Tuesday, February 1, 2022

Morning Note: Headwinds Presently Prevail

At the end of each month we score our newest barometer; the PWA Equity Market Conditions Index. With it we assess the present signals/state of affairs expressed by the US dollar, interest rates, monetary policy, fiscal policy, US equity valuations, sector leadership, macro conditions, the geopolitical landscape, S&P 500 technicals, US equity market breadth, market sentiment and credit market conditions.

Yesterday's score was -29.17 (on a +100 to -100 scale):

I.e., Our indicator suggests that US equities presently face a few headwinds.

Now, we do not, under any circumstances, consider this a market timing tool; we use it to help us assess the current risk/reward setup for the US equity market. I.e., stocks could absolutely come bounding off of a dismal January and skate their way to new all time highs and beyond. It's just that, for the moment, they'd be doing so on some pretty thin ice.

With regard to valuations, one of the 5 measures we use is the highly regarded/touted Shiller Cyclically Adjusted Price/Earnings (CAPE) Ratio.

Last week, premium research firm BCA looked at the CAPE for US equities and compared it to the same for emerging market equities. As clients and regular readers know, we're presently bullish on non-US equities. relative to US. One of the compelling reasons is relative valuation. 

Here's their takeaway:  emphasis mine...
"Based on a cyclically-adjusted P/E (CAPE) ratio, EM stocks are close to their fair value. In contrast, based on the same measure, US equities are very overvalued. As a result, the relative CAPE ratio of EM versus the US is at a record low. Hence, on a multi-year horizon, odds are that EM share prices will outperform their US peers." 

Asian equities were mostly green overnight, with all but two of the markets we track (a handful shuttered for the Lunar New Year) closing higher.

Europe's up strongly across the board, with all of the 19 markets we track trading notably higher as I type.

US stocks are mostly lower to start the session: Dow down 69 points (0.33%), SP500 down 0.42%, SP500 Equal Weight down 0.33%, Nasdaq 100 down 0.90%, Nasdaq Comp down 0.95%, Russell 2000 down 0.96%.  All of the major sectors, save for energy and financials, are trading lower as I type.

The VIX sits at 24.87, up 0.16%.

Oil futures are down 0.81%, gold's up 0.07%, silver's up 0.96%, copper futures are up 2.31% and the ag complex (DBA) is up 0.78%.

The 10-year treasury is down (yield up) and the dollar is down 0.08%.

Among our 38 core positions (excluding cash and short-term bond ETF), 17 are up, 21 are down to start the session. Energy stocks, silver, base metals futures, Latin American equities and ag futures lead the way so far this morning. The decliners are led by AT&T, solar stocks, SOXX (chip makers), MP (rare earth miner), uranium miners and utilities stocks. 

"Investment is not a physical science, but a pursuit to establish price by human beings who bring key psychological biases to the endeavor. The importance of those biases waxes and wanes, but at some although not all times, they become overwhelmingly important."

--Russell Napier 

Have a great day!

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