The Bull Case, Not the Bull Chase
Several indicators suggest that the next six months may not be as rewarding as
the past half year. The Panic/Euphoria Model's latest reading suggest a more cautious
stance might be appropriate as levels have begun to approach "euphoria" territory.
Moreover, lower intra-stock correlation also implies a more upbeat investment
community focused on stock selection and less concerned about macro dynamics,
thereby adding to the risk profile as economic, political or geopolitical events are no
longer being considered by fund managers by virtue of their actions.
Normalized earnings yield gap analysis suggests only a random probability for
further appreciation by late 2013. With the current weekly normalized gap between
one and two standard deviations below the 40-year average, there is a 70% chance of
market upside in the next six months, in line with the 67% random outcome and down
from the 98% opportunity seen earlier this year. Keep in mind that the 12-month
figures still offer up a 90% probability of equity index strength and accordingly support
a generally constructive tone looking out to mid-2014 but not necessarily the back half
of this year.
Forecasts for 2H13 US economic strengthening provide a hurdle that needs to be
overcome. Investors believed that first half 2013 would be hampered by the effects of
both the fiscal cliff and the sequester when the year began and thus had low
expectations that could be more easily beaten. Such a set of circumstances are not
present heading towards the balance of the year with Europe potentially being a
significant spoiler.
Hedge fund positioning and money flows also show a more positive investment
community that needs to see a continuous stream of good news to keep things
in a happy place. Negative headlines about possible Fed policy tapering, Chinese
PMI or more challenging Italian bond auctions already have generated some increased
market volatility and underscore the change in investor attitude. Reports of extended
net long positioning by hedge funds and US equity mutual fund inflows have been
sustained even as some international trends have been less encouraging.
Nonetheless, the longer term Raging Bull Thesis is still in place for equities. The
secular bull argument for US stocks beginning in 2013 retains its key tenets even as
"chasing the tape" nearer term may be a bit overdone. A revival in US manufacturing
competitiveness, a rebound in housing, mobile technology benefits and the trend
towards energy independence all sustain more growth potential for America, while
demographics and asset class returns surprisingly argue for more equity focused
money over the next few years. Hence, 2013’s double-digit performance may be only
the beginning of a multi-year (and possibly decade long) climb for stock investors who
are still scarred by the sharp bear declines during the 2000s.
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Several indicators suggest that the next six months may not be as rewarding as
the past half year. The Panic/Euphoria Model's latest reading suggest a more cautious
stance might be appropriate as levels have begun to approach "euphoria" territory.
Moreover, lower intra-stock correlation also implies a more upbeat investment
community focused on stock selection and less concerned about macro dynamics,
thereby adding to the risk profile as economic, political or geopolitical events are no
longer being considered by fund managers by virtue of their actions.
Normalized earnings yield gap analysis suggests only a random probability for
further appreciation by late 2013. With the current weekly normalized gap between
one and two standard deviations below the 40-year average, there is a 70% chance of
market upside in the next six months, in line with the 67% random outcome and down
from the 98% opportunity seen earlier this year. Keep in mind that the 12-month
figures still offer up a 90% probability of equity index strength and accordingly support
a generally constructive tone looking out to mid-2014 but not necessarily the back half
of this year.
Forecasts for 2H13 US economic strengthening provide a hurdle that needs to be
overcome. Investors believed that first half 2013 would be hampered by the effects of
both the fiscal cliff and the sequester when the year began and thus had low
expectations that could be more easily beaten. Such a set of circumstances are not
present heading towards the balance of the year with Europe potentially being a
significant spoiler.
Hedge fund positioning and money flows also show a more positive investment
community that needs to see a continuous stream of good news to keep things
in a happy place. Negative headlines about possible Fed policy tapering, Chinese
PMI or more challenging Italian bond auctions already have generated some increased
market volatility and underscore the change in investor attitude. Reports of extended
net long positioning by hedge funds and US equity mutual fund inflows have been
sustained even as some international trends have been less encouraging.
Nonetheless, the longer term Raging Bull Thesis is still in place for equities. The
secular bull argument for US stocks beginning in 2013 retains its key tenets even as
"chasing the tape" nearer term may be a bit overdone. A revival in US manufacturing
competitiveness, a rebound in housing, mobile technology benefits and the trend
towards energy independence all sustain more growth potential for America, while
demographics and asset class returns surprisingly argue for more equity focused
money over the next few years. Hence, 2013’s double-digit performance may be only
the beginning of a multi-year (and possibly decade long) climb for stock investors who
are still scarred by the sharp bear declines during the 2000s.
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