the results of a BofAML survey of fund managers and shows the percentage that responding to a question regarding the level of risk they are taking within their portfolios. With results going back to 2001, a net 49% of fund managers who are taking higher than normal risk has moved to a record high, surpassing the prior high set in 2015.  The survey, as sourced by Bloomberg, notes “a mini rotation out of banks, though investors remain overweight the sector, in favor of laggard energy names and Japanese equities.”

Yield Curve Flattening May Be Bullish For Stocks
I’ve shared a chart of the yield curve and the relative performance of the financial sector throughout this year, showing that the financials often follow the direction of the curve, which often has been a headwind for the sector’s relative performance. Ari Ward, CMT, Head of Technical Analysis at Oppenheimer, shared on CNBC that the flattening curve may in fact be  bullish for equities as a whole. In a recent CNBC interview Ari said “how we measure it, the S&P 500 has averaged a 16.5 percent gain over the next 12 months based on the current level and direction going back 40 years of history.”

Record Setting Year for Global Equities
In a thanksgiving-themed article, Jeffrey Kleintop, CFA, the Chief Global Investment Strategist of Charles Schwab shared five reasons investors should be thankful this year. One of the charts Jeffrey posted is below, which shows the running streak of positive monthly returns for global stocks, noting this is the first in 30 years every month has been in the green.

A Decline in Equity Shorts
Binky Chadha, Deutsche Bank’s chief strategist, posted this chart as mentioned in a Business Insider article of the aggregate short position in stocks declining to the lower end of its range. While the market on average sees a 2-3% pullback every two to three months Chadha shared, 2017 has been anything but average. While we’ve yet to see any major declines in U.S. equity indices, traders do not appear to be overly concerned as they appear to be holding few hedges or short positions in equities, ETFs, or futures.

Your Time Frame Dictates Your View Point
Morgan Housel is one of my favorite writers and I make sure to never miss a post he puts out – always getting a solid takeaway from what he shares. In Morgan’s recent piece “We’re All Innocently Out of Touch” he discusses that how the market performed in your early years often has a large impact on how you view it going forward, sharing the chart below, which shows the total return of the equities in the U.S. or Japan at various starting points. While the whole article is well worth a read, here’s one of the points Morgan makes, “One quote from the study stuck out to me: “Current [investment] beliefs depend on the realizations experienced in the past.” That’s powerful. Think of the arguments we deal with in investing – over valuation, over expected returns, over moats, over bubbles. Two people with the same education and same data can think bitcoin is either the next tulip or the next internet. The whole reason markets work are because these gaps in opinion exist.” I believe this very much accounts for a great deal of the current market opinions floating around out there and why there’s a growing dichotomy of bulls and bears for U.S. equities.

Growing Spread in Performance for REITS
REITs are also show the growing spread in performance between brick and mortar retail and e-commerce,
“The chart below shows real estate tied to e-commerce continues to have a spectacular year. Data Center and Warehouse REITS are +33% and +24.6% on the year, respectively. Meanwhile, Mall REITs have stabilized but not yet seen a material recovery. Regional mall REITs are -9.6% on the year, shopping center REITs -13.2%.: according to Bianco Research.

The FANG Stocks May Be Shifting In Several Indices
The much beloved FANG stocks may be seeing a shift in their allocations for several major indices, “S&P Global Inc. and MSCI Inc., two of the world’s biggest index providers, plan to overhaul their industry classifications, merging some internet and media stocks with phone companies into a group called “communication services.” It would replace the existing telecommunication sector.” The Bloomberg article notes that Google and Facebook may be leaving the tech industry and Amazon and Netflix may be moving from consumer discretionary to the internet and direct retail marketing category.

Near Record Setting October Temperatures
It seems we are experiencing ‘record’ high temperatures throughout the last few years these past couple of years. NASA, as recorded by MentalFloss, calculated that October of this year was the second hottest on record, “After an unseasonably toasty October, the numbers are in: Temperatures exceeded averages across the globe last month, making it the second-hottest October ever recorded, according to NASA.”

You May Reconsider Your International Overweight
A great post by Newfound Research highlights some considerations that many asset managers may not be taking into account with the global weighting of their portfolios. Evaluating foreign markets may not be a fair apples-to-apples comparison as they have different factors that greatly impact their economy’s growth, valuation, and financial markets.

How Overconfidence Can Wreck Havoc
Nick Maggiulli of the blog Dollars and Sense shared a good point recently with a story of how different aged children have varying success rates of survival when alone in the woods, with younger children capitalizing on their lack of knowledge. Nick discusses how this translates well into financial matters as well, where overconfidence can have a potentially large negative impact on decision-making.

More Americans Hit the Road This Thanksgiving
With nearly 51 Americans traveling for the holiday, Bloomberg reports that  “U.S. Thanksgiving travel will jump to the highest level since 2005 boosted by a stronger economy, even as gasoline prices will be higher than a year earlier.”

Off-Topic

Emirates airline offers new £7,000 first class suites on new planes 
“Featuring floor-to-ceiling sliding doors for maximum solitude, most of the suites also provide a window view which can be enjoyed with a personal pair of binoculars. […] Customers can video-call the crew for service requests without leaving the comfort of their suite, and crew can serve drinks and canapes through a special service window without disturbing passengers.”

Millennials Love Cold Brew
As a millennial myself, I can vouch for this article as a fellow cold brew fan. Oddly enough, I personally don’t like the taste of traditional hot coffee but do enjoy cold brew. The WSJ reports that “U.S. retail sales of refrigerated ready-to-drink coffee rose 29% in the 52 weeks ended Sept. 10 to more than $289 million, according to market researcher IRI.”

Carving a Turkey
I personally take great pride in my turkey carving abilities, carving up one this past Sunday in fact at a party among friends, but if you need a reminder on how to carve a bird this Thanksgiving, this video by Bon Appetite does a great job on how to breakdown a big bird.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.