I would encourage all readers of the “latest news” pages on Capitalsynthesis.com (around 500 unique visitors daily) to regularly check and preferably contribute to the forum pages. The content on the forum pages is far greater and the analysis deeper.
Here below I re-post a couple of the recent forum comments.
From Saturday 13th July:
We have weak sp500 internals and weak structure on price but within a huge cyclical bull.
The difference this time is that rates are rising and have not retraced. Its certainly the weakest internal and price structure wave yet of this bull run. Its also extremely stretched in terms of over bought. But do you step in front the train here? Thats not something im ever very keen to do having been burnt so often by this approach.
What we can say is that more sectors need to join this move urgently if this is to have a chance of sustaining. In terms of which the cyclicals need to lead unless rates come back down. We should therefore be watching rates, the us$ and the cyclicals.
As an exercise just trawl through the dow30 components. Its an interesting thing to do to look inside this giant bull run from 2009.
Go to yahoo and track through the components.
http://uk.finance.yahoo.com/q/cp?s=%5EDJI
There are many cyclical stocks in the dow.. 23 of the 30 are cyclical which implies, if we are starting a new cyclical bull wave up then we are only just getting started here in terms of values for the dow.
Obviously finance is booming and tech isnt far behind. For the bulls issues like ciscos and MS performance is telling. Cisco and MS are indicative of global tech infrastructure investments but so is IBM’s & Intel which is far less tech promising and a short target as is CAT.. (indeed cat looks promising at the 90 level for a short. Ie can she get above her may lower high??!
I watch the tech earnings reports and I’m still in touch with some tech colleagues & friends. There is a boom at present in terms of tech infrastructure H/W and S/W investment.. Why? Simply put cost of finance is super cheap. This feeds into the 5 or 7 yr P&L of any deal. All big tech deals are dependent on taking to the boards of large cos 5 or 7 yr P&L deals. Usually these deals are on cost savings based on biz process re-engineering simplifying speeding efficiency and cutting man power over heat as well as energy over heads maintenance and s/w. If the cost of finance is close to zero on these deals then the whole p&l shifts downwards in terms of be point. For corporates this encourages tech investment. This passes on as low prices to consumers and industry and higher margins for corporates and shareholders.
In the short term it creates positive tail winds to the economy as creates high paid tech and professional services jobs, bonuses and margins for the tech cos. It also makes a lot of people redundant ie new money into the economy as redundancy payments. Its all positive stuff really but note. None of this is really expansionary. Its tech progress, short term plus but its not about expansion of products and services its more around margin improvements cost cutting driven by low rates and falling demand.
So the cyclical story is more complex than meets the eye.
Issues like CAT are indeed very cyclical and there in lies the weakness or potential weakness in my mind.
Housing – hgx had a bounce on thurs friday and did achieve the may high so its all ok so far. Issues like HOME DEPOT look ok here. HD is as much linked to the consumer balancesheet story as any co. So for as long as she is ok the consumer is alive and kicking. HD is not a target for now. No way. We cant ever sell this sort of tech strength. You will 9 times out of 10 get burnt!
And having seen the strength here in some cyclicals (but a mixed pic) what about the defensives? Is MS right that higher rates is going to squeeze the defensives?
JNJ – doesnt show this.. New breakout and she is powering on. Defensives leading again even as higher rates??????? mrk also strong.. PFE is weak technically. She is interesting as a bet against the defensives on this basis. She topped out early in april and has been tech weak ever since. Beautiful level on the 29.5 usds to play off.
UNH – United health care.. health care, according to MS should be weak. It isnt. Tech very strong here with new highs.
Another defensive that should be problems is PG. What do we see.. No problem. Very close
to breaking out, again.
Volumes are weak and especially weak given the gaps and high momentum price move we have seen. This hasn’t be the usual drift upwards. This is a surge, a powerful momentum rally upward. For this to occur on low volumes, and falling volumes as the move has progressed isnt bullish but price and tech remains bullish here.
My own book is long but i do hold a few underwater hedges. Looking at the tech i may have thrown a some margin away here as i dont see the weakness to support short here other than the volume issues, weak internals, rates and us$ issue. There are reasons for shorters to be optimistic but its not really translating yet into price.
Its not the high prob move to short this. What of my hedges, cover or ride? Really i should cover but we are so close now to the prior high and so over bought im holding for now but really starting to look for an exist rather than adding, expect for a tactical trade off the level short. A false break to rejoin the distribution is a reasonable prob trade given how fast and on low vol we have come.
In summary, the dow30 looks good. And this is surprising as the dow30 represents the world view more so than the purely US view. You would expect, if there is real weakness, to see the US centric cos start to out perform the dow30 cos given the em problems and continued euro weakness. And yet its the reverse? Another paradox i guess. But also possibly a sign that the world view is not as weak as we hear?
We have tech strength on cyclicals and defensives here, combined. We still have a low rate environment. Rates have now become positive and the usd is strong. The combination of events is usually bearish for equities. We also have huge weakness in world indexes also a usually bearish event. Im on the perpetual look out for weakness in internals but i cant find the evidence myself yet that i would like to (in terms of being able to add to hedges) see.
This is where i am. This is a crazy crazy cyclical bull driven by central banksters. Where she ends i have no idea. No model i have ever read forecasted this sort of strength from the 2009 lows. Just throw away these predictive long range models. Or better yet use them as toilet paper for that is their best use.
Big picture wise the euro cyclical indexes look ok. Less convincing than their US cousins but they are intact technically. 5 of the 6 charts here are cyclicals. Euro tech and autos are leading this in Europe. The Euro Finance sector the obvious laggard and significant laggard to their US finance cousin. If MS etc are correct re the cyclical defensive rotation the euro finance sector has a lot of catch up to do and that remains an interesting trade therefore. Though with stops as if they are wrong, from “failed moves come fast moves”.
In spite of the Italian and Spanish contraction in lending to the consumer, paradoxically, the Euro Travel and Leisure sector also leading this off the back of the German consumer, in the main. Defying all reports, It appears, from the index, there is a European discretionary spending boom underway?
From Europe the list of german cyclical stocks is telling and remains very weak technically with lots of may non confirmations in tact:
http://www.bloomberg.com/quote/BMW:GR
http://www.bloomberg.com/quote/VOW:GR
http://www.bloomberg.com/quote/BAS:GR
http://www.bloomberg.com/quote/SAP:GR
http://www.bloomberg.com/quote/IFX:GR
http://www.bloomberg.com/quote/TKA:GR
Patience for clarity will come here. Run the longs, the high yielding defensive stocks and look for some clarity on the cyclicals before taking any action. Will the great rotation occur here or has jumped the gun on the taper talk? The trade should be clear when she comes.
Its also worth noting that Issues like AMB2, the domestic German insurance co, hitting extreme highs yesterday at 115 euros. I bought in the 60s and still hold 2/3rds. The german cos domestic earnings are booming and no wonder. But there may be problems ahead looking at the large cap german cyclicals which would eventually feed into consumer confidence but in a lagging way. Like the US a domestic German housing boom could continue to lead consumer expansion but with rates creeping up there are obvious threats to this if the cyclical story cannot join.
From Alan on the forum pages a nice quarterly review of his own allocations and nos. I draw out a few paras here:
“I elected to sell a large part of my equity holdings midway through Q2 as I was convinced that an equity correction was due, in addition to the “sell in May” trend. It turned out I was right about the correction, although it turned out to be fairly short lived – but unfortunately I held onto my paper PMs and PM miners and suffered the consequences.
So my asset allocation now looks like this:
UK Equities 20.3%
North American Equities 5.1%
European Equities 1.5%
Japanese Equities 0.2%
SE Asia Equities 1.8%
Emerging Markets Equities 0.8%
Bonds & Gilts 17.1%
Commodities 9.6%
Property 7.3%
Cash 36.3%
So… the questions for Q3 are, can the PMs and their miners recover, and have the prices of physical PMs permanently decoupled from their paper instruments ?
And, for me personally, is there any point in continuing to hold paper PMs in a SIPP when suspicions of price manipulation are all around ?
I really don’t know. I guess it comes down to whether the deflationists or the inflationists are correct… and whether those who allegedly manipulate the paper markets have achieved whatever it is they want for the moment.
While I’m not comfortable about holding such a large proportion of cash and gilts at this time, I’m equally not too happy about reinvesting in equities right at the moment, so I’ll probably sit out the next couple of months and look again at the markets in September.
I suppose the one consolation is that a lot of pro investors were on the wrong side of the PM and PM miner movement in Q2, so I am probably not the only one licking my wounds.
My ISA portfolio also suffered in Q2, but not to the same extent, since I have very little exposure to PMs there, and because I invest monthly I benefit from pound-cost averaging and I’m not tempted to short-term trade on that account. Shame I didn’t adopt the same approach on my SIPP.”
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Thanks Rich
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