Monday Chart Blast: ISM, Capex, Positioning, Share Counts

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1 Monday Chart Blast: ISM, Capex, Positioning, Share Counts We covered some details in today s ISM Non- Manufacturing survey in a blog post this afternoon, but we also need to update our trackers for payrolls and growth, at right, using the weights of GDP attributable to Manufacturing and Services. At right, we note a large divergence between the Employment component of the ISMs, which indicate hiring in excess of 400,000 per month, and the NFP level. In the prior two divergences, noted with red circles, we saw ISM catch-down to NFP. That said, the current divergence is very large and quite puzzling, and approaching an unprecedented level. At right we show the tracking between production (Manufacturing) and activity (Non- Manufacturing), weighted by GDP share. Unlike employment, production figures point to a notable slowdown in growth in Q3 versus Q2. As far as ISM comparisons go, our chart bottom right shows Employment and Activity/Production continuing to surge in the services sector relative to the industrial economy, not a new story. Finally, at bottom we show economic capex (which includes inventory accumulation) relative to total GDP. Despite the pain in the industrial economy, capex has picked up dramatically in the last few quarters, and corporate investment in future production or sales is now in the 75th percentile since Capex Has Accelerated Dramatically As A Percentage of GDP 16% 15% 14% 13% 12% 11% 9% 8% 7% 75th percentile! 12.65% GDP-Weighted ISM Composite Signals ISM Employment Composite Consistent w/ >300k NFP ISM Employment Composite (Left Axis) NFP (Right Axis) ISM Activity/Production Composite Consistent w/ ~3% Growth ISM Activity/Production Composite (Left Axis) GDP (%, QoQ SAAR, Right Axis) R^2 = R^2 = Services Continues to Outperform The Manufacturing/Industrial Economy Employment Spread Activity/Production Spread Copyright 2015, Bespoke Investment Group, LLC. Bespoke Investment Page 1 of 10 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 CFTC Commitments of Traders Positioning: Net Position (% of Open Interest) CAD CAD Asset Manager CAD Leveraged Fund CHF -1.66% -0.44% % % - - CHF Asset Manager - CHF Leveraged Fund GBP JPY 15.84% % GBP Asset Manager - GBP Leveraged Fund % 5 EUR % EUR Asset Manager % -5 - EUR Leveraged Fund - - JPY Asset Manager % - JPY Leveraged Fund AUD % AUD Asset Manager AUD Leveraged Fund RUB RUB Asset Manager RUB Leveraged Fund 4.36% 10 MXN 32.68% % - MXN Asset Manager - - MXN Leveraged Fund % Above, and on the following pages, we introduce a compliment to the commodities positioning data that we include each Friday in The Closer. Financial futures positioning is segmented somewhat differently, but we choose to show two categories: leveraged funds and asset managers, a broad proxy for hedge funds and other institutional money, respectively. Page 2 of 10

3 CFTC Commitments of Traders Positioning: Net Position (% of Open Interest) BRL - - BRL Asset Manager BRL Leveraged Fund NZD 9.92% % NZD Asset Manager % % - NZD Leveraged Fund 7 5 Dow Dow Asset Manager Dow Leveraged Fund % S&P % % -3 S&P 0 Asset Manager % - S&P 0 Leveraged Fund 5 Nasdaq 32.51% % Nasdaq Asset Manager Nasdaq Leveraged Fund Nikkei 54.65% % - Nikkei Asset Manager - Nikkei Leveraged Fund Russell -9.34% % - - Russell Asset Manager Russell Leveraged Fund Nikkei - JPY Nikkei - JPY Asset Manager Nikkei - JPY Leveraged Fund 37.32% % We ll continue to update these charts, along with the commodities positioning charts, every Friday in The Closer. We believe these positioning charts are best used as an indicator at extremes, especially when the entire professional community is positioned in the same direction. For this week we note aggressive Dow and Nasdaq short covering under way and small S&P 0 net longs for Asset Managers. Page 3 of 10

4 CFTC Commitments of Traders Positioning: Net Position (% of Open Interest) 5 MSCI EAFE % - - MSCI EAFE Asset Manager MSCI EAFE Leveraged Fund MSCI EM MSCI EM Asset Manager MSCI EM Leveraged Fund % 4.92% Long Bond 5 S&P Long Bond Asset Manager Long Bond Leveraged Fund % 7.31% % -3 - S&P 400 Asset Manager S&P 400 Leveraged Fund % Ultra Long Bond 2 Year 45.75% 3 Ultra Long Bond Asset Manager 16.58% Ultra Long Bond Leveraged Fund % % Year Asset Manager 2 Year Leveraged Fund 5 10 Year % % Year Asset Manager 10 Year Leveraged Fund 5 Year % % -3-5 Year Asset Manager 5 Year Leveraged Fund We also note extreme, unheard of net short positioning in S&P 400 (midcaps) as well as extreme shorts in the five year note from hedge funds. We also note very, very low long positions in MSCI EM futures, and very long ten year note positioning amongst asset managers. Page 4 of 10

5 CFTC Commitments of Traders Positioning: Net Position (% of Open Interest) 5 Fed Funds % Fed Funds Asset Manager Fed Funds Leveraged Fund -2.38% Eurodollars % -9.31% - Eurodollars Asset Manager - Eurodollars Leveraged Fund 10 Year Swap 5 Year Swap - 10 Year Swap Asset Manager 10 Year Swap Leveraged Fund 29.26% % - 5 Year Swap Asset Manager 5 Year Swap Leveraged Fund 27.98% % USD Index 22.53% % - - USD Index Asset Manager USD Index Leveraged Fund 5 VIX % VIX Asset Manager % -5 VIX Leveraged Fund 15.84% - Dow Jones Commod % - Dow Jones Commod Asset Manager - Dow Jones Commod Leveraged Fund 2009 In VIX, asset managers are net short volatility, while leveraged funds are near their longest positioning in over 6 years. Page 5 of 10

6 One more blast of charts for you. Below, we show the relationship between share prices, dividend yields, and share counts for a number of popular trades (Energy, specific exploration and production companies, high yield, and EM) that have collapsed in the last 18 months. For Energy, the lower the price and higher the yield, the more capital is committed to the sector; that s true of both XLE and XOP. In high yield, shares outstanding are actually uncorrelated to both yield and price; this is counter to the yield chase narrative that is often associated with HYG. Finally, in EM, we show in our charts below that the ETF s shares outstanding are highly sensitive to price, with much less yield sensitivity; investors by and large chase returns or flows are solely responsible for gains in EM equities. 1 1 Shares Out Versus Price And Yield: Bottom Fishers, Yield Hunters, And Reflexivity Price (Right Axis) Indicated Yield (%, Right Axis) XLE (Energy) 85 1 XLE (Energy) Price (Right Axis) Indicated Yield (%, Right Axis) XOP (O&G E&P) XOP (O&G E&P) HYG (High Yield) Price (Right Axis) HYG (High Yield) Indicated Yield (%, Right Axis) ,300 1,200 1,100 1,000 0 Price (Right Axis) EEM (EM Equity) Indicated Yield (%, Right Axis) EEM (EM Equity) Page 6 of 10

7 Weak data today but it was bad news is good news for US equities as the S&P 0 rose 1.67%, making it nearly a 5% gain off the lows following Friday s Employment situation report. What s more, the VIX curve is now upward sloping again. Both spot and front month VIX trade at levels below the fourth month VIX, the first time that both have done so since the big selloff that hit global equity markets in August. The move from backwardation into normal contango for the volatility market is a huge sign of normalization in US equity markets. Also supporting the rally (86 points on the S&P 0) has been high yield; cash high yield bonds closed an amazing 17.5 bps tighter in OAS today, led by Energy, Communications, and Industrials bonds. Energy assets in general did well; XLE broke its downtrend and closed above its -DMA for the first time since May. HYG had its biggest one-day gain of the year on the day, while investment grade spreads both on cash bonds and CDS indices slammed tighter as well on strong volume and good breadth. We ve heard a lot of noise over the last few days that the markets are reacting to a rate hike being taken off the table this year. We disagree. Rather, more importantly, we think the market is seeing such a dramatic rally because it feels there is certainty. If the Fed had hiked, and clearly telegraphed its intentions via the Statement of Economic Projections and statement, we feel the outcome would have been identical. Regardless, though, today was all about equities; despite a hike off the table (continuing the analysis from Friday s dissection) bonds sold off across the curve, which steepened to its second highest levels of 2015 today as measured by 5s30s. Ten year note yields actually closed higher today than at any point in the last week, the five year point of the breakevens curve closed at the highest levels in the last two weeks, and real yields are also up. Adding to the easing pressure down on yields: WTI has closed at or above its -DMA on four straight days, the first time since Q2 it has done so. Copper has also made a tentative double bottom. While all of this might seem to suggest an easy money, Fed US Data Recap and Overnight Preview Time Release Period Estimate Reading Last 9:45 US Markit Services PMI (Final) Sep :00 Canada Bloomberg Nanos Confidence 2-Oct :00 Labor Market Conditions Index Sep :00 ISM Non-Manufacturing Sep :00 Crop Condition Corn 2-Oct -- 68% 68% 16:00 Crop Condition Soybeans 2-Oct -- 64% 62% 20:30 Australia Trade Balance (bn AUD) Aug :30 RBA Policy Decision 6-Oct :00 India Nikkei PMI Services Sep :00 Germany Factory Orders YoY Aug +5.6% % 3:00 UK Halifax House PricesMoM Sep +0.1% % 3:00 Spain House Transactions YoY Aug % 4:00 UK New Car Registrations YoY Sep % 4:10 Germany Markit Retail PMI Sep :10 France Markit Retail PMI Sep :10 Italy Markit Retail PMI Sep :10 Eurozone Markit Retail PMI Sep :30 Trade Balance (bn $) Aug :15 KC Fed President George (non-voter) speaks. 10:00 IBD/TIPP Economic Optimism Oct :00 3 Year Note Auction ($24 billion) 16:30 API US Crude Oil Inventories (mm bbls) 6-Oct :30 SF Fed President Williams (voter) speaks. lower forever type-trade, gold had no bid today, underperforming just about everything, down 28 bps. Furthermore, the USD was only down 5 bps; not exactly screaming market pricing massively easier monetary policy indefinitely. Instead, beaten down trades are catching a breather as the market loses a huge dose of uncertainty in exchange for unlikely prospects of a hike in Overnight, AUD will be the focus as the RBA meets; the currency is near a breakout point from its downtrend. We also get retail PMIs in Europe, before trade data in the US (the advance release was extremely weak) and API crude inventories, as well as two Fed speakers. Page 7 of 10

8 Closing Charts & Tweets Popular Tweets on Twitter S&P 0 still a little more than 1% away from its -day moving average even with today's move higher. Hasn't been above since 8/19. $SPY - 10:31 S&P 0 Energy ETF $XLE up another 3% today after gaining 4% on Friday. Huge 2-day move. - 14:38 S&P Energy sector back above its -DMA for the first time since 5/22, breaking a streak of 92 trading days below :37 92 trading days below the -DMA is the second longest streak for Energy $XLE over the last 25 years :38 First time since November 2010 that the S&P 0 was up at least 1.5% and the Nasdaq Biotech Index was down on the day. - 16:01 Junk bond ETF $HYG had its best day of the year today (+1.2%) - 16:17 DuPont just cut its second half EPS forecasts by 46% (from $0.75 down to $0.40). Welcome to earnings season. $DD - 16:19 The Tale of The Tape: S&P 0 (Left Axis) vs S&P 0 Industrials (Right Axis) 1,989 1,984 1,979 1,974 1,969 1, Oil Future: Last 15 Trading Days US Dollar Index: Last 15 Trading Days S&P 0 Intraday: Last 15 Trading Days Gold Front Month Future: Last 15 Trading Days Long Bond Future Intraday: Last 15 Trading Days S&P 0 (Left Axis) S&P 0 Industrials (Right Axis) Nasdaq Composite: Last 15 Trading Days 40 S&P 10 Biggest Movers Price (%) Volume vs Historical Avg (%) Most Up Most Down Most Up Most Down PVA SPF OLN PSEM BAS MNK EPC CAM CRC ENDP FLO LTC BBG CRUS KRA MOG/A CEVA GCI DOW CMCSK AREX ASNA HAIN TE BCEI EW THC MDP SGY MOH WWAV MDCO TMST AGN PRGS PCP DNR UTHR TDY ERA LXU SWKS CKP ROIC UTI VDSI JWN TUES ACOR CCRN TECH ENR ZEUS HAE HRB MBFI -60. PES SUPN UVE BGS Key ETFs (1 Day % Change) Ticker Name Change Last 6 Mos SPY S&P IJH S&P IJR S&P DIA Dow QQQ Nasdaq 1.43 IWB Russell IWM Russell XLF Financials 2.11 XLB Materials 2.61 XLE Energy 3.02 XLI Industrials 2.84 XLY Cons. Cyclical 1.48 XLP Cons. Staples 1.71 XLV Health Care 0.26 IYZ Telecom 3.42 XLK Technology 1.97 XLU Utilities 1.29 GDX Gold Miners 4.35 XME Metals & Mining 5.48 XRT Retail 1.60 XHB Homebuilders 2.88 IYR US Real Estate 1.79 KRE Regional Banks 2.52 IWD Russell 1000 Value 2.10 IWF Russell 1000 Growth 1.56 VXX VIX AGG Total Bond Mkt TLT 20+ Yr Treasuries MUB Muni. Bonds LQD Invest. Gr. Bonds JNK High Yield Bonds 1.10 BKLN Senior Loan 0.30 GLD Gold SLV Silver 2.34 USO Oil 1.56 UNG Natural Gas 0.27 VT Total World 2.00 CWI World Ex-US 2.29 VEA Developed Mkts 2.01 EEM Emerging Mkts 2.16 EZU Eurozone 2.09 DXJ Japan JPY Hdg'd 2.94 EWZ Brazil 2.61 FXI China 1.78 EWT Taiwan 1.99 EWH Hong Kong 1.32 EWW Mexico 1.92 Page 8 of 10

9 Bespoke Market Timing Model: 10/5/15 Bearish Neutral Bullish Current Level Average S&P 0 Performance (%) Sentiment Indicator Direction vs Historical One Week Two Weeks One Month CBOE Call Volume 1.3 ## NYSE Up vs Total Volume (%).9 ## Nasdaq Up vs Total Volume (%) 48.7 ## Index vs Equity PC Ratio -0.2 ## VIX -Day ROC (%) 42.2 ## VIX 10-Day ROC (%) -3.0 ## Investors Intelligence Bullish (%) 24.7 ## Investors Intelligence Bearish (%) 35.1 ## Inv Intell. Bull Bear Spread ## AAII Bullish (%) 28.1 ## AAII Bearish (%) 39.9 ## AAII Bull Bear Spread ## Overall Sentiment ## Technical S&P 0 10-Day Avg. Spread (%) 3.0 ## S&P 0 -Day Avg. Spread (%) -0.7 ## S&P Day Avg. Spread (%) -3.7 ## S&P 0 Monthly ROC (%) 0.9 ## S&P 0 Weekly ROC (%) 5.6 ## S&P 0 Quarterly ROC 1 (%) -2.9 ## Group 10-Day A/D Line 34.0 ## Group -Day A/D Line 24.0 ## S&P 0 10-Day A/D Line ## S&P 0 -Day A/D Line 91.0 ## NYSE TRIN Index 1.1 ## Overall Technical ## Fundamental/Monetary Corporate Spreads (10-Day ROC) 14.0 ## Corporate Spreads (-Day ROC) 26.0 ## High Yield Spreads (10-Day ROC) ## High Yield Spreads (-Day ROC) ## S&P 0 P/S Ratio 1.7 ## S&P 0 P/E Ratio 17.6 ## S&P 0 P/B Ratio 2.9 ## Yield Curve (-Day ROC) 4.1 ## Yield Curve (10-Day ROC) ## Overall Fundamental ## Bottom Line ## Average S&P 0 Performance (All Days) Page 9 of 10

10 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 10 of 10