Irrational Exuberance, Claims Clean, Golden Outlook

Transcription

1 Irrational Exuberance, Claims Clean, Golden Outlook Over the last couple of decades, the International Center for Finance at Yale University has regularly surveyed both individual and institutional investors and asked them about their views of the market. There are four major questions: one year confidence, buy-on-dips confidence, crash confidence, and valuation confidence. We re going to focus on two of those today: one-year confidence and valuation confidence. One-year Yale "One-Year Confidence" Reading: 2001-Present confidence is the percent of investors Institutional expecting a positive return for the Dow Jones Industrial Average over 90 Individual the next year. Valuation confidence is 85 the percentage of investors that think the market is valued either too low or about right, as a share of investors who have an opinion on valuation. The confidence indices are shown for all investors, individual investors, and institutional investors Yale "Valuation" Reading: 2001-Present Institutional Individual Investor "Irrational Exuberance" Indicator* One-Year Confidence Minus Valuation Confidence (Combined) One-Year Confidence Minus Valuation Confidence (Institutional) One-Year Confidence Minus Valuation Confidence (Individual) *Investor confidence that "market will be higher one year from now" minus investor confidence in "valuation of the market." Data from Yale Investor Confidence Monthly Surveys. Copyright 2016, Bespoke Investment Group, LLC. Bespoke Investment Page 1 of 7 At above left, institutional investors are extremely bullish: only 1% don t expect gains for the Dow over the next year, just off the record reading established last month! Individual investors are the most bullish since February 2004, when 93.4% expected gains. Currently, over 90.9% expect further gains. On valuation, a historically low share of investors think the market is cheap; both individual and institutional investors are less negative about valuations than they have been recently, but are near their lowest levels on record. We can also combine the two. To do so, we subtract the valuation series from the share of investors that expect gains. We chart those series for all investors, individual investors, and institutional investors at left. We call this our irrational exuberance indicator, which we ll discuss more on the next page. Group, LLC believes all information contained in this report to be accurate, but we do not guarantee its accuracy. None of the information in this report or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.

2 The key takeaway from our combined irrational exuberance indicator is that investors think simultaneously that the market is over-valued but likely to keep climbing: that s the exact phenomenon famously described by former Fed Chair Alan Greenspan in a December 1996 speech. Robert J. Shiller, the originator of the Yale Investor Confidence series, is rumored to have first invented the term; he later wrote a book with the same title. Investor "Irrational Exuberance" Indicator* Confidence that "market will be higher one year from now" is higher than "confidence in valuation in the market." Financial Crisis market lows "Confidence in valuation of the market" is higher than confidence that "market will be higher one year from now." One-Year Confidence Minus Valuation Confidence (Combined) *Investor confidence that "market will be higher one year from now" minus investor confidence in "valuation of the market." Data from Yale Investor Confidence Monthly Surveys. Investor "Irrational Exuberance" Indicator* vs. S&P One-Year Confidence Minus Valuation Confidence (Combined) S&P 0 (Right Axis) *Investor confidence that "market will be higher one year from now" minus investor confidence in "valuation of the market." Data from Yale Investor "Confidence" Monthly Surveys. The Yale Confidence series aren t a very good market-timing tool, in our view. That said, we can say that lower readings on our irrational exuberance indicator generally come at lower levels of the market. The low of our Irrational Exuberance reading came just after the lows for the market during the Financial Crisis. We also think that as a general proposition, if a huge share of investors think that the market is expensive but are still optimistic, the market s psychology is fragile. Equity valuations are not as extended as they ve been in true bubble territory (the tech bubble). That said, we think it s a negative for the market in the longer-term that so many expect gains despite having little conviction in valuations. Page 2 of 8

3 1/67 1/70 1/73 1/76 1/79 1/82 1/85 1/88 1/91 1/94 1/97 1/00 1/03 1/06 1/09 1/12 1/15 1/67 1/70 1/73 1/76 1/79 1/82 1/85 1/88 1/91 1/94 1/97 1/00 1/03 1/06 1/09 1/12 1/15 1/67 1/70 1/73 1/76 1/79 1/82 1/85 1/88 1/91 1/94 1/97 1/00 1/03 1/06 1/09 1/12 1/ Initial Claims Relative to Civilian Labor Force Initial Claims, 0.15%, Left Continuing Claims, 1.24%, Right Initial Claims Relative to Total Employment Initial Claims, 0.17%, Left Continuing Claims, 1.36%, Right Initial Claims Relative to Civilian Noninstitutional Population Initial Claims, 0.1%, Left 0.6 Continuing Claims, 0.78%, Right In addition to our initial claims post this morning on the blog we also wanted to take a look at the bigger picture. Because the population changes over time, we think it s more helpful to adjust claims for that and other factors over very long periods of time. At left, we chart both initial and continuing claims as a share of the labor force, total employment, and the civilian noninstitutional population dating back to Relative to all three measures of the population, initial claims were at an alltime low in February, and are near those levels again currently. Continuing claims were lower relative to population and the labor force back in 1969, but are the lowest on record relative to employment as-of this week s release. By any measure, the claims data is indicative of a very healthy labor market, regardless of less reliable one-off data points like the weak March NFP number reported a few weeks ago. It s also worth remembering that while that figure relies on statistical sampling and is subject to a wide margin for error, the claims data is a hard count not based on statistical models; while it isn t perfect, it s one of the most accurate and timely indicators we have available for what s going on in the labor market. Page 3 of 8

4 Price Action Bias To The Upside After Gold's Cup And Handle Gold Seasonality Starting To Become A Headwind (% Change) $1375 Prior High + Price Target Based on Cup's Height $1310 Pivot + ~% of Cup Height $12 $ y Avg 5y Avg To do so, gold will have to overcome some unfavorable seasonality (as shown above). The middle two quarters of the year have been weak for gold over the last 20 years, though we should note more recently Q4 has had the worst impact on gold longs. Another threat is the USD. As shown at right, gold and the buck (we use Bloomberg s USD index as a broad proxy) have had a high inverse correlation over the past year; with the dollar having already retreated significantly in the face of what should be bullish interest rate differentials, a gold long (and therefore dollar short) may seem to be testing fate. However, there s ample room for the inverse gold/ dollar correlation to drop somewhat. If it did so, the yellow metal could continue its rally regardless of the dollar s move. Based on the technicals, seasonality, and cross-asset signals, gold seems like a reasonable bet in for the rest of Gold has performed extremely well since the start of the year, with spot gold rising from the high-$1120s to its current price around $1280, a rally of 13.5%. That s impressive, but arguably more impressive is the technical set-up that rally has created. As shown at left, the December low for gold carved out the base of a large cup-andhandle pattern. Over the last week or so we ve seen the start of a breakout from that pattern, which would have an upside price target of $1375 for spot gold based on the height of the cup. That s right at the highs for gold seen last summer, a confluence of two patterns. Getting there isn t a done deal, however. The breakout of the cup-and-handle would have an initial target about half the size of the formation, or roughly $1310. That s also been a significant pivot over the last year, serving as an area of both support and resistance multiple times. Technicals suggest a move to that level, consolidation, and then a fresh push to the old high Strong Dollar Generally Means Weak Gold BBG USD Index (Left) Spot Gold (Right, Inverted) R^2 = Room For Less Co-Movement = Less Dollar Threat Rolling 1y Correlation Between Gold and Bloomberg USD Index Page 4 of 8

5 Credit FX Int'l Equity Eurodollars Commodity Curves/BE Trsy Yields Equity Futs After two days of declines the S&P 0 got a three-quarters percent bump today and small caps outperformed. The CAC 40 had its best day since March 1st as European stocks rallied broadly on optimism ahead of French elections scheduled for Sunday. The euro didn t get much of a tailwind though, with EURUSD seeing the smallest gains among G10 currencies. Overnight, flash PMIs from Markit are scheduled, followed by UK retail sales, Canadian CPI, and Mexican unemployment. Economic Calendar: Americas Recap, Asia & Europe Overnight Time Release Period Estimate Reading Last 8:00 Brazil CPI IPCA-15 YoY Apr +4.48% +4.41% +4.73% 8:00 Fed Governor Powell (voter) speaks 8:30 Philly Fed Apr :30 Initial Jobless Claims ('000s) 15-Apr :30 Continuing Claims ('000s) 8-Apr :30 US Crop Export Sales 9:45 BBG Consumer Comfort 16-Apr :45 BBG Economic Expectations Apr :00 EZ Consumer Confidence (Prelim) Apr :00 Leading Index MoM Mar +0.2% +0.4% +0.6% 10:30 EIA Natural Gas Storage Change (bn cu ft) 14-Apr :30 BoE Governor Carney speaks 12:30 BoE Governor Carney speaks 13:00 5 Year TIPS Auction ($16bn): 2 bps through, lower bid/cover. 14:30 Brazil Formal Job Creation Total (NSA, '000s) Mar :00 South Korea Exports YoY (Prelim) Apr % 20:00 South Korea Imports YoY (Prelim) Apr :30 Japan Nikkei Manf. PMI (Flash) Apr :30 Japan Tertiary Industry Index MoM Feb +0.3% % 3:00 France Markit Manf. PMI (Flash) Apr :00 France Markit Svcs. PMI (Flash) Apr :00 Spain Trade Balance (bn EUR NSA) Feb :30 Germany Markit Manf. PMI (Flash) Apr :30 Germany Markit Svcs. PMI (Flash) Apr :00 EZ Markit Manf. PMI (Flash) Apr :00 EZ Markit Svcs. PMI (Flash) Apr :00 ECB Current Account (bn EUR) Feb :30 Italy Industrial Orders MoM Feb % 4:30 Italy Industrial Sales MoM Feb % 4:30 UK Real Retail Sales Ex Auto Fuel MoM Mar -0.5% % 4:30 UK Real Retail Sales Inc Auto Fuel MoM Mar -0.5% % 4:30 Italy Current Account Balance (bn EUR NSA) Feb :30 Canada CPI YoY Mar +1.8% % 8:30 Canada CPI Core - Common YoY Mar +1.3% % 8:30 Canada CPI Core - Median YoY Mar % 8:30 Canada CPI Core - Trim YoY Mar % 9:00 Mexico Unemployment Rate Mar 3.52% % 9:45 Markit Flash Manufacturing PMI Mar :45 Markit Flash Services PMI Mar :00 Existing Home Sales (mm SAAR) Mar :00 Baker Hughes US Rig Count 21-Apr :00 Baker Hughes US Oil Rig Count 21-Apr :00 Baker Hughes US Gas Rig Count 21-Apr :00 Federal Reserve H.8 Commerical Bank Balance Sheet Aggregates 15:30 CFTC Commitment of Traders Report Change Today (bps) Asset Last Change S&P Russell VIX Fut TSX Year Year Year Year s10s s30s Yr BE Yr BE Jun ' Sep ' Dec ' Mar ' Gold Silver WTI Copper Nikkei Shanghai ASX Stoxx BBG USD EURUSD USDJPY EM FX CDX IG itraxx IG CDX HY itraxx HY Page 5 of 8

6 Closing Charts & Tweets Popular Tweets on Twitter Lowest print in Continuing Claims since April :32 Bullish sentiment according to AAII breaks down...again. - 10:04 The Tale of The Tape: S&P 0 (Left Axis) vs Vanguard FTSE Europe - VGK (Right Axis) 2,363 2,3 2,357 2,354 2,351 2,348 2,345 2,342 2,339 2,336 2,333 2, Oil Future: Last 15 Trading Days BBG US Dollar Index: Last 15 Trading Days S&P 0 Intraday: Last 15 Trading Days S&P 0 (Left Axis) Vanguard FTSE Europe - VGK (Right Axis) Gold Front Month Future: Last 15 Trading Days Long Bond Future Intraday: Last 15 Trading Days Nasdaq Composite: Last 15 Trading Days S&P 10 Biggest Movers Price (%) Volume vs Historical Avg (%) Most Up Most Down Most Up Most Down SCSS INVA UNIT GEO SXC RLI SCSS NSR SLM MD WR RT BMI 9.19 PLXS MD VSTO AKS 8. WR RLI MSCI KND 8.48 AZZ PLXS TDG ADS 8.30 TCBI URI LW SPPI 7.56 URI AZZ PNRA EXPR 7.47 IDTI DGX PKY X 7.35 NVR IEX CMTL KALU 7.32 HOS GXP TISI STLD 6.76 DHR DHR LMOS SPXC 6.71 EBAY IDTI ANIP PERY 6.62 EVHC FL PBI IEX 6.55 QHC WWD 2.11 REG Key ETFs (1 Day % Change) Ticker Name Change Last 6 Mos SPY S&P IJH S&P IJR S&P DIA Dow QQQ Nasdaq 0.84 IWB Russell IWM Russell XLF Financials 1.69 XLB Materials 1.10 XLE Energy 0.49 XLI Industrials 1.21 XLY Cons. Cyclical 1.05 XLP Cons. Staples XLV Health Care 0.62 IYZ Telecom XLK Technology 0.91 XLU Utilities GDX Gold Miners 0.81 XME Metals & Mining 3.11 XRT Retail 1.86 XHB Homebuilders 0.38 IYR US Real Estate 0.06 KRE Regional Banks 2.11 IWD Russell 1000 Value 0.77 IWF Russell 1000 Growth 0.81 VXX VIX AGG Total Bond Mkt TLT 20+ Yr Treasuries MUB Muni. Bonds LQD Invest. Gr. Bonds JNK High Yield Bonds 0.30 BKLN Senior Loan 0.17 GLD Gold 0.19 SLV Silver USO Oil UNG Natural Gas VT Total World 0.84 CWI World Ex-US 0.80 VEA Developed Mkts 0.90 EEM Emerging Mkts 1.24 EZU Eurozone 1.00 DXJ Japan JPY Hdg'd 1.58 EWZ Brazil FXI China 1.33 EWT Taiwan 0.77 EWH Hong Kong 1.36 EWW Mexico 1.06 Page 6 of 8

7 Bespoke Market Timing Model: 4/20/17 Bearish Neutral Bullish Current Level Average S&P 0 Performance (%) Sentiment Indicator Direction vs Historical One Week Two Weeks One Month CBOE Call Volume 1.4 i NYSE Up vs Total Volume (%).4 h Nasdaq Up vs Total Volume (%) 53.3 h Index vs Equity PC Ratio 0.6 i VIX -Day ROC (%) 25.3 i VIX 10-Day ROC (%) 9.8 i Investors Intelligence Bullish (%) 51.9 i Investors Intelligence Bearish (%) 18.3 i Inv Intell. Bull Bear Spread 33.6 i AAII Bullish (%) 25.7 i AAII Bearish (%) 38.7 i AAII Bull Bear Spread i Overall Sentiment i Technical S&P 0 10-Day Avg. Spread (%) 0.3 h S&P 0 -Day Avg. Spread (%) 0.0 h S&P Day Avg. Spread (%) 5.5 h S&P 0 Monthly ROC (%) 0.4 h S&P 0 Weekly ROC (%) 0.5 h S&P 0 Quarterly ROC 1 (%) 3.7 h Group 10-Day A/D Line -1.0 h Group -Day A/D Line 66.0 h S&P 0 10-Day A/D Line h S&P 0 -Day A/D Line h NYSE TRIN Index 1.3 i Overall Technical h Fundamental/Monetary Corporate Spreads (10-Day ROC) 1.0 i Corporate Spreads (-Day ROC) High Yield Spreads (10-Day ROC) 10.0 i High Yield Spreads (-Day ROC) S&P 0 P/S Ratio 2.1 h 2.2 n/a n/a n/a S&P 0 P/E Ratio 21.5 h S&P 0 P/B Ratio Yield Curve (-Day ROC) h Yield Curve (10-Day ROC) -9.3 h Overall Fundamental h Bottom Line h Average S&P 0 Performance (All Days) Page 7 of 8

8 Current Level Average S&P 0 Performance (%) Sentiment Indicator Direction vs Historical One Week Two Weeks One Month CBOE Call Volume Overall Sentiment Bottom Line Average S&P 0 Performance (All Days) The Bespoke Market Timing Model is a compilation of some widely (and not so widely) followed market indicators. While most investors have one or two indicators they rely on, we all recognize that no indicator by itself is correct all of the time. With this in mind, we set out to create a series of indicators from multiple disciplines in order to see what the 'crowd' of indicators are telling us. Just as no individual is bigger than the market, we contend that no single indicator is more accurate at forecasting the market than the sum of them all. What follows below is an explanation of the various fields in our report. Indicator: Current level of the given indicator. In this example, CBOE call volume is 1.7 times CBOE put volume. Direction: Change in the indicator (positive or negative) over the last week. In this example, calls relative to puts have increased during the last week. vs Historical: This field measures the distance in standard deviations that the indicator is currently at versus its average over the last five years. In the above example, the volume of calls relative to puts is 0.6 standard deviations above its historical average. Average S&P 0 Performance: This field displays the average performance of the S&P 0 following previously occasions when the indicator was at similar levels to the present. Values highlighted in green indicate the two indicators for that group which are predicting the biggest gains, while indicators highlighted in red highlight the indicators which are signaling the most negative returns going forward. Overall Scores: Averages all the indicators for a given category. In the example above, overall sentiment is 0.3 standard deviations from its long-term average. At similar levels in the past, the S&P 0 has gone up an average of 0.14% over the next week, 0.16% over the next two weeks, and 0.28% over the next month. Bottom Line: This line shows the average of all the indicators in the study. In the example above, the aggregate level of all the indicators is currently 0.3 standard deviations above the historical average, and based on prior experiences, the S&P 0 has gone up an average of 0.12% in the next week, 0.21% in the next two weeks, and 0.27% in the next month. Values highlighted in red indicate returns that underperform the S&P 0 over the entire period covered (regardless of the indicator level), while green highlights indicate that they outperformed the overall average S&P 0 performance. Average S&P 0 Performance (All Days): This line measures the average historical performance of the S&P 0 over all periods for one week, two week, and one month time frames. These levels are then compared to the average level the indicators are predicting.in the next two weeks, and 0.27% in the next month. Values highlighted in red indicate returns that underperform the S&P 0 over the entire period covered (regardless of the indicator level), while green highlights indicate that they outperformed the overall average S&P 0 performance. Page 8 of 8