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Breadth Thrusts & Bread Crusts: Evidence of a Butterfly? Yes. Of a Bull Market? Not So Much.

July 14, 2022
JC Parets

From the desk of Willie Delwiche.

I'm watching a butterfly emerge from a chrysalis.

Literally.

I’m not conjuring a metaphor. This is happening in real life… in a jar on my desk.

A few weeks back, I found some Black Swallowtail caterpillars in my dill patch. I collected several, provided a steady supply of fresh dill, and watched them grow big and plump.

Eventually, they attached themselves to a stick, shed their caterpillar skins and have spent the last couple of weeks undergoing an amazing metamorphosis inside their chrysalis.

Reorganization complete, they are now emerging anew.

[PLUS] Weekly Observations & One Chart for the Weekend

July 8, 2022
JC Parets

From the desk of Willie Delwiche.

The June employment report shows a labor market that remains on relatively firm footing. Nonfarm payrolls were up more than expected in the month, though this was partially offset by downward revisions to gains from previous months. Total employment rose at 3% annual rate in the second quarter, though adjusting for a downtick in average weekly hours, the aggregate hours worked index was up only 2% in the quarter. While continued growth in employment is good for workers, it is coming as output (as measured by GDP) is at best stalled and is more likely contracting. This is likely to put further upward pressure on unit labor costs and downward pressure on productivity. That translates to lower profit margins, which peaked in Q3 2021 and have fallen in each of the last two quarters. Slowing top line growth and contracting margins leave plenty of room for earnings estimates to be revised lower. That’s a fundamental headwind for stocks moving forward. 

[PLUS] Dynamic Portfolio Management

July 6, 2022
JC Parets

From the desk of Willie Delwiche.

A new quarter brings new positioning for our strategic portfolio, tilting away from equities, taking a fresh look at bonds and trimming up our commodity exposure. Recent strength in bonds has adjusting our fixed income exposure in the cyclical and yield portfolios and adding it to the tactical portfolio. While comfortable limiting our risk exposure for now, we also want to lean toward where the evidence suggests the market is heading.

[PLUS] Weekly Sentiment Report

July 6, 2022
JC Parets

From the desk of Willie Delwiche.

Key Takeaway: Flow data showing equities attracting 71 cents of every ETF dollar in the first half of 2022 casts some doubt on claims that sentiment is washed out even as bears continue to outnumber bulls. New lows > new highs and excessive pessimism are features of bear markets, while new highs > new lows and building optimism tend to be seen in bull markets. The wall of worry seen in the AAII sentiment data off of the COVID lows is more an exception than it is a rule, especially in the absence of breadth thrusts or other evidence of strong participation. Between the ETF flow data and measures of household asset allocations, the risk is that the investor love affair with equities grows cold and they seek solace elsewhere. Overall the sentiment data now looks more similar to what was seen in Q1 2008 than what was seen at the lows a year later.

Sentiment Report Chart of the Week: Equities Feel The Flow

[PLUS] Weekly Market Notes

July 5, 2022
JC Parets
From the desk of Willie Delwiche.

Key Takeaway:

  • Commodities facing pressure.
  • Bonds looking for tailwinds.
  • Stocks relying on hope.

The first half of 2022 was one for the record books, but it was more dubious than distinguished. Only two years (2020 & 2009)  in the past quarter century experienced more 1% moves in the first half than did 2022 and only one (2008) finished the year with a higher percentage of 1% moves than we have experienced in the first half of this year. Both stocks and bonds were down in back-to-back quarters for only the third time in the past 45 years. This contributed to the benchmark 60/40 stock/bond portfolio experiencing a first half of the year that was twice as bad as another in the past quarter century. According to data from Ned Davis Research, it was the worst first half for a balanced portfolio since the 1930’s.

[PLUS] Weekly Observations & One Chart for the Weekend

July 1, 2022
JC Parets

From the desk of Willie Delwiche.

June asset allocation data from the AAII suggests that investors are beginning to act on their emotions. It’s not uncommon for sentiment to lead and positioning to lag, but the gap between the two had gotten historically wide. That is beginning to change as investors shift from equities to cash. The AAII asset allocation survey shows equity exposure dropping from 67% in May to 65% in June, while cash exposure rose from 19% to 21%. History suggests this could be the beginning of a larger unwind. When sentiment got to similar extremes in 1990, 2003 and 2008, stock exposure approached 40% from above and cash exposure approached 40% from below. By the March 2009 Financial Crisis low, cash exposure was above equity exposure. Even during the brief (though intense) COVID crash, equity exposure dipped to 55% and cash exposure jumped to 26%. If past periods are a guide, investors may only be in the early stages of adjusting equity market exposure.

Breadth Thrusts & Bread Crusts: They Keep Popping Up

June 30, 2022
JC Parets

From the desk of Willie Delwiche.

Earlier this week, I laid out some similarities between now and 2008. From a price, liquidity, breadth and sentiment perspective, the echoes are there. 

The comparisons keep popping up. 

A couple of days ago, there was a chart showing that the ongoing decline in equity market value (relative to GDP) exceeds any other drawdown in the past 40 years with the exception of what was experienced during the Financial Crisis. 

Today, it’s data from Gallup showing economic confidence is at levels only seen in 2008-2009.