Implications
of Surging Momentum and Highlights of BoAML Fund Manager Survey
by the Curmudgeon
Despite valuations and sentiment
indicators off the charts, the U.S. stock market has shown astounding relative
strength this year with the DJI average easily surpassing 26,000 in morning
trading today. The reversal to a slight daily decline in all the major
averages is insignificant, when compared to the momentum surge during the first
nine trading days of 2018.
Leuthold Weedens preferred
measure of medium-term momentum (14-Week Relative Strength Index, or RSI)
blasted to a new high for the current bull market (which started in March
2009). According to one Twitter pundit, the S&P 500 RSI was the
strongest since at least 1929, which was before RSI was even calculated!
Thats extraordinary, and yet
another piece of evidence that the bull is not quite ready to meet the mortician,
said Doug Ramsey of Leuthold Weeden.
Its historically been very rare
that the cyclical peak in stock prices coincides with the peak in momentum.
The table below summarizes market behavior leading into the last 21
cyclical bull market peaks dating back to 1900. (Leuthold used weekly closing
prices to define those cycles since their momentum measure is also weekly).
Among these cases, the peak in market prices coincided with the bull markets
momentum peak only two times (in 1938 and 1980). In more than 90% of past
cycles, a fresh cycle peak in momentum was a pre-cursor to many more months of
market gains.
..
Chart of S&P 500 vs Medium Term
Momentum (14-week RSI):
Source: The
Leuthold Group
.
Curmudgeon Comment:
Indeed, the Curmudgeon vividly
remembers the super strong stock market in the first two weeks of 1987, with
the peak for most stock averages occurring in late August of that year prior
to the October 19th crash.
..
Once a bull market peak in momentum
has been established (which obviously can be known only with hindsight), the
average additional gain in the market has been +18.4%, occurring over an
average span of 60 weeks.
The implication is obvious (and
painful to value investors and seasoned veterans whove experienced many long
grinding bear markets): RSI and momentum this strong usually requires a
multi-month cooling-off phase before the bull market becomes vulnerable to a
severe correction, bear market, or crash.
..
The following is from a BofA
Merrill Lynch Global Research report (bold font added where deemed
appropriate):
January 2018 BoA
ML Fund Manager Survey finds equities the asset of choice for investors (no
surprise!)
Total Return of Global
Equities/Global Govt Bonds vs Fed Funds:
Source: BofA
Merrill Lynch Global Investment Strategy, Bloomberg
Investors continue to favor
equities, said Michael Hartnett, chief investment strategist. By the end
of Q1, we expect peak positioning to combine with peak profits and policy to
create a spike in volatility.
In summary, BoAML finds that
Investors are long stocks, unprotected from a correction or bear market, and
believe the global equity bull market will continue to 2019 and beyond.
If those pros are correct, bears are in for a lot more suffering!
Good luck and till next time...
The Curmudgeon
ajwdct@gmail.com
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Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a
historian, economist and financial innovator who has re-invented himself and
the companies he's owned (since 1971) to profit in the ever changing and arcane
world of markets, economies and government policies. Victor started his Wall Street career in 1966
and began trading for a living in 1968. As President and CEO of Alpha Financial
Technologies LLC, Sperandeo oversees the firm's research and development
platform, which is used to create innovative solutions for different futures
markets, risk parameters and other factors.
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