Weekly Notes With Tiho - Issue 20
Location: Saigon, Vietnam
I am so glad I escaped the cold European months towards South East Asia, with today's temperature at 32 degrees Celsius.
In general, November has been an interesting month for investors - in particular for the US equity bulls. Credit spreads continue to remain narrow and the economy is still on a synchronized upswing. The Federal Reserve is probably going to hike rates this month, all else being equal.
As always, we will start our summary with the stock market and then move towards bond & credit. In future posts, I will also be adding real estate & other alternative asset section.
The All Country World Index (NASDAQ:ACWI) finished up +2.0% for the month of November. While the MSCI index itself is up every single month this year, the actual ETF that tracks it - is not. There was a slight sell-off in June, producing a down month to an otherwise perfectly bullish trending calendar year.
Keep in mind the seasonality of global stocks, which tend to have a strong showing in December. To start off 2018, there tends to be more volatility so a corrective period anywhere from January to March shouldn't surprise you.
What I find interesting here is that ACWI is up +23.7% year to date, and yet it is up +26.6% over the last three years. In other words, 2014, 2015, and 16 weren't anything to write home about. Just about all the gains realized over the last three years have happened in 2017.
Why is this so?
The US dollar has been weak this year, unlike 2014.. 2015… and 2016.
US stocks finished up +3.1% for the month of November - now up 8 months in a row and 12 out of the last 13 months. Let us look at the momentum.
Solid returns can be seen in the short, medium and long-term perspective. Furthermore, the index also remains above the 3-month, as well as the 12-month moving average - so clearly, the momentum is positive. However, one could make an argument that momentum itself is rather exhausted, with 362 trading days without a 5% drawdown. Last time we saw something similar was in the mid-1990s - and it rarely lasts for longer.
This is the first time since early October that SPY has traded at least 2 standard deviations above the three-month moving average. Moreover, take note of a sharp rise in volume in recent days.
Sector-wise, the technology sector did not finish the month on an optimistic note. FAANGs and BAT stocks were battered in recent days. Let us not forget the sharp selling in the semiconductors sector, giving back the November gains. Discretionary, Financials, Industrials, Energy, Telecom, and Staples all had bullish month end finishes - with both Consumer Staples and Consumer Discretionary rising by over +5%. Dow Transports also recovered well, for those that track the Dow Theory.
Now, let us focus on the monthly array of charts by analyzing breadth and sentiment.
The percentage of SPY components trading above their 50-day MA recovered over the last week. The current reading of 79% is the highest since the start of March 2017.
For those looking to invest at the right times, readings below 20% usually tend to mark meaningful bottoms. This is what we saw in August 2015 and January 2016, as well as August and October 2011.
We also saw a slight uptick in NYSE 52 week new lows throughout the month of November, but nothing on a major scale.
Readings above 500 tend to mark an intermediate low, while spikes above a 1000 mark major bottoms. Clearly - by observing the chart above - immense selling pressure in October and November of 2008 went on to mark a generational bottom in US stocks… producing a nine-year winning streak and the second-longest bull market in history.
The month of November saw a sharp rise in bullish advisor sentiment, reaching record high levels of 64.4%. Additionally, the spread between the optimists and pessimists hit 50 - also a record high. Contrarians should take note.
Whenever the sentiment spread of bullish and bearish advisors drops below 20% - a rare occurrence happening only 7% of the time - subsequent annualized returns were double than of SPY norm. On the other hand, advisor sentiment spread above 40% - also a rare occurrence happening only 6% of the time - saw subsequent annualized returns flat (all the risk, with no reward).
Globally, for those diversifying away from the US equities, November was a disappointment on a relative basis. While the majority of the regions saw a positive performance, it was really only Frontier Markets that had solid gains of +3.4% - outperforming SPY.
Emerging Markets sold off, dragged by the ever-troubled Latin American region.
Developed Markets ex. North America finished up +0.7% for the month of November. Let us observe the momentum.
Solid returns can be seen in the short and medium term, with a below average gain over the longer-term perspective. Furthermore, the index also remains above the 3-month, as well as the 12-month moving average - just like the US - indicating positive momentum.
What about various components of the index? Japan has been driving the momentum higher. Quite to the contrary, Switzerland peaked around May of 2017 and the best it has done is edge a little higher ever since. The Nordic equity region has been underperforming since October, while there has been some downward consolidation in the Club Med countries. Singapore remains near an all-time record high, while Hong Kong suffered a nasty reversal this week, following in the footsteps of other Chinese markets (more in the EM section below).
Emerging Markets lost ground in November, down -4%, after a very strong gain we saw last month. As we look at the momentum, disappointing returns over the short term are obvious with a drawdown over 4% already. The market has stalled over the last quarter.
However, a keen observer can also notice world-beating returns over the medium term, making the EM rally talk of the town. Finally, below average performance over the longer-term perspective - as EM has made little to no gain over the last three years. The index just dropped below the 3-month moving average but remains above the 12-month moving average. Generally speaking, a mixed picture is observed when we look at the Emerging Market momentum.
What about various components of the index? The Chinese mainland stock market has gone through a nasty bearish reversal over the last couple of weeks, giving back all the gains in November. Indonesia and the Philippines are looking vulnerable right now, while Russian equities failed to rally despite strong Crude Oil prices. Qatar, Mexican and Turkish equities - which have been serious underperformers as of late - have stabilized for the time being.
However, the stock market of Chile showed one of the worst sell-offs this month, straight down without a pause. Egypt continues to outperform the rest of the EM, from very depressed price levels.
I'm paying close attention to the Emerging Market volatility, which has been rising since the 15th of September and trending upward in the short term. Without too much surprise, EM equities have not made any progress since the trough in VOL.
Bonds & Credit
Treasuries sold off by -0.3% for the month of November - third monthly fall since the geopolitical tensions escalated with North Korea. Let us observe the momentum of the bond market.
Negative returns can be seen in the short term, while below average returns have been realized in the medium and long-term perspective. Furthermore, the index also remains below the 3-month average, and barely above the 12-month moving average. In general, the momentum isn't positive.
TIPS rose in November, by a hair's whisker, edging out a +0.1% gain. Inflation-linked bonds have been outperforming Treasuries since the start of September.
Treasury market sentiment remained neutral for the month of November - right around 55 to 60% optimists. The last two extremes, both the bearish and the bullish ones, were seen in July 2016 and December 2016. Market price, as well as sentiment, has found some kind of equilibrium since.
Sentiment readings below 30% optimists have marked major buying opportunities within the US Treasury market.
In general, quite a negative picture for the bond and credit markets throughout the month of November. The only place to hide was foreign fixed income denominated in local currencies, due to a big slump in the US dollar.
High yield was the worst performer in the credit space, as spreads continue to track sideways for some months now.
Investment grade bonds also lost ground this month, declining by -0.1%. What does the momentum tell us? Poor returns are the theme for almost all bonds over the short term, underperforming since the North Korea geopolitical event.
Unlike Treasuries, corporates have been solid over the medium and longer perspective. Furthermore, corporates remain above the 3-month, as well as the 12-month moving average - indicating overall positive momentum.
Global Treasuries ex-US benefited strongly in November, rising by +2.1% - mainly a USD weakness story. As we look at the momentum, we can see a recent improvement.
The performance over the short and long-term perspective is below average and rather disappointing. Lots of volatility here with a USD rally in 2015, correction in the first half of 2016, followed by another rally in early 2017 and then a major sell-off. Medium-term performance has been very solid, once again mainly thanks to an awful 2017 for the greenback.
Global government bonds remain above the 3-month, as well as the 12-month moving average - indicating overall positive momentum.
A new development in the junk credit market over the last few months has been the inability to continue outperforming similar-maturity Treasuries.
In plain English, credit spreads have stopped narrowing - in some cases, like the CCC junk grade - for several quarters already. Nevertheless, spreads have not started to widen, yet…
Wishing all of my website readers, social media followers and podcast listeners around the world a very safe and enjoyable holiday season - as well as a Happy New Year.