Weekly Update

Getting Nervous?

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Published May 5, 2017


When our most recent TimingCube Turbo Model Buy signal was sent out on December 6 we can bet that no one expected it would still be in place five months later with a gain (using the QQQ) of over +18%. While the trend, especially on the Nasdaq 100 (QQQ), remains up, and strong earnings growth reports coming in this month appear supportive of the market, some fund managers are nervous. Here’s the commentary of one such manager, Cliff Stanton of 361 Capital in Denver. Note how the world has changed at Vanguard since 2000!

Signs of detachment from economic and market fundamentals are piling up. For one, the lack of market volatility is staggering. The S&P 500 just finished its least volatile quarter since 1968 and the NASDAQ 100 posted its most extreme percentage of positive days in a quarter since the inception of the index; it was in positive territory 71% of the days in the first quarter, something that wasn’t even achieved during the Tech Bubble.
Granted the lack of volatility doesn’t necessarily have anything to do with market fundamentals, but when paired with the following observations, it sure makes us feel uncomfortable.
Investors have evidently given up on the idea that investing should be about underlying value. Price discovery, long considered a component of the raison d’etre of markets, is being trampled at the hands of passive investing. As reported by Bloomberg and Ignites:

  • Vanguard hauled in $121 billion in new money during the first quarter, beating its best-ever quarter by 46%. The cash breaks down to $2 billion a day. Extrapolated to the end of the year and would mean $500 billion in sales during 2017, breaking Vanguard’s single-year record of $305 billion. Vanguard is in uncharted territory and may have hit a tipping point. “I think they’re actually overwhelmed at this point,” says Bloomberg’s Eric Balchunas.
    Source: Bloomberg

That sure sounds an awful lot like the situation in the first quarter of 2000, or more correctly, the reverse thereof, when active managers were king. Here is an excerpt from an article entitled “Return of the Stock Pickers”. It’s actually comical to read the following, knowing what came next:

  • Indeed, stock-picking is back in vogue. AMG’s Adler says industry-wide large-cap index funds–mainly S&P 500 funds–are getting only 4% of new cash this year, vs. 42% in ’99. And that’s not all. In four of the past five weeks, more money came out of index funds than went in…No wonder Vanguard Group, the No. 2 fund company and premier purveyor of index funds, is also turning to stock-picking managers for help.
    Source: Bloomberg

Vanguard was adding to their active sub-advisory bench right at the market top, because investor preference for active was so strong. Wow.
Lastly, how about this scary little piece about Chinese investors:

  • Like many individual investors in China, Yang Mo has no idea what’s in the wealth management products that make up a big chunk of her net worth. She says there’s really no point in finding out. Sure, WMPs invest in all kinds of risky assets, but the government would never let a big one fail, she says.

    “It’s not how the Chinese government does things, and it’s not even Chinese culture,”

    explains Yang, a 29-year-old public relations professional in Beijing.
    Hers is a common refrain in Asia’s largest economy, where savers have poured $9 trillion into WMPs and similar products on the assumption that they’ll get bailed out if the investments sour.
    Source: Bloomberg

“Breathless” seems to be the best adjective to describe investor activity or how I’m feeling at the moment of this writing…but for very different reasons.

Of course our TimingCube models use price and volume data, among many other inputs, to derive the trend of the market. All of the above anecdotes are just information floating around and do not have any impact on our signals.

Market Update

Stocks pushed higher Monday as investors continued to reward the large-cap tech stocks that have posted strong earnings, such as Amazon. The Nasdaq rallied to a +0.7% gain while other indexes showed much more modest moves. Tuesday found market indexes running in place awaiting Apple’s earnings announcement after the close. Apple has surged more than +25% already this year. Whether earnings would support that heady move put investors in a wait-and-see mood. After the close, the company reported a disappointing sales quarter but chalked it up to consumers waiting for their upcoming 10th anniversary release of a new iPhone. Investors became comfortable with this explanation as the week progressed bidding up shares of Apple. Wednesday brought the outcome of the latest Federal Reserve meeting with no change in rates expected. The Fed delivered that message and did little to alter the outlook for two more interest rate hikes in 2017. Stocks again traded tightly closing near flat. Thursday shifted focus back to oil prices which plunged -5%. However, stocks overall barely budged holding flat despite the House passing a version of the healthcare reform bill. Investors have come to discount the impact of the healthcare bill at least for now believing that the bill will be heavily modified in the Senate before it’s ultimately enacted. Stocks turned a rather listless Friday into a record high close with technical trading pushing the indexes to their round-number targets – e.g. the Dow Industrial Average to just over 21000, the S&P 500 to just shy of 2400, and the Nasdaq Composite to an even 6100 by the end of trading, giving plenty of grist for anyone who views markets as manipulated in the short-term. That end of the day nudge left stocks up +0.4% on the day. That put the S&P 500 (SPY) higher by +0.68% on the week to hold the prior week’s breakout. The small-cap Russell 2000 (IWM) remained stuck with a -0.05% weekly result. The Nasdaq 100 (QQQ) continued to dominate the market year-to-date gaining +1.14% this week.

Warm wishes and until next week.