Gavekal Capital: 2014-10-26

Friday, October 31, 2014

Look Out Below!

It wouldn't be Halloween without a few scary sights.  Here, we share some of the most frightening point-and-figure charts we are seeing in MSCI Europe right now.  Though the heavy representation by cyclical (or Russian Telecom) companies may not surprise many investors, the presence of names from some of the more defensive sectors might.  Why are these charts so concerning?  Well, it is generally not a good sign when (relative) prices break down below levels of long-term support, with no end in sight.

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Greater Focus on ROE in October

Over the last month, ROE has moved to the top of the list of factors that influence returns in the MSCI World Index:

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While this was also the most important driver in Europe, it did not even make it into the top five for the North American or Pacific regions:

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North America
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Pacific
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Thursday, October 30, 2014

Widespread Weakness in Technical Scores

As we have mentioned before, each month we score companies' technical strength relative to the benchmark.  Since a year ago, the average score for European and, to a lesser extent, North American companies has declined.  Companies in MSCI Pacific, however, seem to be recovering from weakness in the last quarter:

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By sector, Health Care and Information Technology stocks continue to show the strongest trends relative to the MSCI World while Utilities and Financials are the weakest groups:

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In every region, there has been a recent uptick in significant pullbacks and loss of momentum in individual stocks' relative performance.  As we mentioned last week (here), that weakness has been most prominent in European Health Care and Energy names:

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In North America, it has been the Financial and Materials stocks:

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And Information Technology and Consumer Staples sectors have exhibited the worst slowing trends, in general, in the Asia-Pacific region.

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The Bounce Back Rally Hasn't Overcome The Negative Trend In Momentum Yet

Two of the blunt technical tools that we look at are the percent of stocks trading above its 200-day moving average and the percent of stocks with its 50-day moving average trading above its 200-day moving average. These two tools work well together by a) identifying the main momentum trend in the market b) identifying turning points in this trend.  They accomplish this because the % of stocks with 50-day MA above 200-day MA reduces the noise which is helpful in identifying the trend and the % of stocks trading above its 200-day MA is a more volatile series and changes direction at turning points earlier than the first series.

With that in mind, we went through our charts to try and determine whether or not the slight correction the equity markets experienced earlier this month is over. Based on these two blunt measures, it doesn't seem to be over in the developed markets or emerging markets with a few possible exceptions.

Let's start with the two major indices and then drill our way down to interesting country indices. 48% of all MSCI World stocks have a 50-day MA trading above its 200-day MA (we will refer to this.series 50>200 MA for the rest of the post). Meanwhile, 43% of MSCI World stocks are trading above its 200-day MA after hitting a low of 22% on 10/16. So we are not quite at the point to say that the trend in momentum has turned back upwards.

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For the emerging markets, 59% of stocks have 50>200 MA and 50% of stocks above its 200-day MA. This series hit a low of 34% also on 10/16.

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The MSCI USA is close to crossing the 50>200 MA line. 65% of stocks have 50>200 MA and 62% of stocks are trading above its 200-day MA. We would expect a sustained period of a few weeks with the red line above the blue line in order to call for a trend change in momentum.

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In Asia, MSCI Japan seems a ways away from changing trend while MSCI Hong Kong is approaching the breakeven level.

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In Europe, the breakdown in momentum was far worse than the rest of the developed world. However, here we have our three exceptions we alluded to above. MSCI Germany, MSCI Sweden, and MSCI Switzerland all now have more stocks trading above its 200-day moving average than percent of stocks with 50>200 MA. All three of these indices have had this configuration for one week or less so we will have to let a little more time pass before we can begin to feel confident that momentum is turning positive. These three indices do have the advantage of being very oversold.

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In the emerging world, only one country indice is has the configuration of the three European country indices we just laid out. That country is South Africa.

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MSCI India remains the most overbought country indice in either MSCI World or MSCI EM according to these measures.

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MSCI Brazil has been completely washed out and seems to have a long way to go before momentum is again positive there.

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MSCI Russia is very oversold as well.

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Finally, the last BRIC country, MSCI China has had a nice snap back as currently 56% of stocks are trading above its 200-day MA compared to just 37% a few weeks ago. However, the 50>200 MA line still stands above it at 59%.

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Wednesday, October 29, 2014

Margin Debt Slightly Increases In September

NYSE Margin debt rose a miniscule (relatively speaking) $800 million in September. It currently still sits just below the all-time high set back in February. The three month change of -$433 million is the smallest absolute change since the three month period ending in August 2010. Credit balances slightly increased so net margin debt dropped a bit in September. We are eager to see if there was a pronounced drop in margin debt in October as equity volatility slightly increased.

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Tuesday, October 28, 2014

A Low in Positive European Earnings Revisions?

It's tough to find a great deal of optimism in or about European equities these days.  And, while the percent of issues with positive earnings revisions over the last six months has reached multi-year lows in most sectors of MSCI Europe, it is noteworthy that such extremes tend to remain in force for at least five or six months-- meaning we would not expect a rapid rebound in positive revisions anytime very soon.

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