Stock markets may be not too far away from all-time highs, but some high-profile stocks –Amazon, Netflix, Exxon Mobil and Goldman Sachs, among others – have suffered double-digit drops lately. Are cracks appearing in the rally?
These are not isolated cases. Some 200 S&P 500 stocks, or 40 per cent of the index, have fallen into correction territory (a fall of at least 10 per cent). Less than 60 per cent of stocks in the Russell 3000, an index representing almost the entire US stock market, are trading above their 200-day moving average, according to Jonathan Krinsky of MKM Partners.
On the other hand, the number of US stocks hitting new highs is at healthy levels, according to Citi Research. Additionally, about 50 per cent of stocks are beating their benchmark index, in line with historical norms, while low volatility "doesn't suggest a narrowing market".
Stock market breadth is an important indicator of underlying market health. As rallies age, fewer stocks hit new highs, with the market becoming overly reliant on a small number of large-cap high-fliers.
The recent deterioration in breadth is not alarming but there are, says Krinsky, enough negative signals to “warrant some caution” as we enter the seasonally weakest part of the calendar.
Confused? So are fund managers
Confusion reigns among institutional investors, judging by Merrill Lynch’s latest monthly fund manager survey.
A record number say global equities are overvalued, but they are nevertheless continuing to overweight stocks. Expectations regarding corporate profits have nosedived, hitting the lowest level since November 2015, but an equity bubble is deemed much more likely than a recession or bear market. European asset managers are holding more cash than at any time since March 2003, indicating caution, but Europe remains the most-preferred region among global managers.
It all sounds very contradictory, but the message may be that investors are concerned by valuations but feel they have no alternative but to buy stocks in a low-yielding world. The least expensive stocks are in Europe and in emerging markets, which remain consensus long positions, but allocations towards the US market – the most expensive major market – have hit their lowest levels since January 2008.
Overall, Merrill’s Bull & Bear Indicator has climbed to 7.7; a tactical sell signal is generated on readings above 8, which reflects euphoria. For now, however, the mixed sentiment picture suggests it’s not time to exit just yet.
An investor or a speculator?
Buy-and-hold index investors tend to be regarded as sensible, boring types, but are they really speculators in disguise?
According to a new white paper from GMO strategist James Montier, the US market is dangerously overpriced, so much so that "you are no longer entitled to refer to yourself as an investor" if you are exposed to it via passive index funds. "You may call yourself a speculator, but not an investor. Going passive eliminates the ability of an active investor to underweight the most egregiously overpriced securities in the index."
Montier is one of the world’s most well-regarded strategists and his notes are always worth reading, but this is over-the-top stuff. Firstly, active managers are indeed free to buy cheap stocks and eschew the priciest stocks on an index, but most nevertheless failed to outperform passive funds in the 2000 and 2008 market meltdowns. Secondly, for anyone who wants to overweight non-US markets, the cheapest and simplest approach is to buy any number of passive exchange-traded funds (ETFs).
If you want to speculate, try spread betting or day trading. And if you don’t? Stick with passive funds.
Markets stay calm over North Korea
Stocks have fallen since the US-North Korea flare-up, but only slightly. Are investors right to be calm?
LPL Research looked at the market reaction to 10 other geopolitical events, ranging from the Cuban missile crisis to the invasion of Panama to Brexit. In all but one case, stocks had recouped their losses within 10 days; the median recovery took just five days.
Investors: leave that app alone
How often do you check your investment portfolio? Once a year? Once a month? Ten times a day?
Yes, some hyperactive souls people really do check their account 10 times a day, according to US brokerage Robinhood – that’s the average number of times active customers check the Robinhood app, often in response to push notifications.
Robinhood, named after the legendary archer of Sherwood Forest who took from the poor to give to the rich, is famous for offering commission-free trading. However, overtrading is a quick road to the poorhouse. Nor is frequent checking a harmless pursuit – research shows it plays with your nerves and results in poorer performance.
Wall Street Journal columnist and Devil's Dictionary author Jason Zweig put it well, tweeting: "If I wanted to curse someone, I'd say: 'May you check your account value 10 times a day for the rest of your so-called life.'"
