Friday, March 28, 2014
What Do Outside Reversal Days Portend for Stocks?
Over the past several weeks we've noticed a clustering of negative outside reversal days (defined as days when both the intraday high is greater than the previous day's intraday high and the close is lower than previous day's intraday low). The theory goes that these negative outside reversal days are symptomatic of stock distribution among institutional investors. If the theory holds then, we should experience clusters of negative outside reversal days around intermediate and major highs. To test the theory for the S&P500 we have created a chart that sums up all the negative outside reversal days over the last 65 days (roughly 1 quarter) and compares it to the price level of the index. What we find is that spikes in the 1 quarter sum of negative outside reversal days do in fact correspond to intermediate highs in the market, but by no means is this indicator perfect. It seems that readings of 4 or higher do often correspond with intermediate peaks in the price level, but the percentage decline is fairly ambiguous. It also does not follow that the higher the reading in negative reversal days, the bigger the forthcoming decline. In any event though, the consistency of the indicator to spike around the vicinity of intermediate highs is noteworthy so we will keep an eye on it.
Japanese Real Household Income Falls for 5th Straight Month
In the latest piece of evidence that Abenomics is having the effect of suppressing real income and expenditure, new data out today reveals that real income (red line, right axis) is down 1.3% YoY and real personal consumption expenditure (blue line, left axis) is down 2.5% YoY. Keep in mind that these are statistics describing February data and thus are likely to continue to fall once the consumption suppressing VAT tax hike takes effect in April.
Consumer Discretionary Has Fallen And Can't Get Up
In early February we mentioned that consumer discretionary was starting to show some cracks in their leadership status. And a few weeks ago we mentioned how richly valued this groups of stocks had become. Today we pick on Consumer Discretionary stocks again showing how they have been the true laggards YTD.
Over the past four years, Consumer Discretionary stocks have outperformed the MSCI World by 54% and have outperformed the average stock by over 75%. They were the second best performing sector (behind Health Care) over this period. While Health Care has managed to maintain leadership status YTD (second best performing group oddly behind Utilities), Consumer Discretionary has fallen to bottom, and by a pretty wide margin at that.
Digging deeper we see that it has been a broad based decline. There are 24 industries in the MSCI World. Of which, five fall in the Consumer Discretionary sector. Not a single Consumer Discretionary sector is positive YTD nor in the top half in performance YTD.
Taking it down the next step to sub-industries, we find that of the 154 sub-industries, Consumer Discretionary not surprisingly accounts for 10 of the worse 20 performing sub-industries YTD.
And finally, it is only fitting that worse performing stock YTD comes from the Consumer Discretionary sector (and actually the two worse performing stocks are Consumer discretionary stocks).
Over the past four years, Consumer Discretionary stocks have outperformed the MSCI World by 54% and have outperformed the average stock by over 75%. They were the second best performing sector (behind Health Care) over this period. While Health Care has managed to maintain leadership status YTD (second best performing group oddly behind Utilities), Consumer Discretionary has fallen to bottom, and by a pretty wide margin at that.
Digging deeper we see that it has been a broad based decline. There are 24 industries in the MSCI World. Of which, five fall in the Consumer Discretionary sector. Not a single Consumer Discretionary sector is positive YTD nor in the top half in performance YTD.
Taking it down the next step to sub-industries, we find that of the 154 sub-industries, Consumer Discretionary not surprisingly accounts for 10 of the worse 20 performing sub-industries YTD.
And finally, it is only fitting that worse performing stock YTD comes from the Consumer Discretionary sector (and actually the two worse performing stocks are Consumer discretionary stocks).
Positive Expectations for Most Everything-- Except Prices-- in Europe
Sentiment indicators for Europe showed an improvement in the month of March, driven primarily by consumer confidence's largest monthly increase since April 2009:
The five largest economies all posted gains (though muted in France and Germany), while the Netherlands was this month's big winner with a +2.3 rise:
The one notable decline: selling price expectations (in all major categories). Drops in the Services and Retail groups were particularly pronounced and consumers' price expectations reached the lowest levels since November 2010:
The five largest economies all posted gains (though muted in France and Germany), while the Netherlands was this month's big winner with a +2.3 rise:
The one notable decline: selling price expectations (in all major categories). Drops in the Services and Retail groups were particularly pronounced and consumers' price expectations reached the lowest levels since November 2010:
Cracks in the Postitive Relative Performance of European Equities?
A quick scan of our heatmap shows a slowing in 200-day relative performance over the last several weeks, led by equities in MSCI Germany and MSCI U.K.:
On a sector basis, Consumer and Technology stocks have faltered the most, while Telecom and Utilities remain on a more positive trajectory:
Though the Food, Beverages, & Tobacco industry group's performance has improved some in the last month or so, the entire Consumer Staples sector continues to underperform:
On a sector basis, Consumer and Technology stocks have faltered the most, while Telecom and Utilities remain on a more positive trajectory:
Though the Food, Beverages, & Tobacco industry group's performance has improved some in the last month or so, the entire Consumer Staples sector continues to underperform:
Thursday, March 27, 2014
How Bullish is a Bull Flattener?
Over the last 4.5 months the spread between the 30 year treasury yields and 10 year treasury yields has fallen from 112bps to 85bps, a difference of 27bps, and that spread has been falling fast in recent weeks. This has occurred in the backdrop of 30 year yields falling while 10 year yields have remained basically flat. Under this scenario the narrowing of the spread between 30s and 10s (i.e. a flattening of the yield curve) is referred to as a bull flattener. This namesake, however, can be misleading because in a situation where 30s are falling faster than 10s it is either because very long-term inflation expectations are falling, very long-term growth expectations are falling, or both. That type of situation doesn't sounds very bullish (!), but let's see what the charts say.
Given that both 30s and 10s have generally been on a downward trajectory since 2009 and 30s have fallen more than 10s over that period, we have a good sample set of five years by which we can generally assume that any flattenings of the yield curve have been bull flattenings. So how have growth sensitive assets like copper, EM stocks, and the S&P500 responded to flattenings and steepenings since 2009? We observe a fairly tight correlation between the 30-10 spread and both copper and EM stocks (i.e. as the 30-10 spread narrowed copper and EM stocks fell, and vice versa). The same was true for the S&P500 until 2013 when relationship came unglued.
How have inflation sensitive assets like gold responded to flattenings and steepenings since 2009? Basically in the same way the growth assets have responded (i.e. flattening of the yield curve has resulted in a lower gold price).
Finally, how has the ultimate bid-to-quality asset, the USD, responded? Here we notice that the yield curve has maintained a very tight relationship with the USD, but on an inverted basis. When the yield curve flattens the dollar strengthens.
Having established a few macro relationships with the long end of the yield curve, we will simply remind readers that the bull flattening of the yield curve has accelerated in recent weeks and is close to making a downside breakout. If a downside breakout does occur and past relationships continue to hold we should expect lower prices for assets sensitive to inflation and growth expectations and a stronger dollar.
Given that both 30s and 10s have generally been on a downward trajectory since 2009 and 30s have fallen more than 10s over that period, we have a good sample set of five years by which we can generally assume that any flattenings of the yield curve have been bull flattenings. So how have growth sensitive assets like copper, EM stocks, and the S&P500 responded to flattenings and steepenings since 2009? We observe a fairly tight correlation between the 30-10 spread and both copper and EM stocks (i.e. as the 30-10 spread narrowed copper and EM stocks fell, and vice versa). The same was true for the S&P500 until 2013 when relationship came unglued.
How have inflation sensitive assets like gold responded to flattenings and steepenings since 2009? Basically in the same way the growth assets have responded (i.e. flattening of the yield curve has resulted in a lower gold price).
Finally, how has the ultimate bid-to-quality asset, the USD, responded? Here we notice that the yield curve has maintained a very tight relationship with the USD, but on an inverted basis. When the yield curve flattens the dollar strengthens.
Having established a few macro relationships with the long end of the yield curve, we will simply remind readers that the bull flattening of the yield curve has accelerated in recent weeks and is close to making a downside breakout. If a downside breakout does occur and past relationships continue to hold we should expect lower prices for assets sensitive to inflation and growth expectations and a stronger dollar.
US Economic Round-Up - Pending Home Sales Decline Again
Quite a bit of US data was released this morning. The major releases were GDP 3rd revision, Corporate Profits, Initial Jobless Claims, & Pending Home Sales. Let's take a quick look at each.
Starting in reverse order, Pending Home Sales fell for a record 8th straight month (there was a 12-month period in the 2nd half of 2005 and fist of 2006 were pending sales were down every month except for one very small gain). As we have noted before, pending home sales tend to lead existing home sales, so this does not suggest a bounce in existing home sales in the near future.
Initial Jobless Claims had a very nice improvement and the four-week moving average improved to a 6-month low.
Corporate profits ended 2013 at an all-time high and corporate profit margins are nearly at an all-time high. After-tax corporate profits (with IVA and CC adjustments) were nearly 8% higher year-over-year in 2013 which almost exactly the average yearly change over the past 30 years.
And finally, the 3rd revision of 4Q13 GDP improved but slightly less than what consensus was hoping for (2.6% vs 2.7%). The residential housing market negatively contributed to GDP in the fourth quarter for the first time sine 3Q2010. Intellectual property products contributed 15 bps to fourth quarter GDP.
Starting in reverse order, Pending Home Sales fell for a record 8th straight month (there was a 12-month period in the 2nd half of 2005 and fist of 2006 were pending sales were down every month except for one very small gain). As we have noted before, pending home sales tend to lead existing home sales, so this does not suggest a bounce in existing home sales in the near future.
Initial Jobless Claims had a very nice improvement and the four-week moving average improved to a 6-month low.
Corporate profits ended 2013 at an all-time high and corporate profit margins are nearly at an all-time high. After-tax corporate profits (with IVA and CC adjustments) were nearly 8% higher year-over-year in 2013 which almost exactly the average yearly change over the past 30 years.
And finally, the 3rd revision of 4Q13 GDP improved but slightly less than what consensus was hoping for (2.6% vs 2.7%). The residential housing market negatively contributed to GDP in the fourth quarter for the first time sine 3Q2010. Intellectual property products contributed 15 bps to fourth quarter GDP.
Wednesday, March 26, 2014
The Future's So Bright...I Gotta Wear Smartglasses?
Following yesterday's announcement of its partnership with Google to produce eye wear with integrated internet access, Luxottica's stock bounced off of the high-performance support line in our point & figure chart:
The Italian owner of brands like Oakley and Ray-Ban seems eager to ensure its early involvement in the smartglass market. This sort of 'recombinant innovation', discussed at length in The Second Machine Age (Brynjolfsson & McAfee, 2014), has important implications for the growth of companies like Luxottica. It remains to be seen whether this development will help perpetuate the uptrend in the stock price. For now, valuations seem to have a bit more room to expand, earning estimates are the most positive in its sub-industry, and bullish support remains intact on a relative basis:
The Italian owner of brands like Oakley and Ray-Ban seems eager to ensure its early involvement in the smartglass market. This sort of 'recombinant innovation', discussed at length in The Second Machine Age (Brynjolfsson & McAfee, 2014), has important implications for the growth of companies like Luxottica. It remains to be seen whether this development will help perpetuate the uptrend in the stock price. For now, valuations seem to have a bit more room to expand, earning estimates are the most positive in its sub-industry, and bullish support remains intact on a relative basis:
Durable Goods Orders: The Disconnect Continues
This morning durable goods orders were released, and while the headline index exhibited a good bounce from January, the rest of the report was more mixed. We identified durable goods orders as an economic indicators we are watching closely for 2007 parallels. So far, we don't see much to validate the idea that the US economy is breaking out into some new, stronger growth phase.
In the charts below, we compare durable goods orders--both total and total ex-transportation--to the S&P 500. In order to justify stocks having broken out above 2007 levels, we would like to see some economic validation. We don't see it in today's report. Both total and total ex-trasnsport durable goods orders are only 1% higher than the end of 2011. The S&P 500, meanwhile is up over 550 points from the end of 2011. The disconnect between stock prices and economic activity continues.
In the charts below, we compare durable goods orders--both total and total ex-transportation--to the S&P 500. In order to justify stocks having broken out above 2007 levels, we would like to see some economic validation. We don't see it in today's report. Both total and total ex-trasnsport durable goods orders are only 1% higher than the end of 2011. The S&P 500, meanwhile is up over 550 points from the end of 2011. The disconnect between stock prices and economic activity continues.
Is Biotech's Leadership Status Finally Cracking?
Over the past four years In North America, no sub-industry has performed as phenomenally well as biotech. This group, on an equal-weighted basis, has outperformed the MSCI World by a staggering 373%. They haven't just beat the pace care but have lapped the entire field. Internet retail, second in terms of absolute performance over the past four years, has underperformed biotech by 212%!
Top 20 Performing Sub-Industries Over The Last Four Years
(Noteworthy...Of 138 sub-industries in the MSCI North America only 6 have negative performance over the past four years)
There are nine stocks that comprise the North American biotech sub-industry. The performance leader is Pharmacyclics which is up an astonishing 1,900%+ over the past four years. The performance laggard is Vertex Pharmaceuticals which is up "only" 82% (about 5% lower than the average stock in the MSCI North America during this time).
Individual Biotech Stock Performance Over The Past Four Years
Over the past month, however, biotech is down 4.3% and is the 8th worse performing sub-industry. Digging into the individual companies, we are starting to see technical breakdowns that have either not been seen since about 2011 or not at all during this advance in many of these stocks. The only positive technical chart is Amgen's (the second worst performer over the past four years). Absolute point and figure charts below:
Top 20 Performing Sub-Industries Over The Last Four Years
(Noteworthy...Of 138 sub-industries in the MSCI North America only 6 have negative performance over the past four years)
There are nine stocks that comprise the North American biotech sub-industry. The performance leader is Pharmacyclics which is up an astonishing 1,900%+ over the past four years. The performance laggard is Vertex Pharmaceuticals which is up "only" 82% (about 5% lower than the average stock in the MSCI North America during this time).
Individual Biotech Stock Performance Over The Past Four Years
Over the past month, however, biotech is down 4.3% and is the 8th worse performing sub-industry. Digging into the individual companies, we are starting to see technical breakdowns that have either not been seen since about 2011 or not at all during this advance in many of these stocks. The only positive technical chart is Amgen's (the second worst performer over the past four years). Absolute point and figure charts below:
Tuesday, March 25, 2014
Expectations Take a Dive
While the Ifo business climate appears to be hanging in there, the expectations component (light blue line)-- for trade and industry as well as services-- fell back quite a bit in March (not unlike the results of the ZEW Survey published last week):
By sector, none of those surveyed indicated a positive change in the general business climate:
By sector, none of those surveyed indicated a positive change in the general business climate: