Follow thru day?

Unless equities rally to end the afternoon, today will go down as a follow thru day to the downside. The early week bounce appears to be failing. Breadth has been weakening in major indices opening the door to seasonal weakness. Barometer portfolios are hedged with index futures and have reduced long positions over the last two weeks. 

After maintaining a bullish stance since lows in February 2016 we are more cautious in the near-term. Our intermediate term view remains bullish supported by strong fundamentals, solid risk equity premia and cautious investor positioning however longer term corrections can only happen when started by short term corrections. Our job is not to say what should happen, but rather to focus on what is happening.  Listen to the markets message. 

Seasonal weakness is likely to create back half opportunity. With clear leadership themes and low correlations, the current market continues to favour active vs. passive managers. 

Mind the Gaps

Mondays market action was clearly much better than at the end of last week.

Indices and sectors rallied into the gaps that were left when the market dropped Thursday. From here, follow through would be required to become more bullish however, no short or long term breadth indicators reversed back positive with Monday action.

Bullish percent measures have been turning down for weeks around the globe which clearly had little to do with the North Korea news last week. When the news hit, the market were already vulnerable to shock. 

At the sector level, tech had the best bounce which makes sense given that it has been clear leadership during this bull market. Most sectors also attempted to fill the gaps left last week, with a few note able exceptions.

We will continue to watch for indication that recent weakness is resolving however for now, we remain invested with index hedges in place to mute market impact.

See below some key 15 minute charts.



Recent trading ranges resolving…bonds and energy making moves $TLT $TLH $XOP

Much has been made of the recent tight ranges in many asset classes. It appears that we are moving through the end of thes tight trading ranges. 

Bond prices appear to moving lower…bullish for interest sensitives like financials, and industrials. 

And energy shares after consolidating their move up from the lows in January appears to be beginning another move higher.  


All of this bodes well for risk assets as money is likely to start a more concerted rotation from fixed income to equities. 

Do consensus bearish sell-side forecasts lead to down markets? This may not surprise you ;-)

From a BAML report, their Sell Side Indicator is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month, they have found that when Wall Street strategists are bearish, markets tend to go the other way. In fact, with BAMLs indicator at the most bearish level in three years, they point out that when it was at these levels or lower, the forward 12 month total return for the S&P500 was positive 100% of the time for an average 12 month return of 27%!

This study supports The Barometer Team view that investors and analysts can’t currently see the forest for the trees. Flows continue into bonds at the lowest yields in history and flows continue out of equities while the yields available in stocks offer the biggest yield premium to bonds in 20 years. This is all ocurring at a time when earnings revisions for US stocks over the last month have seen the biggest lift in five years.

With markets having consolidated the gains made between February and June, Barometer believes markets are set to move against the grain leaving many portfolio managers and investors woefully under-invested.

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Flows into or out of Equities

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After coming back from what many considered the brink in February on expanding market breadth, the S&P500 made new all-time highs in June. Since then the market has traded sideways in the tightest consolidation range in forty years, working off an over-bought condition. During this period, while many managers and investors have been reducing equity weightings and talking the market lower, breadth readings have been immune and have remained skewed solidly positive.  Of our short term indicators, percent of stocks with positive price momentum has pulled back from 72% in the S&P500 to 34% and now the market looks likely to be ready to make another push higher.

“Never short a quiet market”. Tightest trading range in 40 years…and no deterioration in breadth. $SPY