Guest post by Peter Tchir.
Last week was a feeding frenzy for algos and a disaster for those who were poorly positioned. Crowded complacent trades were pummeled, including, or especially, investment grade CDS. But now we have had some time to think about what happened and the markets seem calmer. On this bond market holiday, let’s just take a look at 5 simple things. These will be the drivers for the market.
If there was ever a case of people lamenting now owning a stock, swearing they would buy more if it ever came down, then dumping en masse when it did come down, this is it. Apple is unique in that it isn’t just a huge component of the indices (which it is) but it has become such an indicator of sentiment, that guessing Apple correctly is very important, if not critical. I like AAPL here. Sadly I started liking it at $570 but added some Friday morning. The sell-off seems overdone, at least for now. All those worried about paying taxes on their “big” gains, now need to worry about the gains. While everyone else was “amazed” by the great Apple products, I went to stores and found the iPhone 5 available on launch date, and remain confused about why the iPad mini which is either a small iPad or a big iPhone with no voice capabilities was such a big deal. But that was at $650 and above. Here I like it and it is oversold by many measures, including my personal favorite – RSI. I am also encouraged how many people were talking about the 200 day moving average. Many were investors who normally would demand you wash your mouth out with soap for saying such a naughty word. Finally, if they finally do something big with their cash, the multiple should look very attractive.
Market commentary by Hussman of Hussman Funds.
In mid-September, our estimates of prospective market return/risk dropped to the lowest figure we’ve observed in a century of market history (see Low Water Mark). That week turned out to be the high of the recent bull market, though it’s certainly too early to establish whether that was the ultimate peak. During the recent correction, I’ve noted a modest improvement in our return/risk estimates – which focus on a blended horizon looking out from 2-weeks to about 18-months. However, last week, the stock market experienced some significant damage to internals (breadth, leadership, price/volume measures, etc). As a result, our estimates of prospective return/risk have plunged lower again, to what is now the second most negative figure we’ve observed in a century of data – the September 14, 2012 weekly close of 1465.77 continues to mark the most negative estimate.
My intent in these weekly comments has always been to share what I am looking at, and what our analysis of the economy and financial market suggests – based on extensive historical data and every analytical tool we can bring to bear. There is no need to present the case as any better or worse than it is, but the simple fact is that our return/risk estimates for stocks dropped into the most negative 1% of historical data way back in March of this year, and the estimates we’ve seen since September have been even more extreme.
The S&P 500 has now underperformed Treasury bills for nearly 14 years, including dividends. The cycle since 2007 has been extraordinary in its economic, monetary and fiscal characteristics, not to mention the need to contemplate Depression-era data along the way. It’s undoubtedly easier to dismiss my present concerns as the rantings of a permabear than to understand the narrative of this particular market cycle. But for the benefit of those who do, I want to share my view that the statistical risk of severe market outcomes, given present observable data, has almost never been worse.
Remember the High Yield market? What could possibly go wrong? From Sober Look.
High yield bond issuance hit an all-time record in 2012, with $306 billion worth of new HY bonds coming to market by the end of October. In fact September was an all-time record month for new issue – on the back of the Fed’s latest action.
Leverage finance space as a whole also hit a new record. Adding new issue HY bonds and institutional loans (see discussion) puts 2012 ahead of 2007, the previous record.