After the last three weeks the market has recovered some of its losses, so why aren’t we buying? This is a question that we get a lot after we have taken protection and raised some cash in client portfolios. Everyone gets nervous that they are missing out on some extra gains, but truthfully the high in the US Equity markets was in July of 2015, so far this year. If you have protected gain, that is just what was done, keeping the gains we had accumulated. Anxiety over missing out on some gains, is just that, market induced anxiety. The truth is both in advancing equity markets, and declining equity markets it is a series of moves down, and up. This happens over and over, rinse and repeat, until price expectations for the market have been correctly priced. So let’s look at what is happening “under the hood” so to speak. The ERCI is an economic think-tank that tracks the overall health of the economy, and weekly puts out its Leading Indicators. Here is their last reading from October 22, 2015.
Now it doesn’t take much training in market theory to realize this line is going the wrong direction, and has been since late 2014. Most of this year in fact, we saw the S&P 500 tread sideways, until July. Then we had headwinds from Europe and China start to weight on growth expectations. Then as we made our way into August, intervention after intervention from Central Banks left the markets grappling with exactly what it could expect for earnings? You see, Mr. Market likes to get paid. Funny how that works. You can see in the charts below how US Small Cap got banged up.
Now why would that be important? The US Russell 2000 index is the small cap index for just US based companies. Most of these firms do the majority of their business in the US. This chart, is just confirming what the ERCI Weekly Leading Indicator report is saying, things are slowing in the US. The lows for the Russell were made in October, just before more Central Bank stimulus was announced out of China, and a concession from the ECB that more may need to be done in Europe, as it relates to Quantitative Easing. We are still down -10.5% since the highs on June 23rd, 2015. So the picture here shouldn’t give you the warm and fuzzes about committing more capital right here. But, what I hear is what about the S&P 500. Let’s take a look.
As a reminder, the S&P 500 is the Large Cap area of the US Stock Market with 500 companies represented. This however is not ALL large cap companies. Different investments that represent the S&P 500 are created differently too. Some use Capitalization Weighting, some use Equal Weighting. So If the S&P is doing well all of the components should be doing fairly well, right? Well no, the way the index is constructed gives us our best indication of why it might not be quite time to re-enter this market right here. Let’s look. Recently we had Microsoft, Alphabet (Google), and Amazon all reported earnings. All beat earnings expectations. Because Microsoft is 2.3% of the index, and Alphabet (GOOGLE) is 2.54% and Amazon is 1.25% of the index that is Capitalization Weighted, you can see it was a really good week for the index! We finally broke over the beginning year value.
However, if you looked at that same period, but now just equal weighted the S&P 500 you can see that the index is still struggling to find the next catalyst to the next level of earnings expectations.
On this index we are still negative on the year! October is a month that can be full of tricks in the market, historically speaking. So don’t rush to thinking that the market is all healed because of the last few weeks. We have a mountain of earning and GDP to go yet! And the bond market seems to be saying be careful!
This chart echo’s that yields on treasury bonds have been making lower highs. Not a great sign for growth. So be patient and not too anxious. Believe me, when the market is ready for entry all the markets will be telling the same story.
Angela M. Bender
Securities offered through Triad Advisors, Inc. LLC. Member FINRA/SIPC.
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