Worried? Just Follow The Money.
1.) POSITIONING – There’s a big difference between saying you’re worried and actually positioning your money like you’re worried. Because when markets really start to deteriorate, money moves. Below are three completely different relationships, but they’re all telling us something similar about the health of the market. And right now, I don’t see much evidence of deterioration. I’ve discussed credit spreads before, so I won’t explain it again here. But you can go here (credit spread post) if you want a quick refresher. Bottom line? If credit spreads were widening (problem), we’d see the line in the first chart going up. It’s not. It means riskier bonds are outperforming Treasurys. People are not hiding in “safe” Treasury bonds. The next chart is Consumer Staples relative to the S&P 500. Consumer Staples – companies that produce stuff that people buy no matter what the economic environment – just finished the week at their lowest level in history relative to the S&P 500. Lowest ever! Ever is a long time. So, no one is hiding in Staples. The last chart compares Low Volatility stocks with High Beta (risky) stocks. High-beta stocks are the ones that tend to move around more. They’re the faster horses. And roughly half of the High Beta Index is technology. These are exactly the kinds of stocks we expect to see leading during healthy bull markets. Low-volatility stocks are slower, steadier companies investors often prefer when they want protection. Who’s winning that race? High Beta. So credit isn’t showing stress. Consumer staples are getting destroyed relative to the market. And investors continue to favor high beta over low volatility...Oh, and the Dollar isn't ripping higher either. This isn’t about predictions, but what is actually happening today. There’s a big difference between protecting yourself because the market is actually deteriorating and protecting yourself because you’re afraid it might. Right now, I’m just not seeing the evidence that investors are running for safety. Can that change? Of course! But when markets do start to deteriorate, these relationships should tell us.
2.) SHORT-TERM – Are there some short-term headwinds? Sure. There always are in markets. But short-term headwinds don’t always turn into a market that deteriorates further. CTAs…some of the biggest money movers in the market…create many of those shorter-term moves as they direct their flows from selling to buying and vice versa, all of which are done systematically. Rules-based, no human involvement. Scary? Maybe a bit if you don’t recognize this part of the market structure. Goldman Sachs’ model estimates that CTAs sold about $16 billion of global equities last week, which kept a bit of a lid on markets. That action reduced net positioning to about $123 billion, or the 75th percentile over the past year. Here is what they expect over the next 1 week and 1 month. Do those “expectations” tell you that you should hide? No, not necessarily. Point number one above is showing what money IS doing, not what they are expected to do. Does this mean that if CTAs do sell some more that we might experience a little more market bumpiness? Sure. But that certainly doesn't spell doom either.
3.) GOLD – One thing is for sure… gold doesn’t like the move in long rates (10YR – 30YR). Yes, it remains that high rates are the cure for high rates. But that doesn’t change the fact that gold doesn’t like high rates! Gold is down -0.71% so far this year and -1.47% over the last month. So momentum is not on its side. $4,250 remains an important level of support for gold, and unless long rates start to settle down a bit, gold might not hold that level. As an investor in stocks, should that worry you? No! Why? Well, if gold was accelerating here, it would likely mean there was a bit of a “flight to safety” taking place. It might also mean that gold sees stagflation – growth slowing, inflation accelerating. So far, those aren't the signals we're getting from the Dollar, bonds, gold or various stock relationships.
