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MArket - A seasonal tsunami of huge inflows into equity funds

Monday 1-10-2011

 

Dr. John L. Faessel

ON THE MARKET

Commentary and Insights

 

Quote of the day

“It has been said that politics is the second oldest profession. I have learned that it bears a striking resemblance to the first.”

~ Ronald Reagan ~

~~~~~~~

 

For Best Ideas for 2011 send request: Dr.Faessel@onthemar.com

 

Last Friday weak job data hit the bond market and that will almost certainly put the Fed on hold. Commodities, copper gold, silver were off big chunks. Today the worries about the Portuguese slice of the EuroLand [PIGGS) debt bomb has the market off 5 S & P futures.

 

I remain bullish going into Q3 based on the seasonal tsunami of huge inflows into equity funds that have averaged $6 billion a week over the last month. Outflows from Money Market funds average $6.3 billion over the last four weeks. (In November there was $2.8 trillion in Money Market assets so there is still plenty of fuel in there to keep this move going.) Importantly, the Bank Index (BKX) was up 13% over the same 4-week period.

 

There's a confluence of factors that lineup well for the next several months as the Feds $600 billion QE2 should grease the machine. (QE 1 let’s remember was $1.7 trillion that kicked in beginning March 2009.) There's also a powerful Presidential Cycle in force; since 1939 100% of the time the stock market/Dow Jones industrials has been up, remarkably by an average of over 16%. Add in to this study the $trillions in corporate treasuries are now reported to be leaking out into business expansion and the continuing boom in corporate revenue and earnings (see below). Taken in sum this could mean that they awaited private sector expansion indeed has a genesis. If not, we should know by mid-way or late in Q2 - that make me think of the old market axiom, “Sell in May and go away” that lines up well in this context.

The Dow Jones Industrial average performance over the 59-year period through 2009 shows that the index produced an average gain of 0.4% during the 6-month periods from May to October, says the 2010 Stock Trader's Almanac. The Dow averaged a 7.4% gain during the six-month periods from November through April.

 

A McClellan Oscillator that remains in neutral keeps me bullish shorter term, but perking cycle high sentiment* (see below) warns of a pullback. I don’t see any euphoria (warning ) “YET” from the Citygroup “Panic / Euphoria” Model.**

 

Q4 numbers begin do be reported today and the overview of forecasts by analysts looks to be exceptional as they go up against weak Q4 2009 results. Startlingly they’re expected to rise 32% in the S&P 500 (SPX). Going forward into 2011, earnings are expected to rise 13%. Remarkably, revenues for 66% of the 500 companies have already exceeded 2007 levels. On a "price" to sales comparison the (SPX) is at 1.3 times sales versus a 1.6 multiple in 2007. This overview speaks well for higher stock prices as the (SPX) is still off 22% from the 2007 highs of 1576, were currently at 1271.

 

Capitol Hill Watch:

There could be some good news on the way as the new Republican majority in the House of Congress tweaks the onerous monstrosity 848 page Chris Dodd / Barney Frank FINANCIAL SERVICES BILL that once enacted busted the banks and the Bank Index (BKX) from 58.83 to 42.70 due to analysts’ projections that passing it would reduce the banks profits by $22 billion. With the prospects of the GOP coming to power in the House, the (BKX) has been on a run as I mentioned above. Recall that Barney Frank, “Let’s Roll the Dice” (on Fannie Mae and Freddie Mac) and Chris Dodd, “If we require a down payment, we’d restrict home ownership to only those who can afford it.” were the spearhead's of the financial crisis fiasco the origins of which goes back to the 1999 and the Community Reinvestment Act. Failure to comply with that Act meant a certain lawsuit. The Act’s guidelines instructed lenders to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage.

 

See the September 30, 1999 NY Times Stephen A. Holmes article. Fannie Mae Eases Credit to Aid Mortgage Lending.

http://query.nytimes.com/gst/fullpage.html?res=9c0de7db153ef933a0575ac0a96f958260

 

 

Short term support is at S&P 500 (SPX) 1262 then 1252 / 1254, then at1246, 1233, 1220 and 1200. The 50-day moving average support is at 1224. 200-day moving average support in the (SPX) is 1148. The former major resistance and now key price support in the (SPX) is at 1146 / 1150.

 

 

Short term resistance is at S&P 500 (SPX) 1278. The next major resistance (SPX) 1313 (neck line bounce highs on August 8, 2008)

 

Of note:

·        The Dow Transports closed at new cycle highs at 5178. The old high in August 2008 was at 5292.

·        The S&P 500 (SPX) added $1.3 trillion in market-cap in 2010.

 

Key indicators and metrics:

 

·                       Friday’s McClellan Oscillator is in neutral @ minus 23

·                       The Treasury 10-year 3.32

·                       3-month $ LIBOR at 0.303

·                       CBOE Put / Call Volume Ratio – 0.91

·                       Euro – 1.29

·                       VIX – 17.14

·                       US Dollar Index – 81.32

·                       Copper – 4.27

 

 

Key WEEKLY SENTIMENT (i.e. CONTRARY INDICATOR) data points:

 

* Scary! BULLISH longer-term investor sentiment consensus readings are near or at cycle highs and are now warning of hazard. Taken in total they are a growing and significant concern. 

 

Last week the CBOE Put / Call Volume Ratio posted an exceptionally low complex of numbers 0.65, 0.65, 0.71, 0.75 and 0.91 that warn of compliancy

 

(High BULLISH readings in the Investor Sentiment Readings usually are signs of Market tops; low ones, market bottoms.)

 

·        The Consensus Index BULLISH investor sentiment survey rose to new recovery cycle 72% highs. The multi-year highs in Bullish sentiment of 76% were reached in the first week of May 2007 just prior to the huge down-leg.

 

·        The Market Vane (Market Letter Survey) posted new cyclic highs of BULLISHNESS with a read of 63%. It had not seen this level since late 2007 when the Market Vane Bullish survey was above 70%.

 

·       The American Association of Individual Investors [AAII] Investor Sentiment Survey BULLISH moved up to 55.9% from last week’s 51.6%. The prior week was at new cycle highs 63.3%. The low of the May selloff cycle at was at 30.1% [The lows registered on March 9th 2009 were an historic low posting of 18.9% only BULLISH.]

·       The AAII Investor Survey of BEARISH sentiment registered 18.3%. 3-weeks ago it posted cyclic Bearish lows at 16.4% that were lows not seen since 2005. The highest Bearishness occurred 24-weeks ago when it ticked the summer “market retreat” high at 57.1%. In August 1987 it ticked the lowest low ever recorded at 6% BEARISH – Remember what happened on October 19, 1987...

·       ** The Citygroup “Panic / Euphoria” Model ticks cycle highs at plus 0.27 but is in the high part of the “neutral” zone, well away from the “euphoria” (DANGER) levels.

 

Following the $ Trillions – The BARRON’s Confidence Index is at 81.4 matching the recovery cycle highs of 3-weeks ago and at levels not seen since the fall of 2007. The Confidence Index Index is the premier measure of how the bond markets trillions (around $40 trillion) are allocated: (The bond market is twice the size of the stock market.) The ability of this key indicator of market health to post new highs bodes well for the economic recovery and for stocks to continue forward.

 

For my Best Ideas for 2011 please send an e-mail request to: Dr.Faessel@onthemar.com

 

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.