I like to view the market utilizing a systematic approach. Over the years, I have created a number of data points which I share in piece-meal with you in various articles. To that end, a few months ago, I decided to consolidate them in a Market Thermometer which encapsulates indicators that I think are key to determining appropriate market positioning. Please find those below, with commentary on each.
The trend is still poor despite the market rally. On the slightly positive side, Industrials - which are my favorite leading indicator - are oversold against the rest of the market.
There is no doubt that the fundamentals are late stage here. Macroeconomically the numbers have been poor and declining. I missed nothing on that front in the previous series of articles. In most other periods, a PMI reading and miss of the magnitude that we saw on July 1st should have led to major market turbulence - but it did not. Bears, take note.
The Ted spread, High Yield bond spreads, and EM debt have all been bastions of strength. I believe deterioration in these metrics are prerequisite for a crash and we simply don't have them.
I haven't talked about sentiment before but it's clearly important to understand when you are consensus and when you are not. Truthfully, I became consensus in June. Being a Macroeconomic purist is not a great trading strategy, thus I have added Sentiment to the market evaluation.
Looking at sentiment as of our latest readings, it does indeed appear there is quite a lot of bearishness. So being the contrarians that we are, I now rate this metric as one of the most bullish in the Thermometer.
A few savvy posters have commented that the Fed will bail us out with QE. The massive anticipation across markets over policy which may or may not occur is amazing. I can't remember a time where so many participants are so tuned in to the macro. It's scary. Still, I believe that the old saying, "don't fight the Fed," (and now the PBOC) has merit here as CPI and commodity pressures have abated.
Net-net, when I sum it all together, I have essentially become market consensus with my recommended trading posture. I simply do not have enough indicators to be overtly bullish nor is it appropriate to be bearish for anything more than a short-term trade based on overbought oscillators. Ultimately, I would use market pullbacks to begin to accumulate growth names and hedges to monetary profligacy (i.e. gold and miners).
As an aside, if I were running the Central Bank, I would not be attempting to stimulate here. We are very late stage and it's clear the economy needs to cleanse out. Tight credit spreads, high profit margins and monetary stimulus have historically been beneficial for large cap growth names. If it's got 4 letters in the ticker and it makes neat little devices, it may be something you want to own.