There’s been a lot of talk here about the recent rally, and there was an expectation that there was going to be somewhat of a breather, but it gets to this idea as to who was actually buying into that rally and more importantly, who wasn’t.
It was due to a combination of forces, but the retail trader was absolutely a big part of it because you can look at proxies for the retail trader. Goldman Sachs has a number of interesting baskets, one of which is retail favorites that handily outperformed the S&P 500 on the way up. It was evident in the meme stocks, and it was evident in non-profitable tech. However, there was also short covering because of where positioning was in the institutional community, because the most heavily shorted stocks also outperformed the S&P 500 handily on the upside.
However, we should also be mindful of what the big picture was and, more importantly, what it is now. In other words, what the setup was and is now. Going into the intraday low on April 9th, the setup was one of an oversold market with severely washed out sentiment, and washed out breadth. In that context, if there is a positive catalyst there is usually a significant pop higher.
By the beginning of this week and coming into this weakness, the setup was one of some complacency, breadth had improved, and technicals were in overbought territory. In this context, a negative catalyst typically leads to quicker downside.
So, what becomes the next potential upside catalyst? You would have to think that it would be a further de-escalation in the trade war. It is hard to envision a scenario where you get some significant improvement in economic data, particularly of the hard data variety. It is hard to conceive of a trigger by way of a miraculous improvement in the economy given all the weights of uncertainty associated with the trade war. And even if, for example, we have another month of somewhat benign inflation data, the knowledge around that is that the US has yet to see the full effect of tariffs, either those that are already in place or what is proposed in the midst of the now less than 90 day delay.
The long-end of US treasuries was the driver of the equities market the week ended 23 May. Taking a slightly different perspective to the fiscal deficit, it is unlikely that foreign investors will significantly dump treasuries. But what if you just eliminate a good chunk of what has been a price insensitive buyer on the part of foreign entities of treasuries. That in turn means more power is wielded by the price sensitive buyers. What price and what yield then becomes the question. And we may have seen some of that dynamic this week. And that has filters into the equity market, not to mention the real economy.
What is the safe-haven in the equity market? Well, there is the classic sector-based safe havens like consumer staples and utilities, for example. However, it is a treacherous environment to play the monolithic sector game. What tends to be a bit of a safe haven within the equity market, and what was certainly the case during the downturn between mid-February and the early part of April, was at the factor level. And in particular, factors like lower beta, lower volatility, strength of balance sheet, stable profit margins, stable if not growing dividend yields. That is, a quality wrapper, but with that emphasis on the lower beta, lower volatility, those factors that tend not to do well when the market is ripping back on the upside.
About YieldReport – Your Income Advantage
YieldReport is Australia’s leading online data and research platform for interest rate markets, securities and products that focus on fixed income and yield generation. YieldReport provides advice, news review, analysis and insights on what’s shaping the yield curve and fixed income markets. It also provides a great source of reference for pricing and performance data on yield generating investment opportunities including cash, term deposits, government and semi-government bonds, managed funds, ETFs, corporate bonds, floating rate notes, hybrids as well as other yield instruments. YieldReport insights and analyses are designed to help anyone managing money – whether it be their own or whether they sit on a finance committee, board etc. – to make informed decisions about where interest rates are going and to have access to the best rates and latest performance data available.
Explore more via the website – www.yieldreport.com.au. Find daily updates on social media platforms such as LinkedIn and Twitter. For inquiries, please contact contact@yieldreport.com.au or call 0408 266 713.
Disclaimer
The material contained in this document is for general information purposes only. It is not intended as an offer or a solicitation for the purchase and/or sale of any security, derivative, index, or financial instrument, nor is it an advice or a recommendation to enter any transaction. No allowance has been made for transaction costs or management fees, which would reduce investment performance. Actual results may differ from reported performance. Past performance is no guarantee for future performance.
This material is based on information that is reliable, but Foresight Analytics makes this information available on an “as is” basis without a duty to update, make warranties, express or implied, regarding the accuracy of the information contained herein. The information contained in this material should not be acted upon without obtaining advice from a licensed investment professional. Errors may exist in data acquired from third party vendors, & in coding related to statistical analyses.
Foresight Analytics disclaims any & all expresses or implied warranties, including, but not limited to, any warranties of merchantability, suitability or fitness for a particular purpose or use. This communication reflects our quantitative insights as of the date of this communication & will not necessarily be updated as views or information change. All opinions expressed herein are subject to change without notice.