Let's take a look at some interesting data that is indicative of market sentiment and where money is flowing these days ..
Wells Advisors' private client group, the third largest U.S. brokerage firm, indicating that their trading commissions are down by more than 14.5 percent so far this year from the comparable 2013 period, as noted by a memo written by group president David Kowach that was recently reviewed by Reuters.
He further notes in a memo to the firm's 11,000 brokers last week, " Commissions that were "a really big driver" of success last year have missed budget this year by about $2.6 million..
In an indication of client wariness about stocks, cash balances in their brokerage accounts of $112 billion are "about the highest level I can remember," wrote Kowach, a 21-year veteran of the securities industry.
A data point like that reinforces what I have stated many times, this market isn't being embraced by the average "Joe or Mary" investor.
Furthermore, ConvergEx looks at year-to-date ETF inflows and outflows and picks up on something rather interesting - after an incredible year in 2013, investors are now shuffling their portfolio assets back toward bond ETFs and away from stock ETFs. We've seen $17.7 billion go into bond ETFs since January 1st while a net $16.3 billion has come out of their equity counterparts…
But the big winner so far this year - both in terms of performance and asset gathering - is not the bond market or the stock market. It's commodities, Wall Street's most reviled asset class by far.
Here's ConvergEx again: Commodity oriented ETFs are up $887 million in new assets during February, after losing $25.6 billion over the last year.
Once again showing the "dog" theory prevails.
Here is a data point I view as a contrary indicator ..
Data from Schaeffer research ,
"SPX component short interest up 4.13% in most recent report, highest level since mid '12 and +9.5% YoY"
Looking Out on the Economic front :
The "fundamentals " recorded favorable data points last week that continue to play into the "recovery" theme...
Global Manufacturing PMI hits 34 month high at 53.3 vs. 52.9 in Jan.
ISM Manufacturing report for the month of February came in stronger than expected. While economists were expecting a level of 52.3, the actual reading came in at 53.2. While January's report was a big miss relative to expectations, February's beat represents the eighth time in the last nine months that the ISM Manufacturing report came in better than expected.
Construction Spending edged up.1%, vs. -0.2% expected, +0.1% prior.
PMI Manufacturing at 57.1 vs consensus of 56.6 53.7 in Jan.
Personal Income & Outlays: Income +0.3% m/m vs. +0.2% expected, +0.0% prior (revised).
Pending Home Sales edged up.1% to 95.0 vs. +2.3% expected, -8.7% prior (revised).
Feb. Reuters/Univ. Of Mich. Consumer Sentiment at 81.6 vs. 81.5 expected and 81.2 prior.
Chicago PMI 59.8 vs. 56.4 consensus, 59.6 prior.
MBA Mortgage Applications : +9.4% vs. -8.5% last
So as I have noted today and in the past there are plenty of good things occurring in the economy..
And Finally , GDP Q4 reported @ +2.4% , vs +2.5% consensus.
I present one fact that shows the recent reduction in that report may be temporary.
Here is a data point that many do not pay attention to or even know about which also points to continued economic progress ..
Truckers on the move ISI's proprietary truckers survey, which gauges shipping activity and has a very high correlation with GDP, bounced back toward the top of the range it's been in for the past three years. This is another sign that weather's impact on GDP, as witnessed in this week's revised report that included December and lowered fourth-quarter growth from an initially estimated 3.2% to 2.4%, is likely to be temporary.
Staying in character with this year's increased volatility the equity markets went on another roller coaster ride. The focus this time was the events surrounding the Ukraine. It gave a momentary pause to my bullish outlook as stated in my commentary last week :
"The market has spoken with new highs on the S & P , the Russell 2000 and the S & P 400 midcap indexes this week..
Add those facts to my comment from last week --"The New York Composite Advance/Decline Line rose to a new bull market high. " -- and the near term outlook becomes encouraging .."
During that selling spree, I decided to take advantage in what I saw as an opportunity as I added selected stocks to my portfolio..
& why I chose to do that a little later in this post. . here are the additions ..
While near-term market forecasts are always difficult, it seems to me that the balance of risks through the rest of this quarter is to the upside. I believe we may be presented with what I view as a 'melt" up phase in the S & P . Thus my reasons for why I chose to add the names I mentioned above.
My recent commentary demonstrated that earnings are improving, the fundamentals highlighted above are also providing a nice backdrop . Some points to bring that "bigger picture" together
- Housing. Although slowed for sure by the terrible winter weather, home builders remain bullish, foot traffic strong and pricing power high. With insufficient inventory available, these conditions are likely to continue to support housing prices. As a general rule, good things happen to industries with pricing power. And strong home prices also means rising collateral values, which could actually lift bank lending after its seven-year decline. With diminishing room to do fill-ins on half-finished developments from the boom era, new developments should re-start soon. Indeed, new FDIC data released this week shows bank lending for land development and construction has turned up after hitting a 14-year low early last year, a sign residential and non-residential construction is set to ignite. A key element of my secular bull theme is the recovery in the construction sector, where most of the lost middle class jobs are.
- Energy. Despite the glut of cheap domestic shale-based oil in the U.S., most of the world's major oil-producing countries continue to experience disappointing production levels. This is supporting oil prices outside the U.S., and is bullish for the idea that the domestic oil sector build-out underway in the Midwest will likely continue. This creates jobs throughout the supply chain in the energy business, and is also giving an edge to U.S. manufacturers, whose cost structure depends partly on oil prices.
- Technology. U.S. technology companies have the most pristine, cash-rich balance sheets in their history, and the big established ones have strong profit margins to match. Whine if you like about the prices being paid for mobile/cloud assets, but something positive is happening here. As we saw in the last big tech remake in the 1990s, it takes the market some time to catch on.
- China. China continues to worry investors, most recently with news that the central bank authorities are letting the Chinese currency, the renminbi, depreciate modestly. This is presumably another reason that the great Chinese credit bubble is about to burst, reining a sort of nuclear holocaust on the Chinese economy and leaving 1.2 billion people wandering the countryside looking for food. I don't think so.
The phrase to note here is "the central bank authorities are letting the Chinese currency … depreciate." With nearly $4 trillion in currency reserves, the Chinese government has massive resources to deal with its credit bubble issues, and the only question is whether it will choose to use those resources. With the alternative being uncontrollable social chaos if the bears have their way, I have a good idea of what they will do.
An article from an author here on SA that has been on the right side of the trade had this to say about the China issue recently.
- The Fed. New Chair Janet Yellen highlighted her dovish credentials this week, emphasizing the threat of the weather to the economy and her desire to not taper too fast. With an eye on interest rates and housing, and even the struggles out in the emerging markets, the Fed is likely to continue to move slowly to complete QE tapering, much less start hiking rates even as the economy accelerates out of the weather-induced coma it briefly lapsed into this winter. It's "Goldilocks" all over again !
Against this bullish economic backdrop, we have a stock market trading at 16-17 times what I believe earnings will be this year.
The data presented indicates "they' (investors) are not 'all in" , at best, flows into equities are just picking up. Now we may see many investors continuing to fret about "I missed it" and "what are the chances of another big pullback" and "I'll wait for a correction to get in." Anxiety may start to really set in and the melt up begins.. Bears saw their recent line of defense of 1850 broken.. Connect the dots and the melt up may be underway ..
What could spoil the party ?
The two technical issues that I noted in comments from last week.
"The two laggards are the Financials and the Dow 30 and at least for now we'll have to welcome the new highs without them.." (That is still a concern to me).
Well, we only have one issue left, the Dow 30, as the Transports joined the other indices and made a new high on Friday. Not to be outdone the financials had a great week with the (NYSEARCA:XLF) tagging along and recording a new high also.
I mentioned that Individual stock selection will be key in 2014, I continue to believe so .. and as testament to that ..
The E & P oils have had a nice run-- the three I selected for 2014 and mentioned here have huge gains in the last 2 months
(NYSE:PXD),from 164 to 204
(NYSE:CXO), from 97 to 122
(NYSE:WLL) from 57 to 71
They are up over 25% this year , the S & P is up 1.3%
For the LT investor, you simply stay the course. For a "pro-active" LT investor (somtimes viewed as "total return") as myself, you move assets around your LT positions by doing what I have promoted for the entire rally. Trim positions that are extended and have outsized gains and rotate into select new ideas that present themselves . (EBAY) LAZ) (NYSE:ALR) are all new ideas that have performed well since purchase.. My one laggard is (NYSE:CPA) , that update can be viewed here :
Longer term, I continue to believe we are in a secular bull market and down the road the indices will be higher than they are today.
Best of Luck to all....
Disclosure: I am long WLL, PXD, WLL, AAPL, MU, CPA, EBAY, LAZ.
Additional disclosure: I am long numerous equity positions , the complete list can be seen here in this Blog.