Many times I have commented about the bifurcation between the indices and the typical stock as many now are chasing returns via closet indexing. For those, such as me, who rely upon sector analysis via geopolitical and macroeconomic trends, the last 12-15 months have been extremely frustrating and expensive.
Is the environment now about to change? According to Fundstrat Global Advisors, the stage has been set for “contrarian-style investments” to sustain outperformance, investments predicated upon emerging themes. According to Fundstrat, such style has lagged 12 of the previous 15 quarters.
The reason for the optimism, the increase dispersion or variances in the returns for individual stocks, a dispersion that has not been experienced since 1979, a breakout in housing and capital spending, and oil.
I have commented many times the markets have been co-opted by the proverbial machines, a view perhaps validated by several Fed officials’ remarks suggesting the averages might be “overly influenced” by ETFs and algorithmic trading.
It is my firsthand experience when everyone has adopted a trading strategy, that strategy will soon start to dramatically underperform.
For those whose philosophy is something other than indexing—either overtly or covertly—all hope the change is now occurring.
Speaking of change, oil opened lower yesterday following Monday’s strong advance only to close higher by over 3.5%. Oil is now at a 2015 high, up almost 23% from its March 18 low, which incidentally is also the low since the 2008-09 financial crisis.
I have cited the data from the oil collapses occurring since 1990 crude typically retraces about 54% of its decline in the six month following its nadir. The issue at hand is determining as to when the low was made. Many, me included, thought the lows were made at the end of January as prices gained in February only to collapse to even lower prices by mid-March.
Will March 18 be regarded as the cycle low? I think yes for a myriad of reasons but unfortunately only tomorrow’s history can answer this question.
Commenting about yesterday’s market activity, stocks closed virtually unchanged. The Dow was up over 100 points earlier in the day but traded lower at the close on monetary policy fears, a rallying dollar and earning concerns.
The Minutes from the March FOMC meeting are posted today. Moreover first quarter earnings season commences this evening. I think profits will disappoint for the first time in many quarters for most have not yet recognized the impact of the surging dollar.
Last night the foreign markets were up. London was up 0.51%, Paris up 0.04% and Frankfurt down 0.33%. Japan was up 0.76% and Hang Sang up 3.80%.
The Dow should open little changed ahead of the Fed minutes and the unofficial kickoff of 1Q earning season. The 10-year is off 3/32 to yield 1.90%.
Ken Engelke
Chief Economic Strategist Managing Director
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.
