Headlines
|
|
Investors get comfortable trading stocks on their own merits:
The correlation among member stocks of the S&P 500 has declined to the lowest level in a year, and is more than a standard deviation below average. This signals complacency among investors.
Unstoppable: The most benchmarked index in the world has been on a tear since the jump in fear last week. The S&P 500 has jumped 1% or more on 3 out of the past 4 sessions while closing at an all-time high. The last time it managed a run like this was 1999. Overall, forward returns were below random, with more risk than reward up to 3 months later.
Bottom Line:
See the Outlook & Allocations page for more details on these summaries STOCKS: Weak sell
We're in an extremely speculative environment that is enough to become defensive, especially with recent cracks showing in what had been pristine breadth conditions. The spike in fear from last week has already mostly dissipated and likely not enough to offset the negatives over a medium-term time frame. BONDS: Weak buy
Various parts of the market have been hit in recent weeks, with mild oversold conditions. Treasuries have been hit hard and will likely start to register some extremes soon. GOLD: Weak buy
A dollar trying to rebound from a severe short position has weighed on gold and miners. The types of signals they've given in recent weeks, within the context of their recent surge, have usually resulted in higher prices over a medium- to long-term time frame.
|
Smart / Dumb Money Confidence
|
Smart Money Confidence: 20%
Dumb Money Confidence: 82%
|
|
Risk Levels
Stocks Short-Term
|
Stocks Medium-Term
|
|
Bonds
|
Crude Oil
|
|
Gold
|
Agriculture
|
|
Research
BOTTOM LINE
The correlation among member stocks of the S&P 500 has declined to the lowest level in a year, and is more than a standard deviation below average. This signals complacency among investors.
FORECAST / TIMEFRAME
SPY -- Down, Medium-Term
|
It's a truism of markets, lasting decades if not centuries, that when investors panic, they sell everything together. When they're comfortable, they buy and sell securities on their individual merits.
That's why we see correlations among stocks and other assets rise during times of anxiety and fall during periods of complacency. This is notable now because the correlation among stocks in the S&P 500 has plunged to the lowest level in over a year.
Correlations have gyrated in a wider range in recent years, so we can transform the data series above into a z-score. This compares the current reading to the average over the past year and adjusts for the standard deviation among those readings. This measure dropped below -1.5 in late January and has stayed right around that level.
When the S&P 500 has been at or near a high and the correlation z-score drops below -1.5, the index has had some trouble holding its momentum.
Over the next 3-6 months, it sported a negative average return. During the next 6 months, its average risk (maximum decline) was -8.5% while its average reward (maximum advance) was only +5.9%. It was also significantly more likely to see a big drop versus a big rise within those 6 months. See this Knowledge Base article for more details about the terms in the table.
Looking at some factor ratios, cyclical stocks tended to underperform defensive ones after these signals.
Small stocks underperformed large ones.
And growth underperformed value, though that last signal was a doozy of an exception.
There is no shortage of signals that most investors are somewhere on the spectrum between complacent and euphoric, perhaps even manic. This can go on for a while, but we've been seeing some cracks under the surface that bear watching. A hyper-speculative environment that's coupled with decaying internal momentum is a recipe for weeks or months of high risk.
Active Studies
| Time Frame | Bullish | Bearish | | Short-Term | 0 | 0 | | Medium-Term | 2 | 5 | | Long-Term | 15 | 3 |
|
Indicators at Extremes
% Showing Pessimism: 3%
Bullish for Stocks
VIX
|
|
Portfolio
| Position | Description | Weight % | Added / Reduced | Date | | Stocks | 8.7% RSP | 8.7 | Reduced 28.8% | 2021-01-26 | | Bonds | 9.5% ANGL, 9.1% SCHP, 9.0% BND | 27.6 | Reduced 0.2% | 2021-01-26 | | Commodities | GCC | 2.3 | Reduced 2.1%
| 2020-09-04 | | Precious Metals | GDX | 8.9 | Added 4.8% | 2020-12-01 | | Special Situations | 10.3% XLE, 8.9% PSCE | 19.2 | Added 19.2% | 2021-01-26 | | Cash | | 33.4 | | |
|
Updates (Changes made today are underlined)
With a market that has seen the kinds of broad participation and big breath thrusts like we did in the fall, it's hard to become too negative. Those kinds of conditions have consistently preceded higher returns over the next 6-12 months. It's the interim that's more of an issue. Even conditions like that haven't prevented some shorter-term pullbacks. And when we combine an environment where speculation is rampant and recent days have seen an increase in cracks under the surface of the indexes, it's enough to become more defensive over a short- to medium-term time frame. We still don't have much confirmation from the price action in the indexes, so those who are more conservative would likely wait before increasing cash levels. In a bid to more closely align the portfolio with what most of our members consider "stocks", we have moved any sector-specific investments to the "special situations" category instead of "stocks." This way, the "stocks" category is essentially the most benchmarked index in the world, the S&P 500. RETURN YTD: 3.7% 2020: 8.1%, 2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%
|
|
Phase Table
Ranks
Sentiment Around The World
Optimism Index Thumbnails
|
Sector ETF's - 10-Day Moving Average
|
|
|
Country ETF's - 10-Day Moving Average
|
|
|
Bond ETF's - 10-Day Moving Average
|
|
|
Currency ETF's - 5-Day Moving Average
|
|
|
Commodity ETF's - 5-Day Moving Average
|
|
