Correction Interrupted (But Stock Upside Still Limited)
Cam Hui | Jun 02, 2014 12:08AM ET
The analysis of financial markets has a low signal-to-noise ratio. Under those circumstances, good traders need to learn to admit when they were wrong and I am prepared to do that. Regular readers will know that I have been fairly cautious about the intermediate term outlook for US equities and I have been calling for a correction this summer. However, with the SPX pushing to new highs last week:
As the first-quarter earnings season wraps up, retailers in the consumer discretionary sector have been some of the last companies to report results. Throughout earnings season, consumer discretionary has been one of the stronger areas, with its 8.6% earnings growth rate outpacing the 5.5% growth of the S+P as a whole. But when it comes to looking ahead, the story has been less positive. Earnings growth for the second quarter is now estimated at 6.9%, just shy of the 7.1% growth anticipated for the index overall. The current 6.9% estimate is down from the 10.3% that was forecast on April 1. This 3.4 percentage point downward revision is the second steepest fall of any sector outside of materials over this time period.
Inter-market analysis still signaling caution
Despite the near-term failure of my market analysis, I continue to believe that inter-market analysis is still signaling caution for the stock market. To underline this point, my former Merrill colleague Walter Murphy wrote the following last week (emphasis added):
We have regularly pointed out that there has historically been an inter-market relationship between the S+P, yields, the euro, and select commodities. With that in mind, it seems important to note that 10-year yields, the euro, and gold have all recently broken down through important support trend lines. These breakdowns, along with price counts and weak momentum, suggest that lower lows are likely for these assets.h3 Low volatility = Rising complacency/h3
Nonetheless, and despite these inter-market pressures, the S+P has continued higher to all-time highs.
So the question is: Who missed the message? Was it the “500” or the other three asset classes? Given the equity market’s overbought momentum and sentiment indicators, as well as fragile seasonal considerations, it would seem that the S+P it the one listening to the wrong message.
In addition, the fall in market volatility is fueling activity that might not be classified as "prudent". For example, the
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Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd . (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”
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