There's mounting evidence that suggests the post-Election Day stock market rally is due for a pullback. Below are three reasons from data reported on Friday and cited by Hedgeye CEO Keith McCullough in today's Early Look.
As equity markets hit all-time highs, total market stock market volume (the sum total of investor buying and selling) didn’t accelerate. On Friday, stock market volume was down -2% versus the 1-month average. Volume accelerates when investor conviction is high. Lower volume on the up move equals less conviction.
Stock market volatility, as measured by the VIX, has crashed -27.5% since the election. Volatility rises as investors grow more fearful and falls as investor confidence grows. In fact, the last 60-days of trading have been the least volatile (rolling 60-day) time period in the Dow and Nasdaq since 2007.
That may be changing.
The VIX appears to be trending higher. "The VIX signaled its 1st higher-low (within my risk range) in 3 months," writes Hedgeye CEO Keith McCullough.
Consumer sentiment got a huge boost after Trump's Election Day win. But the honeymoon period may be waning. The University of Michigan U.S. consumer confidence slowed to 95.5 in February versus twelve year highs of 98.5 last month.
Post the friendly Abe visit to the USA and a #StrongDollar ramp vs. the Yen, the Nikkei’s +3% pop in the last 2 trading days registers an immediate-term TRADE overbought signal inasmuch as Yen (vs. USD) signals oversold – we still like Japanese stocks, but we'd book some gains here.
Youge +5.8% week-over-week move in an important proxy for our #InflationAccelerating call here in Q117 seeing follow through to $2.78/lb this morning but that signals immediate-term TRADE overbought within its bullish TREND too – you should continue to see y/y inflation ramps in the US CPI and PPI reports this week.
US Equities at the highs and Volatility has crashed (-27.5% since the election) despite consensus concerns about Trump – but that’s yesterday’s news; this morning we're registering my first higher-low (within my immediate-term range) for front-month VIX at 10.36; book gains in US equity beta is the call on that.
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This week in Hedgeye cartoons. Get our daily cartoon emailed for free: hedgeye.com/cartoon/email
“You are going to make mistakes in life. It’s what you do after the mistakes that counts.”
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"As you can see in today’s Chart of the Day, 60-day realized volatility for the S&P 500 is at the cycle low. That’s pulverized the bears. Having been one plenty of times in my career, “believe me!," Hedgeye CEO Keith McCullough writes in today's Early Look.
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An interesting dichotomy has been developing in the U.S. housing market over the past year or so. The low-end, first time homebuyer market is booming, while high-end home buying languishes.
In the months following our first update on the nasty reality developing in high-end housing markets like uber-rich Greenwich, Connecticut, America elected Donald Trump. Optimism set in. The stock market popped following his Election Day victory. The real economy appears to have bottomed.
It’s time for a refresh to our high-end housing thesis.
“The strongest part of the market is still the entry level market,” says Hedgeye Housing analyst Josh Steiner. “That’s because rents have been rising above inflation for many years now.” Plus, the low-end housing market is extremely supply constrained.
“The high-end, however, is the exactly opposite,” Steiner says in the video above. Take the hedge fund capital of the world, Greenwich, CT for instance. It’s housing market is in deep trouble. When last we checked, there was a staggering amount of homes sitting on the market. Here’s the breakdown by home price category:
Let’s put that last bullet into perspective. At 128 months, that’s almost 13 years of supply.
Since Trump was elected, though, measures of Consumer Confidence have hit 15-year highs, GDP growth accelerated and the 10-year Treasury yield (a barometer of U.S. economic expectations) soared from 1.86% all the way up to 2.36%.
“It’s a little unclear post the election whether this upswing in market valuations and broader consumer confidence measures will manifest in the form of increased luxury consumption,” Steiner says.
As he points out, the S&P 500 is up 6% since Election Day. Wealthy people tend to “annuitize” – or convert investment gains into income – 3% to 5% of those unrealized gains, he says. And snce the top 10% of Americans by wealth distribution own 85% of all financial assets, this could obviously be a major tailwind to housing.
A few words of caution. “Historically, you always get this honeymoon phase from Election Day to Inauguration Day. But, the big question remains, then how much of that is directly translatable in spending,” Steiner says.
Time will tell.
Some say China’s credit boom will perpetuate a collapse in its debt markets, the yuan, and its stock market. This misses the mark. China has the critical tools necessary to engineer a "soft landing" and slow the country's economic growth.
While we disagree with the China doomsday scenario, slowing growth will undoubtedly hurt the country’s stock market. We suggest investors short Chinese large-cap stocks (FXI).
Setting aside China’s phony GDP data, their economy is clearly slowing. The chart below shows the breakdown of China’s growth by sub-industries. The recent “recovery” in 2016 was predicated on the growth rate of heavy industry.
It's unlikely this growth in heavy industry repeats itself. It was perpetuated by a significant amount of fiscal and monetary stimulus.
In January 2015, the People’s Bank of China pumped 1.235 trillion yuan into the economy. This January, it was a mere 350 billion, a -72% decline. A centrally planned slowdown of this magnitude has never been attempted before in modern economic history. While we’re not calling for collapse, it is safe to assume the glide path down will be less linear than Beijing hopes.
Currently, China is experiencing a financial crisis with communist characteristics. While China may eventually accomplish their twin goals of permanently downshifting GDP growth and rebalancing economic drivers, their insistence upon maintaining financial and economic stability throughout effectively transfers deflation risk from the market in the near term to the real economy over the longer term.
Instead of boom turned bust, policymakers will continue throwing cold water on the economy, specifically the overheated property market.
China’s economy has a closed capital account, which essentially means companies, banks and individuals can’t move substantial amounts of money in or out of the country without bumping up against the government’s stringent rules and regulations.
This largely explains away the possibility of material currency devaluation in China. Comparing China to the 25 other emerging markets we track across a variety of metrics reveals some interesting insights:
We believe that Beijing has the critical tools necessary to engineer a “soft landing” and slow the country’s economic growth. While a soft landing is not a face-plant for the Chinese economy, slowing growth will hurt the country’s stock market. Steer clear of Chinese large-cap stocks.
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