A Week in Review: Important Charts, Performance, & Interesting Stories 11/6/17

The record-setting by U.S. equities continued last week, with the S&P 500 finishing its eight consecutive weekly positive close, the longest streak since 2013. S&P finished the week up 0.26%, the Dow up 0.45%, Nasdaq up 0.74%, the Russell 2000 down 0.79%, and International markets (EFA) up 0.90%. Now lets look at some of the market data, charts, and news stories I believe to be of some importance or significance going into this week….

November Seasonality
Jeff Hirsch, editor of the Stock Trader’s Almanac, shared the following chart for the Dow, S&P, Nasdaq, R1K, and R2K and their respective 21-year market performance during the month of November. As you can see, the month has historically been bullish for equities, although it typically seen an early-month dip before finishing higher. Hirsch notes,  “November maintains its status among the top performing months as fourth-quarter cash inflows from institutions drive November to lead the best consecutive three-month span November-January.” “In post-election years, November’s market prowess is relatively unchanged. DJIA has advanced in 13 of the last 16 post-election years since 1953 with an average gain of 1.8%. DJIA has been up 10-straight post-election year November’s. S&P 500 has been up in 12 of the past 16 post-election years.”

Market Performance Following a new Fed Chair
Last week President Trump put forward his nomination for the next Fed Chair, Jerome Powell. Ryan Detrick, Senior Market Strategist for LPL Financial, ran the numbers for the market’s performance following a new leader of the Federal Reserve. According to Ryan’s research, the market has typically been higher 1-, 3-, and 6-months later but with muted gains compared to the market’s average performance.

Sector Relative Rotation 
Last week experienced several improvements in a few of the S&P sectors. Notably, Industrials, Materials, Financials, and Tech moved further into the ‘leading’ category while Energy continues its trend from ‘Improving’ to ‘Leading.’ Utilities have now moved into the ‘Lagging’ category, joining REITs, Consumer Staples, and Consumer Discretionary. To learn more about RRG charts go here.

Sector Correlation
Looking at the 20-day correlation of the S&P sectors, Tech and Utilities moved up to be the most correlation sectors with the overall S&P 500 index. Health Care and REITs have now joined Consumer Staples as being negatively correlated with the index.

Best  & Worst Performing Stock Last Week
Here are the top five and bottom five S&P 500 stocks last week.

Round Numbers on the S&P 500
I found this chart from Urban Carmel  pretty interesting, it shows the S&P’s reaction to each round number milestone during its climb from 1500 through today. This could potentially be important as we are just a few points away from reaching 2600. As Urban’s chart shows, when the equity index first approaches or reaches a new round number during its multi-year up trend, its first put in a short-term pull back as the market digests recent gains. Commentators often put an over-significant to these round numbers, more so as it pertains to the Dow but nonetheless, seeing how prices react to certain levels it deems important is noteworthy.

Bitcoin’s Assent
Speaking of round number mile-markers, bitcoin is hitting its own at a quickening pace. While looking at the time it takes for a market or security to hit a certain level is not a fair apples-to-apples comparison, as the percentage change is obviously different with each milestone, the speed at which bitcoin has been able to rise in $1,000 increments has gone nearly parabolic – taking just four days to go from $6,000 to $7,000. (Bloomberg)

Stock Market Participation
Jason Goepfert, of SentimenTrader.com, shared this chart on Twitter showing the lack of confirmation in the strength of the S&P 500 based on the number of stocks trading above their respective 50-day Moving Average. In fact, Jason notes that there hasn’t been this small of a percentage of stocks trading above their intermediate-term MA when the S&P was at a new high since 1999.

New Volatility Low
Not only did the Volatility Index put in a new all-time daily and weekly closing low, several other volatility indices did too. Notably, Treasury’s and Gold. The 10-year Treasury Volatility index can be seen below, from Ezra Karhan.

Volatility Performance Last Week
While the Volatility Index made a new all-time low, there were in fact a few volatility markets that did finish out the week in positive territory.The CBOE notes that volatility for the energy sector, Russell 2000, Goldman Sachs, IBM, and Brazil all finished in the green. Also interesting to note that the VIX mid-term and 3-month measures also were positive, while 30-day volatility closed lower by 6%. It appears traders are less concerned about short-term volatility but are bidding up protection on the S&P 500 three and six months out.

Volatility Term Structure
Another view of the changes in volatility can be seen in this next chart, from VixCentral. Compared to last week, we can see the drop in front-month VIX while the rest of the curve rose modestly as we get closer to November expiration.

Volatility Model
I run several different models for the volatility market, one of each examines the current volatility environment and seeks out previous instances where the data has looked similar. Below you can see the model since ’08 and the previous times (marked by red dots) where the data points that make up the model have been at current levels as we saw on Friday. While the components of the model are proprietary, one piece is what I covered in my Charles Dow Award paper, which was a very narrow dispersion of volatility. This narrow range for the VIX has been a theme for large chunks of 2017, which is why I wrote and believe it’s best used when paired with other pieces of market data – which is what my model does. As the chart shows, volatility has risen, sometimes substantially sometimes with a minor advance, during previous occurrences of a similar environment. This, paired with many of the other topics I discuss in this week’s post, lead me to believe there’s a strong bias for the VIX to rise in the coming week or two.

Sector Short Interest
As traders grow more confident as seasonality shifts into what’s historically been the start of the best six months for equities, short-term has begun to decline across several sectors. Thanks to Callum Thomas for sharing this chart from the ETF Research Center. Short interest over the last month has declined in Consumer Discretionary, Energy, Health Care, Industrials, Materials, Technology and Utilities while remained flat in Financials and REITs and an increase in Staples. While bets on the sectors declining have lowered, the two sectors with the heaviest short interest are in the defensive camp, Consumer Staples and Utilities.

Consumer Political and Economic Sentiment Diverge
Jason Goepfert, of SentimenTrader.com also shared this chart via Twitter last week, looking at the large divergence in the U.S. Consumer’s feelings about the economy and towards the President. As we saw in the previous chart, traders have decreased their short bets for most of the equity sectors, a likely sign of growing confidence for the market and economy. That sentiment appears to be shared with the average consumer as well, based on Consumer Confidence Index which has risen steadily this year. However the positive feelings don’t crossover to the President’s approval rating which is at historic lows. It’s unusual for these two sentiment data sets to diverge like this, as many consumers attribute (falsely so) the growth or decline of an economy with the success or failure of the President. We have to go back to the tech boom/bust to find the similar example which hasn’t occurred before then since the last 1960s.

Consumer Spending Accelerates
We can see the confidence in consumer sentiment also in how they are spending their dollars,. as U.S. consumer spending rose by its largest amount in September in the last eight years. (Fox Business)

Lack of Volatility Sends Goldman For the Exit
the recent lack of volatility this year has been the last straw for Goldman Sachs, which announced it will be pullback from the derivatives market, the WSJ reports. Many banks saw revenue declines which they attributed to muted volatility. (WSJ)

ETF Fee Compression
The race by ETF providers to offer the lowest cost products has been a strong theme in 2017 and one that seems to be driving fund flows. With over $300 billion moving into equity ETFs in 2017 through September, the WSJ highlights that “Nearly 75 cents of every new dollar invested in ETFs this year targeted the cheapest funds on the market, a trend that partially highlights investors’ urge to mimic major U.S. equity benchmarks that continue to notch all-time highs. Relentless demand for the cheapest ETFs helps explain why fund companies continue to slash management fees on existing products or rush new, ultra-cheap ones to market.”

Corn COT Data
corn seasonality has historically seen its strength in the first six months of each year but typically puts in a bottom in prices around November and December. Based on the latest Commitment of Traders report, it appears Commercial Traders are making positional bets that corn will follow that seasonal trend. Commercials are currently holding one of their largest net-long positions in recent years. As the chart below shows, when the Commercial Traders have held this type of net position before, corn prices have often rallied in the following weeks/months – as we saw in 2014, 2015, and 2016.

 

Each week  I collect some of the many interesting articles I come across. Below are the ones from the last week I think are worth sharing that may not have gotten as much attention as they should. 

Momentum Strategy Strength Continues
The strength in momentum stocks has been a main market driver this year with the MSCI Momentum Index up over 30% YTD and some strategist think it may be time for them to take a breather. “But has the gap between the performance of the two indexes grown too big? MKM Partners technical analyst Jonathan Krinsky compared how big that gap is relative to its 200-day average, and found it’s at a level that often signals a peak in momentum. Sometimes it’s simply a pause—that was the case in 2005—but sometimes it can signal an impending peak, as it did in 2008. ‘Momentum names are stretched relative to the market,” Krinsky says. “But they can become more stretched.'” (Barron’s)

Tech Stocks Led the Way in October
“The technology sector accounted for more than 75 percent of the S&P 500 Index’s return in October, according to a new note from Bank of America Corp. Apple Inc., which reports earnings after the market closes Thursday, was the biggest contributor, accounting for 16 percent of the index’s climb. Microsoft Corp., Amazon.com Inc. and Intel Corp. rounded out the top four, adding an additional 39 percent, according to data compiled by Bloomberg.” (Bloomberg)

Central Bank Governor Issues Warning in China
One story I am surprised hasn’t gotten more attention is an article the head of the Chinese central bank made on Saturday. “China’s financial system is getting significantly more vulnerable due to high leverage, according to central bank governor Zhou Xiaochuan.” Zhou calls for stricter Chinese bank regulation while loosening regulations on non-Chinese financial firms. He also calls certain Chinese internet companies ‘Ponzi schemes’ and that a bubble is being formed in financial markets under the disguised as innovation. (Bloomberg)

Tech Rally Is Juiced by Highflying Cloud Business
The tech sector has been a strong leader in 2017 and many analysts expect cloud-based computing to help continue drive revenue to the major players in this space like Apple, Google, Amazon, and Microsoft, “Big Tech can generate big numbers, but it was fast growth in the cloud business that helped ignite a buying frenzy Friday that drove up market values by nearly $139 billion in 30 minutes.” (WSJ)

Quants Begin to Question Bonds Ability to Act as a Hedge
Analyst at PIMCO produced a study that leads them to believe there may be the ideal hedge as they have been in the past as correlations begin to tighten. “The old recipe of using bonds to hedge against risks from equity holdings may not be a winner anymore, and investors would be better off with a more complex approach that relies on multiple tactics, according to Pacific Investment Management Co. analysis.” (Bloomberg)

The Question of When to Sell
Most investment commentary and advice surrounds the topic of what and when to buy securities, few ever mention the more critical and often tougher trade decision to make: when to sell. This is the topic of Barry Ritholtz’s latest column “The question of when to sell is perhaps the most overlooked and underappreciated problem in finance. It’s worth bringing this up now as markets keep rising. It’s clearly on the mind of more than one investor.” (Bloomberg)

Bitcoin Futures are in the Markets Near Future
“CME Group, the US exchange operator, has announced plans to launch bitcoin futures in the latest sign of the cryptocurrency’s growing prominence in mainstream financial circles. The Chicago-based company plans to roll out the new futures contracts in the fourth quarter of this year, pending ‘relevant regulatory review periods’.” (FT)

The ‘Tulip Fever’ May Not Have Been What We Always Thought
This was a really interesting read and quite a surprise! Thanks to Wes Gray for sharing this piece. “For decades, economists have pointed to 17th-century tulipmania as a warning about the perils of the free market. Writers and historians have reveled in the absurdity of the event. The incident even provides the backdrop for the new film Tulip Fever, based on a novel of the same name by Deborah Moggach. The only problem: none of these stories are true.” (Smithsonian Magazine)

 QE Didn’t End the Bull Market & Neither Will QT
Great insights shared by Urban Carmel looking at the impact had by quantitative easing and the potential (or lack there of) of quantitative tightening. “The Fed’s policies have clearly led US equities higher, but not in the way that it has been popularly perceived. The Fed established the conditions for fundamental growth in consumption, investment, employment and corporate profits, creating the confidence in investors to place their cash into the financial markets. All of these factors have a strong causal relationship to share price that long pre-date 2009 and the QE programs.” (The Fat Pitch)

 

The Savings Rate Continues to Decline
As investors and consumers alike get more confident in the economy and their personal prospects, the feeling of a need to save begins to weaken. That seems to what’s been taking place over the last few years as investment accounts have (hopefully) been gaining value – savings accounts have not. “The personal savings rate fell to 3.1% in September, the lowest since December 2007, the final month of the last economic expansion, when it touched 3%. That also was the average savings rate during 2005 and 2006, the peak years of the housing boom.” (WSJ)

The Power of Compound Interest Made Buffett His Wealth, Not Just His Investment Picks
Anytime  Morgan Housel writes something I know without a doubt that it will be well worth the read. His latest piece, ‘”The Freakishly Strong Base” which looks at the power of compound interest and shows in one example how if Buffett had started investing at the age of 30 instead of the age of 10 his fortune would look a whole lot different. (Collaborative Fund)

Mutual Fund Use is Plunging
As ETFs continue to see massive inflows and mutual fund managers continue to fight two battles, one on fees and another on performance, the use of these funds is losing market share. “Just 39% of U.S. households own mutual funds, down from 63% in 2010, according to Hearts & Wallets, a retail investment data and analysis firm. Younger investors especially have turned their back on the vehicles.” (Barron’s)

Off Topic

Steve Job’s BMW Goes Up for Auction
Are you a big Apple fan? Do you have a few extra hundred thousand dollars sittle idle? Well then you could make a bid for Job’s 2000 BMW Z8 that is going up for auction. (Sotheby’s)

Hershey’s Will Release a New Candy Bar for the First Time in 20 Years
Hershey’s has been around for 117 years and hasn’t released a new candy bar since 1995. That changes this December when they release a new candy bar called,  “caramelized crème.” (Extra Crispy)

How Much Food Do Cities Waste?
It’s amazing how much we waste as human beings and even more so as Americans. Researchers put on gloves and begun to dig into municipal garbage to see what we were through away and who wastes the most. (Wired)

When States Decided What Stocks You’re Allowed To Buy
Great news clip from Marcelo Lima from the NYT back in 1980 when Apple had its IPO. The valuation was considered too high for Massachusetts residents to buy the stock!

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.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.