Monday, November 27, 2023

Morning Note: Simply Can't Ignore Breadth, Your Weekly Sector, Region and Asset Class Update, and Into Thin Air

Yes, we've touched on this plenty of late, but, again, per our weekly results update below, the divergence among equity sectors this year has been utterly shocking... And while indeed a serious broadening (the 8 of 11 sectors that are, let's say, not having a magnificent year playing catch up) may be in the offing, history offers up some serious red flags to consider.

Allow me to illustrate.

For starters, here's the S&P 500 (cap-weighted) Index (dominated by the so-called "Magnificent 7" names) in white, and the S&P 500 Equal Weight Index (each member receives equal measure) in blue over the past year:

Yep, that's +15% vs +1%.

Let's have a look at calendar year 1999:

Being that the narrowness of this year's rally is indeed historic, there's been no shortage of commentary on the topic in the financial media... Those who see the current setup as bullish for equities going forward believe that there's nothing but opportunity in what, in their view, will be a broadening out that'll see the rest of the pack catch up to the mere handful of stocks that have seen magnificent returns so far this year.

Well, make no mistake, we're certainly openminded to such prospects, but, thing is, per the following, we're not willing to bet the farm on them.

The top panel below captures the ratio between the performance of the S&P 500 Index and the S&P 500 Equal Weight Index -- it rises when the S&P 500 is outperforming the equal weight version (when breadth wanes), declines when it's vice versa (generally healthier breadth) -- the bottom captures just the S&P 500, during the raging bull market of the 1990s... Note the smoothness in the S&P during the first few years when breadth was healthy (down-trending ratio), and then how volatility picked up as breadth narrowed (up-trending line):

And here's how that ultimately played out:

Yep, that's a 50% peak to trough drawdown!

As for the subsequent bull market, note the relative calm as long as the trend favored the equal weight index (healthy breadth), and then the choppiness as breadth began to wane (rising ratio):

And here's how that ultimately played out:

That's a, yikes!, 58% drawdown.

And here we'll take it from the bottom of that 2008 bear market through the brief Covid bear market, and to, depending on whom you talk to, what was either the bottom of the 2020 bear market, or where the present bear market rally (i.e., the "2020 bear market" ain't over yet) began... Note the increased volatility (including 2 bear markets) either during, or immediately following, a stretch of deteriorating breadth:

And, lastly, we'll bring it up to date:

Oof! Clearly, caution is warranted while the above setup, among others, plays itself out! 

Stay tuned...

And here's your weekly sector, region and asset class results update:

Asian stocks got hammered overnight, with 14 of the 16 markets we track closing lower.

Europe's also mostly in the red so far this morning, with 13 of the 19 bourses we follow trading down as I type.

US equity averages are mostly lower to start the session: Dow by 36 points (0.10%), SP500 down 0.07, SP500 Equal Weight down 0.19%, Nasdaq 100 up 0.08%, Nasdaq Comp up 0.08%, Russell 2000 down 0.35%.

As for Friday’s session, US equities were mixed: Dow up 0.3%, SP500 up 0.1%, SP500 Equal Weight up 0.3%, Nasdaq 100 down 0.3%, Nasdaq Comp down 0.1%, Russell 2000 up 0.7%.

This morning the VIX sits at 12.84.

Oil futures are up 0.13%, nat gas futures are down 3.43%, gold's up 0.52%, silver's up 1.78%, copper futures are down 0.79% and the ag complex (DBA) is up 0.07%.

The 10-year treasury is up (yield down) and the dollar is down 0.02%.

Among our 32 core positions (excluding options hedges, cash and money market funds), 12 -- led by SLV (silver), XME (base metals miners), SPTL (long-term treasuries), GLD (gold) and XLRE (REITs) -- are in the green so far this morning... The losers are being led lower by REMX (rare earth miners), Range Resources, EWZ (Brazil equities), VNM (Vietnam equities) and XLE (energy stocks).

I just started reading Into Thin Air, Jon Krakauer's accounting of his 1996 Mt. Everest expedition, and while I'm not suggesting that the entire equity market is at an extreme akin to the one described in this morning's quote, I do, nevertheless, in a sense, find it analogous -- certainly to the late-90s tech bubble... And of course it jibes with my  blizzard analogy:
It would seem almost as though there were a cordon drawn round the upper part of these great peaks beyond which no man may go. The truth of course lies in the fact that, at altitudes of 25,000 feet and beyond, the effects of low atmospheric pressure upon the human body are so severe that really difficult mountaineering is impossible and the consequences even of a mild storm may be deadly, that nothing but the most perfect conditions of weather and snow offers the slightest chance of success, and that on the last lap of the climb no party is in a position to choose its day.

Krakauer quoting Eric Shipton 

Have a great day!

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