MMI August 2019
A bull or a bear market is just a tweet away
Yields crash and stocks are now a "relative" screaming bargain.
With interest rates crashing yields on Treasury bonds approaching one and a half percent on 10-year issue and BBB corporate bonds at 3.3 %, the relative attractiveness of equities has increased significantly in the last month. The caveat is we may only be as good as the next tweet or shift in China's currency fixing. With those two overhangs in mind we can start tiptoeing back into the equity Waters.
As volatility increase the vix and vxn indicators spiked above 20 and put to call indicators spiked to 1.15 both bullish oversold levels. Therefore the level of fear has reached a basic minimum to generate a mildly bullish reading.
(VIX spikes on sell off)
At best, neutral in late July. The nascent August sell-off flipped all our internal indicators to the bearish side. However, the S&P 500 held above its 200-day moving average while other major market indices most significantly small-cap oriented fell below support into bearish territory.
(S&P500 hold at 200 day moving avg.)
Earnings season and blackouts have interrupted strong share buyback programs, which will accelerate now that the EPS yield is significantly above borrowing costs for most S&P 500 companies.
While mutual fund and ETF Equity inflows have been negative the big shift and reallocation has been to bond funds to the tune of a net +$10 billion dollars last month. As a cautionary flag, NYSE margin account indicators show a high amount of leverage. This is more than offset bye overly large cash balances in mutual funds that exceed $ 3.2 trillion dollars underscoring high aversions to Equity Market risk.
With Q2 earnings nearly complete the Outlook is favorable better-than-expected reports have dominated at 76% this beats the long-term mean by 6% Q2 revenue growth also has been strong up 4.1% although Q3 revisions are slightly negative at plus 72% versus a 70% long term mean, Q4 estimates return to the positive with earnings expected to be up 4.5% providing a positive backdrop and foundation for a year-end rally.
As bond yields have plummeted over the last month equities have increase the relative attractiveness.
The estimated earnings yield on forward 12 months is nearly 6 percent. This compares very favorably to a triple b corporate bond yield of 3.3%.
On an absolute basis comparing the value of the equity market to overall GDP, the market is at the higher end of the spectrum at 1.4 x GDP slightly below our overvalued neutral level of 1.5.x
Growth and tech have outperformed value by a margin not seen since 2000- 01 bubble. Our proxy of the New horizons small cap growth fund trades over 30 times earnings, at a 100% premium to the S&P 599. Highlighting this divergence, the Russell 2000 equal weighted trades approximately 15 * earning, micro caps are even cheaper with the Russell microcap index trading 14.3 x.
The well-publicized yield curve has inverted. However, when we look at the shape of the curve on a 2-year to 10-year basis it does have a positive slope the message here is the Fed will be cutting aggressively.
Our monetary indicators show a stimulative backdrop for monetary policy just slightly, at plus .40 bps.
Forward rates in the treasury short term bond market support an further cuts of approximately 40 basis points at this time. This is supported by fed funds futures showing a 63% chance of a September cut in a 62% chance of a January cut.
Latest data from the Federal reserve shows that individuals on average , are under invested in equities, currently having less than 37% of total non-financial assets in the equity markets this compares to the recent generational high in the year 2000 of 60%.
In summary, we would look to buy the sell off to get more bullish going into Q4. Many things favor the upside... We don't want to fight the Fed, earnings surprise and upward revisions are positive, equities are attractive relative to bonds and cash, and the massive share Buy-Backs now look like a tour-de-force to keep the bulls on top through year. end
BULLISH +60 score out of possible 100 max.
Singular research Staff