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Bull Trap?

The bulls are back. $SPX up nearly 8% in January and nearly 14% off of the December lows. What slowing global growth? What reduced earnings expectations? Trade wars? Who cares. It’ll all sort itself out, all that matters was the Fed caving in spectacular fashion laying the foundation for the big bull case. The central bank 2 step is back: Dovish + dovish = nothing but higher prices. The lows are in, what else can I buy? This pretty much sums up current sentiment.

And so goes the familiar script during emerging bear markets, a general sense of relief that the lows are in and a return of optimism and greed after an aggressive counter rally following an initial scary drop. Long forgotten are the December lows after a torrent consecutive 6 weeks of higher prices.

While indeed a renewed fully dovish Fed may be all that’s needed to keep 2019 bullish (after all this playbook has worked for the past 10 years) there is evidence that this rally may turn out to be a big fat bull trap.

And it’s not a single data point, but rather it’s a confluent set of factors that are acting in concert that give credence to this possibility.

Let me walk you through the factors step by step.

Firstly here’s the big monthly chart of everything as I call it which includes $SPX, some basic technical elements, but also a price chart of the 10 year yield ($TNX) and the unemployment rate:

Note the common and concurrent elements of the previous two big market tops (2000 & 2007) versus now:

  1. New market highs tagging the upper monthly Bollinger band on a monthly negative RSI (relative strength) divergence – check

     

  2. A steep correction off the highs that breaks a multi-year trend line – check

  3. A turning of the monthly MACD toward south and the histogram to negative – check

  4. A correction that transverses all the way from the upper monthly Bollinger band to the lower monthly Bollinger band before bouncing – check

  5. A counter rally that moves all the way from the lower Bollinger Band to the middle Bollinger band, the 20MA – check

  6. A counter rally that produces a bump in the RSI around the middle zone alleviating oversold conditions – check

  7. All these events occurring following an extended trend of lower unemployment, signaling the coming end of a business cycle – check

  8. All these events coinciding with a reversal in yields – check

  9. All these events coinciding with a Federal Reserve suddenly halting its rate hike cycle – check

I submit that the current counter rally is consistent with all of these factors. Indeed, as with counter rallies in the past, this rally remains below its broken trend line.

What can we learn from the counter rallies during the two previous emerging bear markets?

In 2008, following the 2007 top, $SPX fell deep below its 200MA, but then saw an aggressive counter rally in a rising wedge pattern that stopped at the 200MA before everything reversed:

What did optimistic, the coast is clear, buyers know then? Nothing as $SPX didn’t bottom until 666 in March 2009.

In 2001 $SPX rallied hard from a yearly low in December (similar to now) and the high was made on January 31, the last trading day of the month. Unbeknownst to buyers then that day turned out to be the high for YEARS to come as markets turned south in advance of the coming recession:

Lows didn’t come until 2002/2003.

Look, my eyes are wide open here, I recognize that between the dovish Fed and a potential China deal markets may just drift higher and any pullbacks could turn into buying opportunities.

However, as long as $SPX remains below its 200MA without a confirmed breakout above the confluent set of elements discussed above suggest there is well founded risk that this market can still turn into a full fledged bear market. After all growth is slowing, earnings growth is slowing and the last 3 times the Fed halted its rate hike cycle a recession soon followed.

And what do we have so far? An aggressive counter rally below the 200MA in a very steep ascension pattern approaching key .618 fib resistance:

In early 2018 the 200MA was support, in the fall it became resistance. $SPX remains below it and I think it’s fair to say we’re no longer oversold. Indeed a dovish Fed has now been priced in. Jay Powell made sure of that on January 4th and confirmed it this week. That carrot is gone.

While the bull case remains technically unconfirmed at this stage the bull trap scenario will also remain unconfirmed for some time. The first few down days following the peak in January 2001 and the peak in May 2008 did not have anyone waving a big white flag screaming the top is in. It’s easy to see these things in hindsight, but much harder, if not impossible, if you’re in the thick of things. And this is where we are now, in the thick of things, and will be for weeks to come, but I suspect we’ll know more in the next month or two. Stay sharp.

Courtesy of Northmantrader

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With the SPX up ~8% in just the last month, increasingly nervous investors who still vividly recall the freefall days of December 2018, are wondering what will stop the unrelenting rally according to JPMorgan's Adam Crisafulli who writes this morning that while there are always risks, none of the (known) ones seem particularly threatening at the moment.

Still, according to the JPM strategist, investors should be wary about chasing the SPX above 16x (i.e. above ~2750) but the index is more likely to touch 16.5x (>2800) than it is to hit 15x (<2600) based on everything known right now.

With that modestly bullish bias in mind, Crisafulli lists 14 things that can go wrong and send stocks sliding once more.

  1. TSYs and the USD fail to ratify the Fed optimism – at some point the TSY curve needs to steepen and the USD has to weaken in order to confirm the dovish takeaways from the recent Fed decision.  If TSY yields fall across the board (or even worse, if the curve flattens) and/or the USD stays bid, this would suggest growth is set to soften going forward.
  2. Growth softens – US growth loses steam, European decelerates further, and China fails to stabilize.  At the moment, this seems unlikely – the US is on a healthy track and China data of late has contained some silver linings (Europe is a bigger wildcard).
  3. The US and China fail to reach a trade agreement – while its always possible Trump could move forward and hike tariffs after the 3/1 ceasefire deadline, this seems very unlikely and all signs point to a Washington-Beijing détente.  The question at this point should be what happens to the existing tariffs – are they rescinded instantly or kept in place to ensure Chinese compliance?  
  4. Trump ratchets up pressure on Eurozone auto OEMs – the Commerce Department is likely to soon grant Trump the authority to implement auto tariffs on national security grounds although it seems unlikely the White House will actually take this step.  The CQ4 market volatility has led to a clear reduction in White House trade threats and it seems unlikely this is an agenda Trump wants to pursue aggressively heading into ’20.
  5. Earnings estimates continue to drift lower – the ’19 consensus has drifted down from ~$178 back in Oct/Nov to ~$172-173 at present.  A ~$172.50 number is enough to support the SPX at present levels but should it slip any further obviously this would represent headwinds for the SPX.  Given that CQ4 earnings are largely over, the ’19 consensus probably won’t change much for the next few weeks.
  6. Super-cap tech stocks exhibit ongoing fatigue – it wouldn’t be shocking to see the super-cap tech stocks continue to trade sideways as they digest years of outperformance and this would be a headwind for the SPX given their enormous weighting in the index (although this could help fuel further outperformance for cyclicals and EMs as the tech dollars search for a new home)
  7. Investors could become more sensitive to valuations – investors may not be comfortable chasing the SPX above 16x but that still means the index can get to ~2750 (and 16.5x would get the index above 2800).  Based on the present fundamental landscape, the odds of the SPX touching 16.5x are higher than they are for the index to return back to 15x.
  8. Washington engages in a big debt ceiling battle – given the recent wall funding fracas, some may worry about a protracted battle around the debt ceiling but this probably won’t occur.  Neither side has made serious debt ceiling threats while the White House clearly is attempting to moderate its policies and rhetoric in a bid to quell market volatility.  The debt ceiling has been suspended until 3/2 although it probably won’t become binding until the summer.  
  9. The Mueller report legally jeopardizes Trump – media reports suggest the Mueller report could hit as soon as mid-Feb although it seems this may wind up be anticlimactic and probably won’t legally undermine Trump.
  10. The Fed attempts to recalibrate market expectations around tightening – stocks right now assume the Fed is permanently over with tightening and could conclude its balance sheet run-off process sooner than anticipated just a few months ago.  However, if US data stays on its present track, int’l growth improves, and stocks extend their gains, the odds of one final hike could rise (although this probably won’t be a problem for stocks for a couple more months at least).
  11. Brexit is “hard” and disorderly – the odds of this actually happen are low (the 3/29 exit date is very likely to be pushed back as neither the UK nor the EU want a “hard” exit) and regardless the SPX should be relatively insulated from any fallout.  
  12. Crude supplies spike and oil prices collapse – stocks are very positively correlated to oil and thus a softening in Brent prices would undermine the SPX.  This may be a risk going forward to the extent the OPEC+ supply agreement crumbles and/or a change in leadership in Venezuela leads to a spike in output from that country but for the next few months oil is likely to stay on its present track (in fact, the near-term risks are skewed to the upside given further tensions in Venezuela and the upcoming expiration of Iranian sanction waivers).  The next OPEC meeting is Apr 17-18 and US Iranian sanctions waivers will expire at the end of Apr (it isn’t clear which waivers will be extended).  
  13. Investors grow more nervous about tax rates ahead of the 2020 US election – this is something stocks should worry about given surging deficits and increased political support for higher tax rates on top earners but for the next few years investors probably won’t worry.  
  14. Draghi is replaced by someone very hawkish (or someone who unnerves markets in some other fashion) – Draghi’s term concludes at the end of Oct but it seems very unlikely the ECB shocks markets with his replacement.  The more important question right now isn’t who will replace Draghi but instead if the ECB will hike rates this year at all (or will they ever hike rates).

Courtesy of ZeroHedge

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U.S. stocks experienced their third straight week of gains, with the S&P 500 Index rising 2.6% and gaining more than 10% since Christmas Day.1 Investors were encouraged by comments from the Federal Reserve indicating a less aggressive policy stance and a sense that trade issues may be improving. Strong outflows from stock funds have also been an important contrarian indicator that investor capitulation had reached a limit. Several market areas were standout performers last week, including industrials, retail sectors, technology and energy, which was helped by a 7.5% climb in oil prices.1 A near -term consolidation is possible, given the strong climb over the last few weeks, but a return to December’s lows seems unlikely.

 

1. The Fed should remain data dependent, which should be good for stocks. Fed comments in October seemed to indicate it would continue to raise rates and sell off its balance sheet for the foreseeable future. But Fed Chair Jerome Powell walked back those comments in early January, causing investors to breathe a sigh of relief. If concerns about the global economy ease, we could see a couple of additional rate hikes this year. Conversely, weakening economic sentiment could cause the Fed to stand pat. In any case, the central bank appears focused on continuing to promote economic growth.

2. Trade concerns have eased a bit, at least for now. At the minimum, the United States and China appear committed to additional trade negotiations. Given that both President Trump and President Xi are eager for a political win makes it likely that some sort of deal could be reached.

3. The jobs market remains an important source of economic strength. December’s employment report was, in a word, stellar. We are keeping a close watch on wages, which have been accelerating in recent months as the jobs market tightens. This increase could represent an eventual source of inflation.

4. Manufacturing is slowing, but remains healthy. January’s ISM manufacturing data dropped sharply, but remained in expansion territory.2

5. The ongoing government shutdown could become a negative for economic growth. The current shutdown now has the dubious distinction of being the longest in history. Last week, JP Morgan lowered its forecast of first quarter GDP growth from 2.25% to 2%.3 The longer this shutdown continues, the more economic damage it is likely to cause.

 

Despite the late-2018 correction, fundamentals remain solid

Stocks have rebounded strongly over the last three weeks, regaining almost half of what they lost in the sharp meltdown in the fourth quarter of 2018. Greater stability in bond yields has certainly helped equity market sentiment. We think bond markets will likely remain relatively stable given that the Fed looks to be backing off from its rate-tightening campaign and a spike in economic activity seems unlikely. At the same time, news on the trade front appears to be improving, even if specifics about a deal remain scarce. Other geopolitical risks could persist, but outside of trade we doubt any of them will significantly affect global economic growth. A combination of greater bond market stability, a pause in the Fed’s rate hiking and some improvement around economic sentiment may help equity markets continue to recover.

Although the financial headlines have been pessimistic since October, overall economic and market fundamentals remain solid. Monetary and fiscal policy remain equity-friendly, the economy is still growing, companies are enjoying solid profit margins and corporate earnings are expanding. In other words, we see no real signs of a recession on the horizon.

That said, though, we think the highs for the current bull market may have already been realized last year. We believe volatility is likely to remain relatively elevated, which means we could see another near-term selloff at any point. Overall, we think equity markets are topping out, but that process can take quite a while and there is still room for upside. To us, this suggests that 2019 will be a year where investment selectivity is critical. In particular, we suggest focusing on companies with higher earnings quality and lower leverage.

Courtsy of Bob Doll @ Nuveen

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Macro And Credit - Buckling

Watching with interest the slowly grind higher in US interest rates with some weakening signs coming from US economic data such as the US trade deficit in goods getting spanked with orders for larger domestic appliances and other durable goods falling by a cool 3.7% from the month before, led by a hard drop in vehicle demand, when it came to choosing our title analogy for this week's conversation we reminded ourselves of "buckling" being a mathematical instability that leads to a failure mode. When a structure is subjected to compressive stress, buckling may occur. Buckling is characterized by a sudden sideways deflection of a structural member. This may occur even though the stresses that develop in the structure are well below those needed to cause failure of the material of which the structure is composed. As an applied load is increased (US interest rate hikes) on a member, such as a column, it will ultimately become large enough to cause the member to become unstable and it is said to have buckled. Further loading will cause significant and somewhat unpredictable deformations, possibly leading to complete loss of the member's load-carrying capacity. If the deformations that occur after buckling do not cause the complete collapse of that member, the member will continue to support the load that caused it to buckle. If the buckled member is part of a larger assemblage of components such as a building, any load applied to the buckled part of the structure beyond that which caused the member to buckle will be redistributed within the structure. In a mathematical sense, buckling is a bifurcation in the solution to the equations of static equilibrium. At a certain point, under an increasing load, any further load is able to be sustained in one of two states of equilibrium: a purely compressed state (with no lateral deviation) or a laterally-deformed state. Obviously we thing that financial markets have reached a bifurcation point and we have yet to see how the buckle of rising interest rates will be redistributed within the complex structures without leading to some renewed avalanche in some parts of the markets.
 
In this week's conversation, we would like to look at the vulnerability of equities and credit markets to a more hawkish tone of the Fed which would lead to more aggressive rate hikes should the "Big Bad Wolf" aka inflation continue to rear its ugly head.  
 
Synopsis:
  • Macro and Credit - Hike it till you break it
  • Final chart - Afraid of buckling? Watch credit availability
In our March 2017 conversation entitled "The Endless Summer" we concluded our missive at the time asking ourselves how many hikes it would take before the Fed finally breaks something. Given the arrival of a new Fed "sheriff" in town one might wonder if the pace will be as gradual as it seems should the Fed feels it is falling behind the curves when it comes the "Big Bad Wolf" aka inflation and current loose financial conditions. As we pointed out in our recent conversations the recent uptick in inflation coincided with a sharp sell-off in equities. Sure, one would point out to us that correlation doesn't mean causation, but, it certainly felt like the very crowded short-volatility complex was looking for a match that triggered the explosion and for some their ultimate demise.  The U.S. Average Hourly Earnings triggered the "buckling" as it brought back the fear in the markets of the return of the Big Bad Wolf aka "inflation".  For some it seems like us, it seems the "Big Bad Wolf" has already blown apart the "short vol" pig's house which was made of straw. If indeed the short-vol house was made of straw we wonder if the pig's equities markets house is made of sticks or and if the pig's credit markets house is made of bricks. The difficulty for the Fed in the current environment is the velocity of both the rates rise and inflation, because if indeed the Fed hike rates too quickly then it will trigger some other avalanches down the capital structure (short-vol complex being the equity tranche or first loss piece of the capital structure we think). If inflation and growth rise well above trend, then obviously the Fed will be under tremendous pressure to accelerate its normalization process. It is a very difficult balancing act.
 
When it comes to the bounce back for equities following the short-vol avalanche, which could have been possibly triggered by the recent uptick of inflation, we read with interest Deutsche Bank's Asset Allocation note from the 23rd of February entitled "Inflation and Equities" with the long summary below:
"The recent uptick in inflation coincided with a sharp correction in equities
Whether this was cause and effect is debatable for a variety of reasons and around half the correction reversed quickly (Stretched Consensus Positioning, Jan 31 2018; An Update On The Unwind, Feb 12 2018). Nonetheless, late in the business cycle with a tight labor market, strong growth, a lower dollar, higher oil prices and a fading of one off factors, all point to inflation moving up. What does higher inflation mean for equities? We discuss five key questions.
Is inflation bad for margins and earnings? Historically, higher inflation has been associated with higher margins and strong earnings growth
■ Conceptually, higher inflation is ambiguous. From a pricing vs cost perspective, whether higher inflation leads to higher or lower margins depends on the relative strengths of price vs wage and other input cost inflation. It depends on the relative importance of variable vs fixed costs. And on the extent to which corporates can increase productivity in response to cost pressures. It is notable that while markets seem to have been surprised by the recent uptick in wage inflation, corporates have been noting it for at least a year. Finally, inflation does not occur in a vacuum. The drivers of higher inflation matter and when it reflects strong growth, it implies not only higher sales but operating leverage from fixed costs can raise margins and amplify the impact on earnings.
Historically, the empirical evidence is unambiguous. Higher inflation was clearly associated with higher margins and strong earnings growth.
Does higher inflation mean lower equity multiples? By how much? A 1 pp rise in inflation compresses equity multiples by 1 point or a decline in prices of around 5% from recent pre-correction levels
■ The correlation between bond yields and equities depends on the driver: inflation (-) or real rates (+). Contrary to popular notions that higher bond yields mean lower equities, the historical relationship between bond yields and equities has been ambiguous (Long Cycles In The Bond-Equity Correlation, May 2014). Instead, the impact of higher yields on equities depends on whether they reflect higher inflation (-) which has always been negative for equities; or whether higher yields reflect higher real rates (+) which have always been positive for equities until real rates reached very high levels (greater than 4%--seen only once during the Volcker disinflation) (Do Higher Rates Mean Lower Equity Multiples? Sep 2014).
■ Why is higher inflation negative for equity valuations? When inflation moves up, the hurdle rate for all nominal investments moves up and in turn bond yields and earnings yields (inverse of the equity multiple) move up.
■ A 1pp rise in inflation compresses multiples by 1 point. A majority (70%) of the historical variation in the S&P 500 multiple is explained by its drivers: earnings/normalized levels (-); payouts (+); rates broken up into inflation (-) and real rates (+); and macro vol (-). Our estimates imply that a 1pp rise in inflation lowers the equity multiple by 1 point or a 5% decline in prices from the recent peak. Our house view and the consensus sees a somewhat smaller rise in inflation over the next 2 years. These ranges of increases in inflation imply a modest pullback in equities that would put it within the bands of normal 3-5% pullbacks that have historically occurred every 2-3 months.
Is the inflection in inflation a leading indicator of the end of the cycle? How long is the lead? On average 3 years, but the Fed’s reaction is key
With an average correction in equities of 21% around recessions, the timing of the next one is obviously key. If the recent uptick marks the typical mid- to latecycle inflection up in inflation, how long after did the next recession typically occur? On average 3 years, which would put it in late 2020. But the timing is likely determined critically by the Fed’s reaction. Historically, a Fed rate-hiking cycle preceded most recessions since World War II, with recessions occurring only after the Fed moved rates into contractionary territory. Arguably the Fed did this only after it was convinced the economy was overheating and it continued hiking until the economy slowed sufficiently or went into recession. At the current juncture, core inflation has remained below the Fed’s target of 2% for the last 10 years and several Fed officials have argued for symmetry in inflation outcomes around the target, i.e., to tolerate inflation above 2%. It is thus likely that the Fed will welcome the rise in inflation for now and simply stick to its current guidance, possibly moving it up modestly.
How high will inflation go? If inflation expectations remain range bound, core PCE inflation will stay within its narrow band of 1-2.3% in which it has been for the last 23 years
Outside the Great Inflation of 1968-1995, core PCE inflation has remained in a remarkably narrow band (Six Myths About Inflation, Oct 2017). The period since 1996 encompassed 3 business cycles that saw unemployment fluctuate between 3.8% and 10%; the dollar rise and fall by 40% more than once; oil prices rise 7-fold and almost completely reverse. Yet inflation remained in a narrow band unusual for an economic time series. Indeed, with a standard deviation of 35 bps, much of the range of variation in inflation since 1996 cannot be differentiated from the normal noise inherent in macro data.
The stability of inflation across large business- dollar- and oil-cycles in our view reflects the stability of inflation expectations which are the only driver of inflation over the long run. Inflation expectations have been stable since the mid-1990s, fluctuating for most of the last 23 years in a tight 50bps range and for most of it in an even narrower 30bps range. Following the dollar and oil shocks of 2014-2015, inflation expectations fell out of and are still 20bps below this range and 50bps below average. Absent large unexpected and persistent shocks, inflation expectations evolve slowly. It has in fact been difficult for policy makers to effect changes in inflation expectations as the recent experience of Japan and  the 10-year miss on the core PCE inflation target in the US illustrate (Six Myths About Inflation, Oct 2017).
What about all the stimulus? The impact of the stimulus will follow a pickup in growth with long lags (1½ years)
It is well known that inflation responds with long lags to growth, a tightening labor market and the dollar. Consider that the correlation between real GDP growth and core CPI inflation is a modest positive 5%. But when GDP growth is lagged by 6 quarters, the correlation jumps to a much stronger 80%. The lagged relationship implies that a sustained 1pp increase in GDP growth raises core inflation by 20bps after 1½ years. Our house forecast for GDP growth which is above consensus implies GDP growth of near 3% and core inflation peaking around 2.2% in 2020.
Growth outcomes significantly above our house view would need to materialize and sustain to raise inflation above and outside the band of the last 23 years. Moreover there would be plenty of lead time with growth needing to sustain at high levels for a prolonged period (1½ years) before it moved inflation up."  - source Deutsche Bank
As we repeated in numerous conversation, for a bear market to materialize you would need a significant pick-up in inflation for your "buckling" to occur and to lead to a significant repricing of risky asset prices such as equities and US High Yield. But what is very interesting to us is that the buildup in the trade war rhetoric coming from the US could be a harbinger for higher inflation down the line given that companies would most likely increase their prices with rising import prices that would be passed on already stretched consumers thanks to solid use of the credit cart (nonrevolving credit). 
 
In our recent conversation "Bracket creep", which describes the process by which inflation pushes wages and salaries into higher tax brackets, leading to a fiscal drag situation, we indicated that with declining productivity and quality with wages pressure building up, this could mean companies, in order to maintain their profit margins would need to increase their prices. To repeat ourselves "Protectionism", in our view, is inherently inflationary in nature. 
 
To preserve corporate margins, output prices will need to rise, that simple, and it is already happening. This can have a significant impact on earnings particularly when the S&P 500 Net Income Margins LTM is at close to record levels as indicated in Deutsche Bank's note:
"Inflation and earnings
Is inflation bad for margins and earnings? Historically, higher inflation has been associated with higher margins and strong earnings growth
Conceptually, higher inflation is ambiguous. From a pricing vs cost perspective, whether higher inflation leads to higher or lower margins depends on the relative strengths of price vs wage and other input cost inflation. It depends on the relative importance of variable vs fixed costs. And on the extent to which corporates can increase productivity in response to cost pressures. It is notable that while markets seem to have been surprised by the recent uptick in wage inflation, corporates have been noting it for at least a year. Finally, inflation does not occur in a vacuum. The drivers of higher inflation matter and when it reflects strong growth, it implies not only higher sales but operating leverage from fixed costs can raise margins and amplify the impact on earnings.
Historically, the empirical evidence is unambiguous. Higher inflation was clearly associated with higher margins and strong earnings growth.
- source Deutsche Bank
 
With the S&P 500 Net Income Margins LTM close to record levels and with the recent rise in prices operated by companies recently, it remains to be seen how long can margin levels remain this elevated. Sure, the fiscal boost provided by the US government should provide additional support yet the big question for us is relative to the US consumer and its sensitivity to rising prices as we discussed in the final point of our conversation "Harmonic tremor". Have we seen peak "Consumer confidence" and peak PMIs recently? One thing for certain is that Citigroup’s US Economic Surprise Index (CESIUSD Index) as an indicator of economic momentum has started to "buckle" recently. There is a clear relationship between the CITI's Economic Surprise Index and the Fed's monetary policy. When the Fed is in tightening mode, good news such as rising inflation expectations is generally seen as bad news. In spread terms, only high yield is sensitive to macro surprises. Moreover, the response of high yield spreads to macro surprises is "monotonic" in ratings: the lower the rating, the stronger the response. In our conversation "A shot across the bows", we indicated the following when it comes the Citi Economic Surprise Index (CESI). It could potentially indicate that economic fundamentals are trading ahead of themselves and could portend some credit spreads widening in the near future given there is a reasonably strong relationship between the inverse of Citigroup Economic Surprise Index and both the IG CDX and HY CDX. So all in all, you want to watch what the CESI does in the coming weeks and months. 
 
But moving back to the impact of the "Big Bad Wolf" aka inflation on equity multiples, we read with interest as well the other part of Deutsche Bank's report on the impact inflation can have:
"Inflation and equity multiples
Does higher inflation mean lower equity multiples? By how much? A 1 pp rise in inflation compresses equity multiples by 1 point or a decline in prices of around 5% from recent pre-correction levels
■ The correlation between bond yields and equities depends on the driver: inflation (-) or real rates (+). Contrary to popular notions that higher bond yields mean lower equities, the historical relationship between bond yields and equities has been ambiguous (Long Cycles In The Bond-Equity Correlation, May 2014). Instead, the impact of higher yields on equities depends on whether they reflect higher inflation (-) which has always been negative for equities; or whether higher yields reflect higher real rates (+) which have always been positive for equities until real rates reached very high levels (greater than 4%--seen only once during the Volcker disinflation) (Do Higher Rates Mean Lower Equity Multiples? Sep 2014).
Why is higher inflation negative for equity valuations? When inflation moves up, the hurdle rate for all nominal investments moves up and in turn bond yields and earnings yields (inverse of the equity multiple) move up.
■ A 1pp rise in inflation compresses multiples by 1 point. A majority (70%) of the historical variation in the S&P 500 multiple is explained by its drivers: earnings/normalized levels (-); payouts (+); rates broken up into inflation (-) and real rates (+); and macro vol (-). Our estimates imply that a 1pp rise in inflation lowers the equity multiple by 1 point or a 5% decline in prices from the recent peak. Our house view and the consensus sees a somewhat smaller rise in inflation over the next 2 years. These ranges of increases in inflation imply a modest pullback in equities that would put it within the bands of normal 3-5% pullbacks that have historically occurred every 2-3 months.
- source Deutsche Bank
 
Obviously from a "buckling" perspective the big question is whether higher yields reflect higher real rates (+) which have always been positive for equities until real rates reached very high levels, or, are they reflecting a higher inflation risk, in which case the repricing could be more severe as the Fed would probably step up on its hiking gear. For the positive momentum to hold and goldilocks environment to continue, you would need inflation and growth not running too hot, so that the Fed can gradually hike rather than stepping up its hiking pace. This is as well clearly highlighted by Charlie Bilello from Pension Partners in his blog post from the 15th of February entitled "Inflation, deflation and stock returns".
 
Again, it is a matter of "velocity" in the movement. An exogenous factor such as a geopolitical event that would trigger a sudden and rapid rise in oil prices would of course upset the situation and be much more negative for equities as we saw with the huge rise in oil prices prior to the Great Financial Crisis (GFC) of 2008.
 
One might therefore rightly ask if indeed inflation could be a leading indicator for recession. This is also a point which has been discussed in Deutsche Bank's very interesting note:
"Inflation as a leading indicator of recession
Is the inflection in inflation a leading indicator of the end of the cycle? How long is the lead? On average 3 years, but the Fed’s reaction is key
With an average correction in equities of 21% around recessions, the timing of the next one is obviously key. If the recent uptick marks the typical mid- to latecycle inflection up in inflation, how long after did the next recession typically occur? On average 3 years, which would put it in late 2020. But the timing is likely determined critically by the Fed’s reaction. Historically, a Fed rate-hiking cycle preceded most recessions since World War II, with recessions occurring only after the Fed moved rates into contractionary territory. Arguably the Fed did this only after it was convinced the economy was overheating and it continued hiking until the economy slowed sufficiently or went into recession. At the current juncture, core inflation has remained below the Fed’s target of 2% for the last 10 years and several Fed officials have argued for symmetry in inflation outcomes around the target, i.e., to tolerate inflation above 2%. It is thus likely that the Fed will welcome the rise in inflation for now and simply stick to its current guidance, possibly moving it up modestly.
- source Deutsche Bank
 
It is most likely that the Fed's hiking process was due to its fear of not being behind the curve when it comes to rising inflation. Yet with a yield curve flattening and loose financial conditions in conjunction with renewed fear of a trade war that would entail pricing pressure and imported inflation with a bear market in the US dollar, there is indeed a big risk in having the Fed having to move at a more rapid pace than it would like to. The balancing act of the Fed is incredibly difficult but, it boast a first mover advantage other the likes of the ECB and the Bank of Japan. Volatility might have been repressed but in all honesty, it is in Europe where the repression has been the most acute as it can be seen in government bond yields.
 
The big question surrounding the potential lethality of the "Big Bad Wolf" aka inflation lies in the velocity of inflation expectations. On that specific point, Deutsche Bank gives us additional food for thoughts in their lengthy note:
"Inflation and inflation expectations
How high will inflation go? If inflation expectations remain range bound, core PCE inflation will stay within its narrow band of 1-2.3% in which it has been for the last 23 years
■ Outside the Great Inflation of 1968-1995, core PCE inflation has remained in a remarkably narrow band (Six Myths About Inflation, Oct 2017). The period since 1996 encompassed 3 business cycles that saw unemployment fluctuate between 3.8% and 10%; the dollar rise and fall by 40% more than once; oil prices rise 7-fold and almost completely reverse. Yet inflation remained in a narrow band unusual for an economic time series. Indeed, with a standard deviation of 35 bps, much of the range of variation in inflation since 1996 cannot be differentiated from the normal noise inherent in macro data.
■ The stability of inflation across large business- dollar- and oil-cycles in our view reflects the stability of inflation expectations which are the only driver of inflation over the long run. Inflation expectations have been stable since the mid-1990s, fluctuating for most of the last 23 years in a tight 50bps range and for most of it in an even narrower 30bps range. Following the dollar and oil shocks of 2014-2015, inflation expectations fell out of and are still 20bps below this range and 50bps below average. Absent large unexpected and persistent shocks, inflation expectations evolve slowly. It has in fact been difficult for policy makers to effect changes in inflation expectations as the recent experience of Japan and the 10-year miss on the core PCE inflation target in the US illustrate (Six Myths About Inflation, Oct 2017).
- source Deutsche Bank
 
As long as growth and inflation doesn't run not too hot, the goldilocks environment could continue to hold for some months provided, as we mentioned above there is no exogenous factor from a geopolitical point of view coming into play which would trigger an acceleration in oil prices. Though, in similar fashion to volatility, the game can continue to be played provided "implicit inflation" or "inflation expectations" remain below "realized" inflation. In similar fashion to the demise of the short-vol trade, if there is a change in the 23 years narrative and suddenly "realized" inflation is above "expectations" then obviously this would be another grain of sand that could trigger some new avalanches in financial markets. We are not there yet we think.
 
Finally in our final chart below, given the late stage of the credit game, we think it is becoming essential to track any changes in credit availability in the months ahead given our loose financial conditions have been and the flattening of the US yield curve.
 
  • Final chart - Afraid of buckling? Watch credit availability
We have long posited that "Credit availability" is essential and a good predictor of upcoming defaults as far as US High Yield is concerned. The most predictive variable for default rates remains credit availability and if credit availability in US dollar terms vanishes, it could portend surging defaults down the line. The quarterly Senior Loan Officer Opinion Surveys (SLOOs) published by the Fed are very important to track. The SLOOS report does a much better job of estimating defaults when they are being driven by a systemic factor, such as a turn in business cycle or an all-encompassing macro event. Tightening in credit standards in conjunction with rate hikes will eventually weight on High Yield, and we are already seeing some fund outflows in the asset class (15th consecutive week). Our final chart comes from CITI Global Economics View note from the 23rd of February entitled "How Could Equity Sell-offs Affect Global Growth" and displays US Non-financial corporations Debt Outstanding as a percentage of GDP and AAA-BBB Effective Yield Spread for Industrial Corporate Bonds (1997-2017):
"What to watch?Given that a tightening in financial conditions poses a risk to the outlook, we would monitor:
  • The durability of the sell-off: that’s rather obvious – a brief period of financial tightening is unlikely to have any material implications on the real economy.
  • Credit availability and credit spreads: given the stage of the business cycle, prospects for higher inflation, and lower monetary accommodation in advanced economies, we think credit availability and credit spreads amid high leverage across some sectors and economies are key indicators to assess whether financial conditions are starting to feed through to economic activity (Figure 6).

 

  • Sentiment measures: measures of household and business sentiment are at very high levels across most AEs. A decline in sentiment would probably be a precursor to some moderation in spending intentions, even though the relationship between consumer sentiment and real consumption appears to have declined in recent years." - source CITI
If further loading of the credit mouse trap will eventually cause significant and somewhat unpredictable deformations, possibly leading to complete loss of the member's load-carrying capacity, low recoveries and significant losses for credit investors, when it comes to assessing a potential "buckling" in the credit markets, apart from the "Big Bad Wolf" aka inflation being the enemy of volatility and leverage, credit availability is an essential part of the credit cycle.
 
Stay tuned!
 
 
 
Courtesy of Macronomy

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Market Predictions For 2018? Bring 'Em On!

Saxo Bank has a few

Naturally, predictions like this are more for bank PR than education but they have some value.

For one, they're a reminder that unexpected, huge and unpredictable moves happen in markets. And they happen far more often than we expect.

The thing is, they usually happen somewhere you least expect.

As for this set of predictions, let's hope this trader is you (from the report):

"World markets are increasingly full of signs and wonders, and the collapse of volatility seen across asset classes in 2017 was no exception. The historic lows in the VIX and MOVE indices are matched by record highs in stocks and real estate, and the result is a powder keg that is set to blow sky-high as the S&P 500 loses 25% of its value in a rapid, spectacular, one-off move reminiscent of 1987. A whole swathe of short volatility funds are completely wiped out and a formerly unknown long volatility trader realises a 1000% gain and instantly becomes a legend."

Courtesy of ForexLive

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The Fastest Growing Brands Of 2017

In a modern business era of near-constant disruption, which brands are winning the hearts of consumers the fastest?

Today’s charts look at the brands that are trending upwards. See below for the brands that have gained the most in brand value since last year, as assessed by BrandZ in their report on the world’s 100 most valuable brands.

Onwards and Upwards for Tech

As many big name brands try to find their footing in today’s fast-paced consumer environment, it’s not surprising to see up-and-coming tech brands skyrocketing in value.

Biggest Movers in Tech

In line with growing revenues, tech brands like Amazon, Facebook, and Netflix are also flying high with their brands. Amazon, for example, had its brand value soar 41% since last year to make it the fourth most valuable brand in the world at $139 billion. Chinese tech companies are gaining traction in the eyes of consumers as well, with Tencent and Alibaba both growing their brand values at clips of 20% or higher.

Note: the measure of “brand value”, not to be confused with company valuation metrics like market cap, is a way of quantifying the dollar value that a particular brand’s image is contributing to the overall value of a corporation.

Other Big Movers

Although tech brands seem to be moving up the list in unison, it’s also worth examining the brands in other sectors that have seen their brand values rapidly increase.

Biggest Movers in Tech

The brands seen here have some interesting commonalities and points worth noting.

Firstly, despite not being a tech brand, Adidas was actually the fastest-growing brand in the whole report with a 58% increase in brand value from 2016 to 2017. According to the analysis, the apparel brand saw its retro sneakers “connect perfectly” with the fashion moment.

Next, alcohol brands also generally performed admirably. Three of the brands that had double-digit growth were owned by the world’s largest beer company, AB InBev – and two of those brands (Skol and Brahma) are Brazilian. Further, Kweichow Moutai, a Chinese liquor maker that surpassed Diageo earlier this year in market capitalization, is also rising fast.

Also of interest is that two 3G Capital restaurant brands, Burger King and Tim Horton’s, happened to increase substantially in brand value. Of course, 3G Capital owns a stake in the aforementioned AB InBev as well.

New Entrants

The following brands are the newest entrants on the 2017 edition of the top 100 list:

Biggest Movers in Tech

However, as we transition into 2018, these new entrants may have very different fortunes ahead of them.

On one hand, Salesforce has been outlining when it’ll hit $20 billion in sales, and Netflix is still crushing expectations for subscription growth.

On the opposite side of the spectrum, Snap Inc. recently reported slow user growth, which made shares tumble 18% in value. The company’s platform, Snapchat, is locked in a battle with Instagram for users, and it remains to be seen how this will affect both company and brand values down the road.

Courtesy of VisualCapitalist

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There is no shortage of cognitive biases out there that can trip up our brains.

By the last count, there are 188 types of these fallible mental shortcuts in existence, and they constantly impede our ability to make the best decisions about our careers, our relationships, and for building wealth over time.

Biases That Plague Investors

In today’s infographic from StocksToTrade, we dive deeper into five of these cognitive biases – specifically the ones that really seem to throw investors and traders for a loop.

Next time you are about to make a major investing decision, make sure you double-check this list!

Courtesy of: Visual Capitalist

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All of the World’s Money and Markets

When we talk about the giant size of Apple, the fortune of Warren Buffett, or the massive amount of global debt accumulated – all of these things sound large, but they are actually extremely different in magnitude.

That’s why visualizing things spatially can give us a better perspective on money and markets.

How Much Money Exists?

This infographic was initially created to show how much money exists in its different forms. For example, to highlight how much physical cash there is in comparison to broader measures of money which include saving and checking account deposits.

Interestingly, what is considered “money” depends on who you are asking.

Are the abstractions created by Central Banks really money? What about gold, bitcoins, or other hard assets?

A New Meaning

However, since we first released this infographic in 2015, “All the World’s Money and Markets” has taken on a different meaning to us and many others. It’s a way of simplifying a complex universe of currencies, assets, and other financial instruments in a way that people can understand.

Numbers represented in the data visualization range from the size of the above-ground silver market ($17 billion) to the notional value of all derivatives ($1.2 quadrillion as a high-end estimate). In between those two extremes, we’ve added many other familiar measures, such as the GDP of California, the value of equities, the real estate market, along with different money supply metrics to give perspective.

The end result? A visually pleasing, but enlightening new way to understand the vast universe of global assets.

Courtesy of: Visual Capitalist

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Will Credit Cause A Slowdown

Saxo Bank thinks a slowdown in credit growth is bad news

IF THERE is a consensus at the moment, it is that the global economy is finally managing a synchronised recovery. The purchasing managers' index for global manufacturing is at its highest level for six years; copper, the metal often seen as the most sensitive to global conditions, is up by a quarter since May

But Steen Jakobsen of Saxo Bank thinks this strength will not last. His leading indicator is a measure of the change in private sector credit growth. This peaked at the turn of the year and is now heading down sharply. Indeed the change in trend is the most negative since the financial crisis (see chart). Since this indicator leads the economy by 9-12 months, that suggests a significant economic slowdown either late this year or early  in 2018. He says that

This call for a significant slowdown coincides with several facts: the ECB’s QE programme will conclude by end-2017 and will at best be scaled down by €10 billion per ECB meeting in 2018.  The Fed, for its part, will engage in quantitative tightening with its announced balance sheet runoff. All in all, the market already predicts significant tightening by mid-2018.

Given the role played by central banks in propping up the economy and markets since 2009, it is certainly plausible that their role will be vital in ending the recovery.  And while copper is a good leading indicator, so is the bond market. At the turn of the year, most people thought the ten-year government bond yield would rise as a Trump stimulus fulled the global recovery; the yield is now 2.06%, down from 2.44%.

Courtesy of TheEconomist

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Market Complexity Could Trigger the Next Crash

Complex systems are all around us.

By one definition, a complex system is any system that features a large number of interacting components (agents, processes, etc.) whose aggregate activity is nonlinear (not derivable from the summations of the activity of individual components) and typically exhibits hierarchical self-organization under selective pressures.

In today’s infographic from Meraglim we use accumulating snow and an impending avalanche as an example of a complex system – but really, such systems can be found everywhere. Weather is another complex system, and ebb and flow of populations is another example.

Markets are Complex Systems

Just like in the avalanche example, where various factors at the top of a mountain (accumulating volumes of snow, weather, temperature, geology, gravity, etc.) make up a complex system that is difficult to predict, markets are similarly complex.

In fact, markets meet all the properties of complex systems, as outlined by scientists:

1. Diverse
System actors have different points of view. (i.e. bullish, bearish, long, short, leveraged, non-leveraged, etc.)

2. Connected
Capital markets are over-connected, and information spreads fast. (i.e. chat rooms, phone calls, emails, Thomson Reuters, Dow Jones, Bloomberg, trading systems, order entry systems, etc.)

3. Interaction
Trillions of dollars of securities are exchanged in transactions every day (i.e. stocks, bonds, currencies, derivatives, etc.)

4. Adaptive Behavior
Actors change their behavior based on the signals they are getting (i.e. making or losing money, etc.)

And like the avalanche example, where a single snowflake can trigger a much bigger event, there are increasing signs that the complexity behind the stock market has also reached a critical state.

Markets in a Critical State

Here are just some examples that show how the market has entered into an increasingly critical state:

Record-Low Volatility
The VIX, an index that aims to measure the volatility of the market, hit all-time lows this summer.

Bull Market Length
Meanwhile, the current bull market (2009-present) is the second-longest bull market in modern history at 3,109 days. The only bull market that was longer went from the 1987 crash to the Dot-com bust.

Valuations at Highs
Stock valuations, based on Robert Schiller’s CAPE ratio (which looks at cyclically-adjusted price-to-earnings), are approaching all-time highs as well. Right now, it sits 83.3% higher than the historical mean of 16.8. It was only higher in 1929 and 2000, right before big crashes occurred.

Market Goes Up
Investor overconfidence leads investors to believe the market only goes up, and never goes down. Indeed, in this bull market, markets have gone up 67 of the months (an average gain of 3.3%), and have gone down only 34 months (average drop of -2.6%).

Here are some additional signs of systemic risk that make complex markets less stable:

  • A densely connected network of bank obligations and liabilities
  • Over $70 trillion in debt added since Financial Crisis
  • Over $1 quadrillion in notional value of derivatives
  • Non-bank shadow finance through hedge funds and securitization make risk impossible to measure
  • Increased leverage of banks in some markets
  • Greater concentration of financial assets in fewer companies

In other words, there are legitimate reasons to be concerned about “snow” accumulation – and any such “snowflake” could trigger the avalanche.

In complex dynamic systems that reach the critical state, the most catastrophic event that can occur is an exponential function of scale. This means that if you double the system, you do not double the risk; you increase it by a factor of five or 10

– Jim Rickards, author of Road to Ruin

The Next Snowflake

What could trigger the next avalanche? It could be anything, including the failure of a major bank, a natural disaster, war, a cyber-financial attack, or any other significant event.

Such “snowflakes” come around every few years:

1987: Black Monday
The Dow fell 508 points (-22.6%) in one day.

1994-95: The Mexican peso crisis
Systemic collapse narrowly avoided when the U.S. government bailed out Mexico using the controversial $20 billion “Exchange Stabilization Fund”.

1997: Asian financial crisis
East Asian currencies fell in value by as much as -38%, and international stocks by as much as -60%.

1998: Long Term Capital Management
Hedge fund LTCM was in extreme distress, and within hours of shutting down every market in the world.

2000: The Dotcom crash
Nasdaq fell -78% in 30 months after early Dotcom companies crashed and burned.

2008: Lehman Brothers bankruptcy
Morgan Stanley, Goldman Sachs, Bank of America, and J.P. Morgan were days away from same fate until government stepped in.

Shelter from the Avalanche

The Fed and mainstream economists use equilibrium theory, regressions, and correlations to quantify the markets. And while they pay lip-service to black swans, they don’t have a good way of forecasting them or predicting them.

Markets are complex – and only complexity theory and predictive analytics can help to shed light on their next move.

Alternatively, investors can seek shelter from the storm by investing in assets that cannot be digitally frozen (bank accounts, brokerage accounts, etc.) or have their value inflated away (cash, fixed-income). Such assets include land, precious metals, fine art, and private equity.

Courtesy of: Visual Capitalist

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China Plans To Ban Sales Of Fossil Fuel Cars Entirely

China’s big electric vehicle push is about to get even bigger: The country is planning to end the sale of fossil fuel-powered vehicles entirely, with regulators working currently on a timetable of when the ban will ultimately take effect, according to Bloomberg.

China is the world’s largest auto market, with 28.03 million vehicles sold last year, a boost in demand of 13.7 percent vs. 2015 sales numbers. The nation has already done a lot to incentivize manufacturers to develop and sell new EVs, including allowing foreign automakers to create a third joint venture with local automakers (a standard requirement for doing business in the country for auto OEMs) so long as it’s dedicated to the creation of EVs exclusively.

The government has also created a number of incentive programs for OEMs, including subsidies. This will add to its positive efforts to drive more EV sales in China with the ultimate negative condition on the other side – at some point, automakers just won’t be able to do business at all in the country if they’re still selling a mix of fossil fuel and electrified vehicles.

This isn’t the first time a governing body has said it would eventually phase out the sale of traditional fuel vehicles: France said it will stop selling fossil fuel cars by 2040 in July, and the UK has committed to the same timeline for sales of those vehicles.

Critics have suggested that a ban on fossil fuel vehicles is likely impractical, because it would stretch an already taxed supply chain, which has some hard limits in terms of the volume of lithium available for lithium-ion battery cells, for instance. But automakers are already responding to this rising trend with expanded EV model lineups and, in the case of Volvo for instance, plans to eventually sell exclusively all-electric or hybrid cars.

China’s timeline for establishing this ban will be crucial in terms of how quickly we see the global shift to EVs occur, as it’s going to be an immense lever in terms of automaker strategic planning internationally, as well as in the country.

Courtesy of TechCrunch

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Well, here it comes—September. It’s widely considered the worst month of the year for equities for good reason since it has historically seen the worst performance. Per Ryan Detrick, Senior Market Strategist, “September is the banana peel month, as some of the largest dips tend to take place during this month. Although the economy is still quite strong, this doesn’t mean some usual September volatility is out of the question—in fact, we’d be surprised it volatility didn’t pick up given how calm things have been this year.”

With the Federal Reserve, Bank of Japan, and the European Central Bank all set to announce interest rate decisions this month, and the S&P 500 Index up on a total return basis nine consecutive months as of the end of July, the stage is set for some fireworks in September.

Here’s some data to consider as September approaches:

• Since 1928, no month sports a lower average return than September, with the S&P 500 down 1.0% on average. February and May are the only other months that are generally in the negative, while July surprisingly tends to be the strongest month of the year.

• Since 1928, the S&P 500 has been higher in September only 43.8% of the time, which is by far the lowest amount—as no other month is less than 50%. December is up most often at 73.0%.

• Since 1950, September has been the worst month of the year down 0.5%, while the past 20 years it has been the second weakest month, with August faring worse.

• The worst September ever for the S&P 500 resulted in a 30% drop in 1931. In fact, no other month has had more 10% drops than September at seven. Interestingly, January is the only month that has never been down 10% or more.

• Over the past 10 years, September has been positive on average, with the S&P 500 up 0.1%. But it is worth noting that September has been lower each of the past three years.

• Since 1950, if the S&P 500 starts the month of September above its 200-day moving average (like 2017 will), it tends to do much better, as it is up 0.4% on average versus down 2.7% if it starts the month below the 200-day moving average.

• Last, August is historically a weak month as well. Generally, when the S&P 500 is lower in August what we tend to see in September is that the month is down as well. On average it’s been down 0.4%, right in line with the average monthly return.

IMPORTANT DISCLOSURES
*Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
The economic forecasts set forth in the presentation may not develop as predicted.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The 200-day moving average (MA) is a popular technical indicator which investors use to analyze price trends. It is the security or index’s average closing price over the last 200 days.

Courtesy of lplResearch

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Watch The Potential Double Tops

Doubles Tops are forming in two key ETFs, the Semiconductor SPDR (XSD) and the Consumer Discretionary SPDR (XLY), and chartists should watch these important groups for clues on broad market direction in the coming week or two. First, let's talk about the Double Top. These patterns form with two peaks near the same level and an intermittent trough that marks support. A break below support confirms the pattern and targets a move based on the height of the pattern. 

Achtung! A Double Top is just a POTENTIAL Double Top until confirmed with a break below the intermittent low. In other words, the trend is still up as long as support holds. Furthermore, Double Tops are bearish reversal patterns and trend continuations are more likely that trend reversals. 

The chart above shows a potential Double Top brewing in XSD over the last three months or so. Because this is an ETF with dozens of moving parts (components), I am marking a support zone using the mid May low and the June low. A close below 60 would confirm the pattern and project a move to the 53 area. Note that the height of the pattern is 7 points (~67 to ~60). As long as XSD is near support, chartists should also be on guard for a bounce off support and break above first resistance at 63. The next chart shows a Double Top brewing in XLY with similar characteristics. 

A number of things can happen going forward on both charts. First, support could hold and the uptrend could continue from here. Second, support could fold and the Double Top could play out. Third, there could a support break and then a bounce off the rising 200-day EMA (bear trap). Just keep an open mind and prepare for different outcomes. 

The Semiconductor SPDR (XSD) is a broad-based ETF with 35 stocks. Quick! Can you guess the top two holdings? Stop for a moment and think.....Would you have guessed First Solar (FSLR 4.33%) and SunPower (SPWR 3.77%).? I certainly would not have guessed those two. According to SPDRs.com, the top ten stocks account for around 35% of the ETF. The Consumer Discretionary SPDR (XLY) is a market-cap weighted sector ETF with Amazon weighing in at a whopping 15.13%. According to sectorspdr.com, the top ten components account for around 57% of the ETF. Chartists interested in XLY should also watch AMZN, CMCSA, HD, DIS and MCD.

Courtesy of StockCharts

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“Low volatility could be ‘the quiet before the storm,’” Nobel laureate Robert Shiller told CNBC last week, adding: “I lie awake worrying.” Over the past 20 years, the CBOE Volatility Index (VIX) has closed below 10 on only 21 days, 13 of which have been in the past two months. The current streak of 270-plus days without a 5% drawdown in any of the major U.S. indices is the longest since 1996. Meanwhile, U.S. equity values continue to diverge from earnings — Schiller’s Cyclically Adjusted PE Ratio (CAPE) has only been higher two times in market history: 1929 and 2000.

Yet, despite the many bulls claiming low volatility is historically normal, and therefore not a warning sign, evidence is beginning to mount that U.S. equity markets may be near a volatility-driven tipping point. With the market consolidated (WILTW June 29, 2017) and buoyed by the lowest interest rates in 5,000 years, investors have taken on more and riskier leverage in search of yield. Compounding the risk, much of that leverage has been “justified” by passive strategies pegged to low volatility. As Baupost Group’s Jim Mooney warned last week: “Low volatility would not be a problem if not for strategies that increase leverage when volatility declines.”

If passive strategies have a bias to buy, they can also have a bias to sell — a threat we explored in WILTW June 15, 2017. With hundreds of billions of dollars of investments now linked to volatility, a spike in the VIX could trigger a devastating algorithmic sell cascade.

Time and again in these pages, we have stressed the need to look beyond the U.S. for opportunity. The longer volatility remains low, the more imperative this becomes. It is impossible to pinpoint when the low-volatility regime will end, but as Howard Marks stressed in an Oaktree client letter last week: “It’s better to turn cautious too soon…than too late after the downslide has begun.”

Mooney believes low volatility could be the harbinger of the next financial crisis. Business Insider synopsized his reasoning:

While leverage is not directly responsible for every financial disaster, it usually can be found near the scene of the crime,” Baupost’s president and head of public investments wrote in the letter. “The lower the volatility, the more risk investors are willing to or, in some cases, required to incur.”

Assets whose performance is linked to volatility include a huge amount of money…These funds, including quant funds and so-called risk parity funds, target a specific level of risk, and when volatility spikes, sending risk upwards, it can trigger selling…

As such, any spike in equity market realized volatility, even to historical average levels, has the potential to drive a significant amount of equity selling (much of it automated). Such selling would, in turn, further increase volatility which would call for more deleveraging and yet more selling.”

Wolf Street’s Wolf Richter pointed out last week that total outstanding leveraged loans in the U.S. reached $943 billion at the end of 2Q17. Moreover, covenant-lite loans — high-risk instruments issued by junk-rated borrowers, with few protections for creditors — made up 72.5% of that total, a record. Yet still, the amount of high-risk leverage in the market is likely even higher. Securities- based loans (SBLs) — or “shadow margin” — are often not disclosed by financial firms, meaning totals remain opaque. However, for the firms that have revealed statistics, growth rates suggest SBLs are also at record highs: Morgan Stanley’s SBLs have doubled since 2013 to $36 billion and Bank of America Merrill Lynch’s SBLs were at $40 billion at the end of 2016, up 140% from 2010.

Refusal to acknowledge the existence of risk has become a pandemic,” Richter writes. “This of course has been the explicit strategy of the Fed since the Financial Crisis — to push investors out ever farther toward the thin end of the risk branch.”

The meteoric rise of passive strategies — unbeholden to price discovery, endowed with the biases of their creators — has further encouraged investors to ignore risk. Jonathan Jacobson, founder of Highfields Capital Management, wrote in a recent letter to clients about why the increasing influence of quants is obfuscating market risk:

“We are convinced that “quant’ funds”, which have attracted hundreds of billions of dollars in the last few years and a significant portion of which use leverage, and whose models and various strategies are largely based on price action and correlations extracted from the reasonably-recent past when volatility has been low (largely of their own making), have contributed mightily to the illusion that market risk is low. As the money continues to flow into these strategies, this dynamic becomes self-fulfilling.”

Of course, there’s a flipside to that self-fulfillment. As we wrote back in June about the systemic threat created by passive strategies: “If a key sector failure, a geopolitical crisis, or even an unknown, black box bias pulls an algorithmic risk trigger, will the herd run all at once?” This is Mooney’s point as well: volatility spiking would trigger algorithms to deleverage, thus exacerbating the volatility, leading to even more deleveraging. Compounding the threat, VIX short positioning is at record levels, which could further expedite an unwinding:

So the question is, what could drive a spike in volatility? The obvious answer is central banks normalizing monetary policy. Many assume central bankers are aware unwinding QE could end the low-volatility regime and will act to protect the “new normal”. As history attests, this faith is misguided and dangerous. Yet, even if the majority is correct, that does not mean other volatility catalysts don’t exist.

Recently, J.P. Morgan equity derivatives strategist Marko Kolanovic highlighted one such potential catalyst. Financials and tech stocks have been moving in the same direction only 30% of the time of late, in stark contrast to the longer-term norm of 80%:

As CNBC wrote last week, this seesaw dynamic between tech and bank stocks is “happening in the context of an overall market that has become quite selective and eclectic, with stocks and sectors rotating in and out of favor with unusual alacrity.” The consequence is market balance and in turn, low volatility — tech accounts for 23% of the S&P 500 and financials have a 14.5% index weight, meaning they have the power to balance the market as long as one rises as the other one falls.

Citing 1993 and 2000 as evidence — years that saw low volatility and a steep drop in inter-stock correlation eventually return to historical norms — Kolanovic does not believe this divergence-driven stability will last. CNBC recaps his analysis: “It’s generally healthy for individual stocks and sectors to respond independently to incoming fundamental information, when the variation becomes extreme and drives volatility to extreme lows, the market can become unstable and vulnerable to a swift selling storm.

Seemingly every day for the past two weeks, the VIX has set new records. In a world defined by political turbulence, a time when U.S. markets appear increasingly frothy, when the Fed has a declared intention to unwind QE, the stability appears unnatural — a menacing codependence between financial engineering and greed.

As Goldman Sachs pointed out recently, there have been 14 low-volatility regimes since 1928 and all have required a large shock — namely a war or recession — to end. However, QE and the rise of passive strategies means history may tell us nothing about what’s to come. And the longer volatility remains suppressed, the bigger the leverage bubble grows and the more costly the correction will be once the passive herd is spooked. As Hyman Minsky once said: “The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.”

Courtesy of 13DResearch

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How Big Oil Will Die

It’s 2025, and 800,000 tons of used high strength steel is coming up for auction.

The steel made up the Keystone XL pipeline, finally completed in 2019, two years after the project launched with great fanfare after approval by the Trump administration. The pipeline was built at a cost of about $7 billion, bringing oil from the Canadian tar sands to the US, with a pit stop in the town of Baker, Montana, to pick up US crude from the Bakken formation. At its peak, it carried over 500,000 barrels a day for processing at refineries in Texas and Louisiana.

But in 2025, no one wants the oil.

The Keystone XL will go down as the world’s last great fossil fuels infrastructure project. TransCanada, the pipeline’s operator, charged about $10 per barrel for the transportation services, which means the pipeline extension earned about $5 million per day, or $1.8 billion per year. But after shutting down less than four years into its expected 40 year operational life, it never paid back its costs.

The Keystone XL closed thanks to a confluence of technologies that came together faster than anyone in the oil and gas industry had ever seen. It’s hard to blame them — the transformation of the transportation sector over the last several years has been the biggest, fastest change in the history of human civilization, causing the bankruptcy of blue chip companies like Exxon Mobil and General Motors, and directly impacting over $10 trillion in economic output.

And blame for it can be traced to a beguilingly simple, yet fatal problem: the internal combustion engine has too many moving parts.

The Cummins Diesel Engine, US Patent #2,408,298, filed April 1943, awarded Sept 24, 1946

Let’s bring this back to today: Big Oil is perhaps the most feared and respected industry in history. Oil is warming the planet — cars and trucks contribute about 15% of global fossil fuels emissions — yet this fact barely dents its use. Oil fuels the most politically volatile regions in the world, yet we’ve decided to send military aid to unstable and untrustworthy dictators, because their oil is critical to our own security. For the last century, oil has dominated our economics and our politics. Oil is power.

Yet I argue here that technology is about to undo a century of political and economic dominance by oil. Big Oil will be cut down in the next decade by a combination of smartphone apps, long-life batteries, and simpler gearing. And as is always the case with new technology, the undoing will occur far faster than anyone thought possible.

To understand why Big Oil is in far weaker a position than anyone realizes, let’s take a closer look at the lynchpin of oil’s grip on our lives: the internal combustion engine, and the modern vehicle drivetrain.

BMW 8 speed automatic transmission, showing lots of fine German engineered gearing. From Euro Car News.

Cars are complicated.

Behind the hum of a running engine lies a carefully balanced dance between sheathed steel pistons, intermeshed gears, and spinning rods — a choreography that lasts for millions of revolutions. But millions is not enough, and as we all have experienced, these parts eventually wear, and fail. Oil caps leak. Belts fray. Transmissions seize.

To get a sense of what problems may occur, here is a list of the most common vehicle repairs from 2015:

  1. Replacing an oxygen sensor — $249
  2. Replacing a catalytic converter — $1,153
  3. Replacing ignition coil(s) and spark plug(s) — $390
  4. Tightening or replacing a fuel cap — $15
  5. Thermostat replacement — $210
  6. Replacing ignition coil(s) — $236
  7. Mass air flow sensor replacement — $382
  8. Replacing spark plug wire(s) and spark plug(s) — $331
  9. Replacing evaporative emissions (EVAP) purge control valve — $168
  10. Replacing evaporative emissions (EVAP) purging solenoid — $184

And this list raises an interesting observation: None of these failures exist in an electric vehicle.

The point has been most often driven home by Tony Seba, a Stanford professor and guru of “disruption”, who revels in pointing out that an internal combustion engine drivetrain contains about 2,000 parts, while an electric vehicle drivetrain contains about 20. All other things being equal, a system with fewer moving parts will be more reliable than a system with more moving parts.

And that rule of thumb appears to hold for cars. In 2006, the National Highway Transportation Safety Administration estimated that the average vehicle, built solely on internal combustion engines, lasted 150,000 miles.

Current estimates for the lifetime today’s electric vehicles are over 500,000 miles.

The ramifications of this are huge, and bear repeating. Ten years ago, when I bought my Prius, it was common for friends to ask how long the battery would last — a battery replacement at 100,000 miles would easily negate the value of improved fuel efficiency. But today there are anecdotal stories of Prius’s logging over 600,000 miles on a single battery.

The story for Teslas is unfolding similarly. Tesloop, a Tesla-centric ride-hailing company has already driven its first Model S for more 200,000 miles, and seen only an 6% loss in battery life. A battery lifetime of 1,000,000 miles may even be in reach.

This increased lifetime translates directly to a lower cost of ownership: extending an EVs life by 3–4 X means an EVs capital cost, per mile, is 1/3 or 1/4 that of a gasoline-powered vehicle. Better still, the cost of switching from gasoline to electricity delivers another savings of about 1/3 to 1/4 per mile. And electric vehicles do not need oil changes, air filters, or timing belt replacements; the 200,000 mile Tesloop never even had its brakes replaced. The most significant repair cost on an electric vehicle is from worn tires.

For emphasis: The total cost of owning an electric vehicle is, over its entire life, roughly 1/4 to 1/3 the cost of a gasoline-powered vehicle.

Of course, with a 500,000 mile life a car will last 40–50 years. And it seems absurd to expect a single person to own just one car in her life.

But of course a person won’t own just one car. The most likely scenario is that, thanks to software, a person won’t own any.


Here is the problem with electric vehicle economics: A dollar today, invested into the stock market at a 7% average annual rate of return, will be worth $15 in 40 years. Another way of saying this is the value, today, of that 40th year of vehicle use is approximately 1/15th that of the first.

The consumer simply has little incentive to care whether or not a vehicle lasts 40 years. By that point the car will have outmoded technology, inefficient operation, and probably a layer of rust. No one wants their car to outlive their marriage.

But that investment logic looks very different if you are driving a vehicle for a living.

A New York City cab driver puts in, on average, 180 miles per shift (well within the range of a modern EV battery), or perhaps 50,000 miles per work year. At that usage rate, the same vehicle will last roughly 10 years. The economics, and the social acceptance, get better.

And if the vehicle was owned by a cab company, and shared by drivers, the miles per year can perhaps double again. Now the capital is depreciated in 5 years, not 10. This is, from a company’s perspective, a perfectly normal investment horizon.

A fleet can profit from an electric vehicle in a way that an individual owner cannot.

Here is a quick, top-down analysis on what it’s worth to switch to EVs: The IRS allows charges of 53.5¢ per mile in 2017, a number clearly derived for gasoline vehicles. At 1/4 the price, a fleet electric vehicle should cost only 13¢ per mile, a savings of 40¢ per mile.

40¢ per mile is not chump change — if you are a NYC cab driver putting 50,000 miles a year onto a vehicle, that’s $20,000 in savings each year. But a taxi ride in NYC today costs $2/mile; that same ride, priced at $1.60 per mile, will still cost significantly more than the 53.5¢ for driving the vehicle you already own. The most significant cost of driving is still the driver.

But that, too, is about to change. Self-driving taxis are being tested this year in Pittsburgh, Phoenix, and Boston, as well as Singapore, Dubai, and Wuzhen, China.

And here is what is disruptive for Big Oil: Self-driving vehicles get to combine the capital savings from the improved lifetime of EVs, with the savings from eliminating the driver.

The costs of electric self-driving cars will be so low, it will be cheaper to hail a ride than to drive the car you already own.


Today we view automobiles not merely as transportation, but as potent symbols of money, sex, and power. Yet cars are also fundamentally a technology. And history has told us that technologies can be disrupted in the blink of an eye.

Take as an example my own 1999 job interview with the Eastman Kodak company. It did not go well.

At the end of 1998, my father had gotten me a digital camera as a present to celebrate completion of my PhD. The camera took VGA resolution pictures — about 0.3 megapixels — and saved them to floppy disks. By comparison, a conventional film camera had a nominal resolution of about 6 megapixels. When printed, my photos looked more like impressionist art than reality.

However, that awful, awful camera was really easy to use. I never had to go to the store to buy film. I never had to get pictures printed. I never had to sort through a shoebox full of crappy photos. Looking at pictures became fun.

Wife, with mildly uncooperative cat, January 1999. Photo is at the camera’s original resolution.

I asked my interviewer what Kodak thought of the rise of digital; she replied it was not a concern, that film would be around for decades. I looked at her like she was nuts. But she wasn’t nuts, she was just deep in the Kodak culture, a world where film had always been dominant, and always would be.

This graph plots the total units sold of film cameras (grey) versus digital (blue, bars cut off). In 1998, when I got my camera, the market share of digital wasn’t even measured. It was a rounding error.

By 2005, the market share of film cameras were a rounding error.

A plot of the rise of digital cameras (blue) and the fall of analog (grey). Original from Mayflower via mirrorlessrumors, slightly modified for use here.

In seven years, the camera industry had flipped. The film cameras went from residing on our desks, to a sale on Craigslist, to a landfill. Kodak, a company who reached a peak market value of $30 billion in 1997, declared bankruptcy in 2012. An insurmountable giant was gone.

That was fast. But industries can turn even faster: In 2007, Nokia had 50% of the mobile phone market, and its market cap reached $150 billion. But that was also the year Apple introduced the first smartphone. By the summer of 2012, Nokia’s market share had dipped below 5%, and its market cap fell to just $6 billion.

In less than five years, another company went from dominance to afterthought.

A quarter-by-quarter summary of Nokia’s market share in cell phones. From Statista.

Big Oil believes it is different. I am less optimistic for them.

An autonomous vehicle will cost about $0.13 per mile to operate, and even less as battery life improves. By comparison, your 20 miles per gallon automobile costs $0.10 per mile to refuel if gasoline is $2/gallon, and that is before paying for insurance, repairs, or parking. Add those, and the price of operating a vehicle you have already paid off shoots to $0.20 per mile, or more.

And this is what will kill oil: It will cost less to hail an autonomous electric vehicle than to drive the car that you already own.

If you think this reasoning is too coarse, consider the recent analysis from the consulting company RethinkX (run by the aforementioned Tony Seba), which built a much more detailed, sophisticated model to explicitly analyze the future costs of autonomous vehicles. Here is a sampling of what they predict:

  • Self-driving cars will launch around 2021
  • A private ride will be priced at 16¢ per mile, falling to 10¢ over time.
  • A shared ride will be priced at 5¢ per mile, falling to 3¢ over time.
  • By 2022, oil use will have peaked
  • By 2023, used car prices will crash as people give up their vehicles. New car sales for individuals will drop to nearly zero.
  • By 2030, gasoline use for cars will have dropped to near zero, and total crude oil use will have dropped by 30% compared to today.

The driver behind all this is simple: Given a choice, people will select the cheaper option.

Your initial reaction may be to believe that cars are somehow different — they are built into the fabric of our culture. But consider how people have proven more than happy to sell seemingly unyielding parts of their culture for far less money. Think about how long a beloved mom and pop store lasts after Walmart moves into town, or how hard we try to “Buy American” when a cheaper option from China emerges.

And autonomous vehicles will not only be cheaper, but more convenient as well — there is no need to focus on driving, there will be fewer accidents, and no need to circle the lot for parking. And your garage suddenly becomes a sunroom.

For the moment, let’s make the assumption that the RethinkX team has their analysis right (and I broadly agree[1]): Self-driving EVs will be approved worldwide starting around 2021, and adoption will occur in less than a decade.

How screwed is Big Oil?


Perhaps the metaphors with film camera or cell phones are stretched. Perhaps the better way to analyze oil is to consider the fate of another fossil fuel: coal.

The coal market is experiencing a shock today similar to what oil will experience in the 2020s. Below is a plot of total coal production and consumption in the US, from 2001 to today. As inexpensive natural gas has pushed coal out of the market, coal consumption has dropped roughly 25%, similar to the 30% drop that RethinkX anticipates for oil. And it happened in just a decade.

Coal consumption has dropped 25% from its peak. From the Kleinman Center for Energy Policy.

The result is not pretty. The major coal companies, who all borrowed to finance capital improvements while times were good, were caught unaware. As coal prices crashed, their loan payments became a larger and larger part of their balance sheets; while the coal companies could continue to pay for operations, they could not pay their creditors.

The four largest coal producers lost 99.9% of their market value over the last 6 years. Today, over half of coal is being mined by companies in some form of bankruptcy.

The four largest coal companies had a combined market value of approximately zero in 2016. This image is one element of a larger graphic on the collapse of coal from Visual Capitalist.

When self-driving cars are released, consumption of oil will similarly collapse.

Oil drilling will cease, as existing fields become sufficient to meet demand. Refiners, whose huge capital investments are dedicated to producing gasoline for automobiles, will write off their loans, and many will go under entirely. Even some pipeline operators, historically the most profitable portion of the oil business, will be challenged as high cost supply such as the Canadian tar sands stop producing.

A decade from now, many investors in oil may be wiped out. Oil will still be in widespread use, even under this scenario — applications such as road tarring are not as amenable to disruption by software. But much of today’s oil drilling, transport, and refining infrastructure will be redundant, or ill-fit to handle the heavier oils needed for powering ships, heating buildings, or making asphalt. And like today’s coal companies, oil companies like TransCanada may have no money left to clean up the mess they’ve left.


Of course, it would be better for the environment, investors, and society if oil companies curtailed their investing today, in preparation for the long winter ahead. Belief in global warming or the risks of oil spills is no longer needed to oppose oil projects — oil infrastructure like the Keystone XL will become a stranded asset before it can ever return its investment.

Unless we have the wisdom not to build it.

The battle over oil has historically been a personal battle — a skirmish between tribes over politics and morality, over how we define ourselves and our future. But the battle over self-driving cars will be fought on a different front. It will be about reliability, efficiency, and cost. And for the first time, Big Oil will be on the weaker side.

Within just a few years, Big Oil will stagger and start to fall. For anyone who feels uneasy about this, I want to emphasize that this prediction isn’t driven by environmental righteousness or some left-leaning fantasy. It’s nothing personal. It’s just business.

HatTip to Member GT for this article.  Thank you buddy! 

Courtesy of NewCoShift

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It's All About Advertising

When people think of Facebook as a company, they mostly think of it synonymously with Facebook the social network. However, Facebook Inc. is much more than that, as today’s chart nicely illustrates. With WhatsApp, Instagram and of course the namesake Facebook and Messenger, the company owns four of the world’s largest social media / messaging services. Facebook alone reaches more than 2 billion people per month and both WhatsApp and Messenger also passed the billion-user milestone recently. Tencent, the Chinese company behind WeChat and Qzone might also boast a billion users in total, but still doesn’t come close to Facebook’s global footprint.

What all of the services mentioned below have in common, is their immense attractiveness to advertisers. Not only do they all boast hundreds of millions of users, but they also have the ability to target specific groups based on likes, dislikes and past behavior. That is why social media advertising has grown immensely over the past few years. In the U.S. alone, social media ad revenue is expected to reach $17.8 billion this year, with more growth to come in 2018 and beyond. For more information on social media advertising, including revenue forecasts for major markets, download our free report: “Digital Advertising: Social Media”.

Infographic: Facebook Inc. Dominates the Social Media Landscape | Statista
Courtesy of Statista

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Are Investors Getting Too Bulled Up?

Ran across this post and found it interesting although anything that's only been around 7-1/2 years is truly untested but only time will tell.  All eyes are on Congress for a break in taxes for the wealthy, as well as 'stumbles' from our leader and chief, Mr. Trump.  Between the Russia investigation and foreign relations (yikes!) the tension is building, or at least being applied by the left.  Will they reach the proportions where firms hit the 'sell' button? I have to say that September is coming -  the worst month for the market thanks to Mutual Fund profit taking at end of fiscal year.  Anything is possible.  Enjoy the ride.  From LyonsShare:

Sentiment indicators can be useful tools for investors, mainly on a contrarian basis. That is, generally when readings get overly bullish, it may signal a lack of remaining buyers in the market and vulnerability to a decline in prices. Conversely, when sentiment is extremely bearish, it is often a sign that selling has been overdone and prices are due for a bounce.

In general, there are two types of sentiment indicators: survey-based and real money gauges. We have found surveys to be less reliable than they once were. This may be due to the fact that sentiment is now widely known as a contrarian tool and survey respondents may be hesitant to look like the “dumb money”.

For that reason, we prefer real money sentiment indicators which show what investors are actually doing with their money. Folks can respond however they’d like in a survey, but at the end of the day they vote with their money. Therefore, these types of measures are typically better barometers of true investor sentiment.

One relatively new real money sentiment indicator is the subject of today’s Chart Of The Day. TD Ameritrade launched their Investor Movement Index® (IMX) the back in 2010 as a way of tracking investor sentiment based upon TDA customers’ money flows. In their words:

“The Investor Movement Index, or the IMX, is a proprietary, behavior-based index created by TD Ameritrade designed to indicate the sentiment of individual investors’ portfolios. It measures what investors are actually doing, and how they are actually positioned in the markets.

The IMX does this by using data including holdings/positions, trading activity, and other data from a sample of our 6 million funded client accounts.”

The reason we chose to make the IMX our Chart Of The Day today is because the latest reading (6.58), as of the end of June 2017, marked the highest reading in the 7-year history of the indicator. Additionally, it exhibited its 3rd largest month-over-month jump ever (+0.45), behind May and August 2016.

Now, before you go selling your entire portfolio, there are few factors that may mitigate one’s concern over this high reading. First off, the indicator is only 7 ½ years old.  In market indicator years, that makes the IMX but an infant. It has not even been through a complete market cycle yet. Therefore, we cannot be sure what the indicator is or is not capable of, outside of its very brief history.

Secondly, while the indicator is at an all-time high, the stock market is as well. And if ever there is a reasonable time for sentiment to be at all-time highs, it is when stocks are also at highs. It would be more concerning if the IMX was hitting new highs when it “wasn’t supposed to”, e.g., while the stock market was either declining or at least making lower highs.

For example, one of the larger jumps (+0.41) in the IMX’s history occurred in June 2015 — despite the fact that the S&P 500 lost more than 2% for the month. Of course, stocks were undergoing a significant intermediate-term top at the time and a sharp correction followed soon afterward.

We are not saying that an all-time high in this sentiment indicator is a welcomed data point. It is just that the conditions surrounding the latest reading do somewhat justify it — or at least reasonably explain it. However, we will certainly monitor this new sentiment tool closely in the months to come.

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