Market Outlook | October 28, 2013

“Confidence contributes more to conversation than wit.” François de la Rochefoucauld (1613-1680)

Plot thickens

There is a roar from the bullish camp that’s supported by this momentum-driven rise in stock prices. Earlier this spring, with bonds seeming less appealing and commodities collapsing, there was a question: Are equities the new safe haven? Basically, stocks appeared to be the asset that one “should” own in a low-rate environment where risk-taking is welcomed despite a mixed picture for corporate earnings. Perhaps, being viewed as a safe haven is investors’ way of expressing a lack of alternatives while appreciating the familiarity and liquidity of US stocks. Recent inflow into equities demonstrates a combination of fear of missing out and piling onto the theme that’s working. After being over 23.4% on the year, the S&P 500 index performance sells itself to entice more buyers.
“Data from the fund flow analyst shows that $69.7bn (£43bn) was pulled from money market products in the week ending 16 October while equity funds captured net inflows of $17.2bn.” (Fundweb, October 21, 2013).

The risk-taking nature in stocks is not only visible in the US. In fact, European assets are attracting capital with the fifth consecutive inflow into European equities, according to Lipper’s data. Not only are assets rising, but the capital inflow is a full-blown declaration of positive momentum, which is also matched by some upside surprises in earnings.

Skepticism threatened

Reaching uncharted territories of new all-time raises few questions. "Doubt" is an ever-growing force surrounding those skeptical observers. Even the non-extreme gloom-and-doom crowd is baffled and awaiting a breather. Goldman Sachs and other banks’ year-end targets have been surpassed. Retail or institutional sentiment indicators all point one direction: simply bullish.. Contrarian indicators suggest a counter-move is only around the corner. Yet, that contrarian story has been preached and tested for weeks among close observers. Each tick-up appears to defuse a dose of skepticism. Some concerns (economics and sustainability) have merits, but a game of perception is tricky to grasp and time.

Piecing the parts

Drivers of a comfortable rally are fueled by the essential thought of status-quo policy when it comes to interest rates. A few months ago, speculation on outcomes surfaced, and today there are less big picture issues to fear (based on collective perception) as the market wait for clarity in early 2014. Amazingly, there is a crowd chasing returns and others who are sitting tight given no known evidence to relinquish exposure to risky assets. Calmness is seen when discussing the taper or QE, since the central bank’s messaging is soothing the crowd. Perhaps, the market is running out of macro issues to fear. Some suggest the panic-buying trends are the ultimate defenseless trend where the bulls are trapped. The decision is facing many between taking justifiable profits and a reasonable run versus rolling the dice for further “greedy” moves. There are a few weeks to close out the year, where vulnerability seems less likely if listening to glorious headlines. The disconnect between the real economy and the stock market should not be comforting by any measure. Even if oil prices decline and economies avoid further crisis, there must be some rhyme and reason for grasping price movement. Irrationality can be accepted for a while, but reason will prevail. For now, confidence remains blinding and spectators wait to be amazed for yet another week with record highs.

Article quotes:

“The sapped U.S. strength in innovation is epitomized by the NIH research funding trends. Between 2003 and 2013, the number of applications increased from nearly 35,000 to more than 51,000, while NIH appropriations shrunk from $21 billion to $16 billion (in 1995 dollars). As a consequence, it has become increasingly difficult for our scientists to garner an NIH grant. Overall application success rates fell from 32 percent in 2000 to 18 percent in 2012. This is particularly bad news for the new applicants, most of whom are young scientists who are at their most productive age and are most in need of grant support: not only have the number of research project grants dropped in absolute numbers, but the success rates for first-time award recipients has dropped from 22 percent to 13 percent. The story is dramatically different on the China side. The government is determined to be the next technology innovation center in the world. By 2011, China had already become the world’s second highest investor in R&D. Government research funding has been growing at an annual rate of more than 20 percent. At the end of 2012, for example, 7.28 billion yuan was spent on promoting life and medical sciences, nearly 10 times the 2004 level. Even more troubling (for the United States), in 2011, 21 percent of the applications were supported, and for young scientists, the application success rate was 24 percent, both of which were higher than the U.S. level. It was predicted that if the U.S. federal government R&D spending continues to languish, China may overtake the U.S. to be the global leader in R&D spending by 2023.” (The Diplomat, October 27, 2013).


“The rise of margin debt is also a fairly bearish indicator. Margin debt, money borrowed by investors against the value of their securities portfolios, exceeded US$400bn for the first time in September, according to data from the New York Stock Exchange. We care about margin debt for two principal reasons. First, it measures the level of optimism in the market. If you are willing to borrow against your securities you must be fairly confident because you risk being forced to sell them, often at the worst possible time, to meet a margin call. That, of course, is the second reason we care: lots of margin debt means you can have lots of forced selling, allowing downdrafts in the market to take on a life of their own. Even adjusted for inflation, this is a high figure. Using 1995 dollars as a base, analyst Doug Short of Advisor Perspectives, a firm which provides analysis to investors, calculates that margin debt adjust(ed) for inflation is a bit below the 2007 peak but above where it stood just before the dot-com bubble burst in 2000. … To be sure, margin debt is not a pure indicator of bullishness. It can represent the activity of hedge funds which sell short as well as go long.In general though it is consistent with what a lot of investors believe: that volatility has been outlawed and that continued support from the Federal Reserve means the stock market has a safety net.” (IFR, October 24, 2013).

Levels: (Prices as of close October 25, 2013)

S&P 500 Index [1759.77] – All-time highs once again surpassing the year-end target by some analysts. Nearly 9% above the 200-day moving average.

Crude (Spot) [$97.85] – Down 13% from August 28, 2013 highs, suggesting a strong downside move driven mainly by supply-demand. Some signs of early bottoming at current levels. Revisiting $95, a common place before the summer highs.

Gold [$1344.75] – Over four months, the commodity is staying above $1300. The upside potential remains questionable following a major correction.

DXY – US Dollar Index [79.19] – Since July, the dollar continues to weaken as the euro is around two-year highs. In upcoming weeks, traders will seek a bottom to the current bleeding.

US 10 Year Treasury Yields [2.50%] – The annual highs of 3% (September 6) seem like a tough achievement in the near-term, given current macro trends.


Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.