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.”


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.

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.