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Is the advance sustainable?  As all know the Dow posted it worse start of the year in history.  The reason for the recovery…data suggesting the economy is not falling into the abyss, emerging pricing pressures, a 50% recovery in oil from its lows, a falling dollar and a change in the path of monetary policy.

In many regards the above is riddled with inconsistencies.  For example the market never believed the FOMC would increase rates four times in 2016.  In my view the statistics never suggested the onset of another recession. Regarding the dollar, how much higher could it have it advanced?  The same, but the inverse, is accurate for oil.

However is the advance sustainable??  Similar to the decline, I think the advance is greatly influenced by high frequency trading.  The SEC states 85% of all equity trades are done via HFTs, a concentrated trading platform which has destroyed the long heralded specialist system.  Depending upon the source, there are four to six major HFT firms whereas 10 years ago there were over 200 specialists.

To write the obvious, a lot of influence is now concentrated in only a few.

In my view, the current advance is partially the reversal of the trade that sent equities frightening lower at the start of the year.

I am an ardent believer that funds will eventually gravitate to issues that offer the greatest potential with the least amount of perceived risk.  As written many times, the advance from early 2014 through 2015 was concentrated in a handful of mega capitalized growth issues that became grossly overvalued, over owned, and over hyped, issues that were/are the dominant names utilized in HFT and ETFs.

Reiterating a JP Morgan statistic, large mega capitalized growth was up about 32% in 2015 while value was down 23%, the greatest disparity since at least 1980.

Warren Buffet once commented shares/sectors can decline 50% for no apparent reasons other than psychological where fear is stronger than greed.

I think if the data continues to exceed the consensus view and if profits exceed expectations—the bar is really low—the advance/transition from mega capitalized growth to value will continue.

Speaking of data, there is little on the economic calendar other than housing statistics and several manufacturing data points.  Equities are closed Friday for the Good Friday.

Last night the foreign markets were mixed. London was down 0.06%, Paris down 0.20% and Frankfurt up 0.26%.  China was up 2.68%, Hang Sang down 1.25% and Japan up 0.06%.

The Dow should open quiet, as all are reflecting upon the incredible volatility of 2016.  The 10-year is off 3/32 to yield 1.89%.

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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.