Much has been made of the late January equity swoon and whether the bounce from the Feb 9 lows is sustainable.
From the rising 200day moving average and the overnight S&P500 futures lows from the previous Monday night equities have rallied sharply.
Since then, almost immediately, the four key short term breadth indicators Barometer uses reversed up after the sharp declines that began as extremely overbought and finished as oversold. These include % of NYSE stocks trading above their 50 day moving Averages, % of NYSE stocks trading above their 150 day moving averages, % of NYSE equities with positive weekly price momentum and % of NYSE Equities hitting new highs vs. new lows. Barometer removed the futures hedges put in place January 30th on Feb 9th.
Almost immediately following the short term indicators positive reversal (improving breadth) our key long term indicator reversed back up signalling a continuation in expanding market breadth and allowing the Barometer Team to redeploy accumulated cash in various portfolios.
NYSE Bullish %
As we sit today, it is important to note that the very clear leadership that had been leading the market coming into the correction is leading the rally coming out. In a structural bull market leadership should be clear and persistent. This can be frustrating for those trying to buy “broken getting fixed” or laggards as opposed to “good getting better”…leadership. New relative strength highs before the correction in the strongest momentum stocks have resolved to higher relative highs post the correction
The message….Stick with established leadership until clear signs of change!
The common characteristic in today’s market is Reflation. The market’s signalling is that we have moved from disinflation to reflation and lessons learned during 35 years of falling rates all have to be questioned….A Costanza moment!
This could last a while.
The combination of targeted focus on clear leadership, hedging and timely redeployment have been a significant contributor to a strong start to 2018 from a risk adjusted returns standpoint.
As of the close yesterday, the S&P500 has pulled back 7.8% from highs reached one week ago. Internally at Barometer the week before last we were discussing the extent that the market had become extended above its longer term moving averages and the possibility that we could see correction. As a potential trigger, we noted that the price of a Long Term US Treasury Bond had started to decline more rapidly due to strong economic and potentially inflationary data. Monday of last week, four of our short term indicators flipped lower signalling short term caution.
Last Tuesday morning the Barometer team executed S&P500 futures hedges covering approximately 50% of the portfolio equity exposures across the Barometer Private Pools and Funds in order to mute volatility. While it is never enough, these hedges have had a significant positive impact on portfolios this past week and allowed us to get to this today without having to sell winning positions which would trigger taxable gains.
Yesterdays market close, and the open today are being driven by technical factors that should clear over the next day or two. Bull markets are punctuated with short sharp pullback that shake out the latecomers. As most know, our view has been that we are in the midst of a secular (long term) re-valuation of developed market equities. It would be extremely rare for a bull market to come to an end from a Friday to a Monday morning with out any prior deterioration in our long term models. We believe that this volatility will clear.
Fundamentally, conditions remain positive. The earnings period we have just come through reflected the best quarter of earnings and revenue beats since 2008. The month of January saw the greatest number of upwards analyst earnings revisions since 2002. The employment picture continues strong and credit conditions show no signs of stress.
We expect that the near term weakness and volatility is likely to clear over the next few days and potentially as soon as today or tomorrow and then markets are likely to resume an upward trajectory. We will update as markets unfold.