Many factors suggest that the U.S. stock market currently is vulnerable to a decline, maybe a big one. The fundamentals are bleak, for starters.
The U.S. economy grew at a dismal 1.2% annual pace in the second quarter, a Commerce Department report released at the end of July showed, and corporate earnings are flat at best. Analysts’ estimates of earnings for the companies in the S&P 500 SPX, -0.08% have declined in each of the last six quarters, according to FactSet Research.
It’s not as if stocks are cheap and can withstand a slowdown in economic growth or business conditions, either. The S&P 500 at the end of July was trading at about 25 times the earnings that constituent companies recorded in the last four quarters. The figure has almost never been that high, and never for very long when it has been.
As for technical indicators, trading volume has shriveled in recent months, a sign of a lack of conviction among traders and investors; a relatively paltry number of stocks are trading at 12-month highs, suggesting a lack of leadership. In a healthy market, one or a few sectors receive substantial investor interest and carry the broad averages up until new leadership takes over. Plus, momentum is flagging, meaning that the market becomes less overbought with each new high.
But two widely followed measures are running in jarring contrast with the others. The advance-decline line — the running total, day after day, of the difference between the number of stocks gaining and losing ground in each trading session — has hit new all-time highs and continues to appear remarkably strong.
Also, investment banks have reported unusually bearish sentiment toward stocks among fund managers and other professional investors, a condition that tends to precede rallies because it suggests that they are out of the market and that there is comparatively little selling left for them to do.
There is evidence to indicate that these normally reliable measures may be sending misleading signals this time around, because of what fund managers are doing and how they’re doing it. The most recent edition of Bank of America Merrill Lynch’s monthly survey of global fund managers, released in mid-July, found that managers had made a big move into U.S. stocks in the previous month, far more than any other change they made to their portfolios.
More managers say they are overweight in U.S. stocks than at any point since early in 2015. However disdainful they may claim to be about stocks, they are putting their money exactly opposite of where their mouths are.
Read: Just like 1999? 3 reasons this U.S. stock market is different
In a separate BofA report, the strategist Savita Subramanian confirmed the reluctant stock ownership of asset managers. While acknowledging the expressions of bearish sentiment, she noted that the “beta” of large-company stock funds, meaning the extent of exposure to the market, is the highest it has been at least since 2008.
A beta of 1.0 means that a portfolio perfectly tracks whatever measure of the market is being used as a benchmark, the S&P 500 in this case. The latest reading of about 1.05 indicates that managers are gaining exposure to the market and using a bit of borrowed money to try to goose returns rather than doing it through stock picking. If they have been buying the market broadly and indiscriminately, it would explain the strong advance-decline line amid a technically weak backdrop overall.
Read more - http://www.marketswing.us
The U.S. economy grew at a dismal 1.2% annual pace in the second quarter, a Commerce Department report released at the end of July showed, and corporate earnings are flat at best. Analysts’ estimates of earnings for the companies in the S&P 500 SPX, -0.08% have declined in each of the last six quarters, according to FactSet Research.
It’s not as if stocks are cheap and can withstand a slowdown in economic growth or business conditions, either. The S&P 500 at the end of July was trading at about 25 times the earnings that constituent companies recorded in the last four quarters. The figure has almost never been that high, and never for very long when it has been.
As for technical indicators, trading volume has shriveled in recent months, a sign of a lack of conviction among traders and investors; a relatively paltry number of stocks are trading at 12-month highs, suggesting a lack of leadership. In a healthy market, one or a few sectors receive substantial investor interest and carry the broad averages up until new leadership takes over. Plus, momentum is flagging, meaning that the market becomes less overbought with each new high.
But two widely followed measures are running in jarring contrast with the others. The advance-decline line — the running total, day after day, of the difference between the number of stocks gaining and losing ground in each trading session — has hit new all-time highs and continues to appear remarkably strong.
Also, investment banks have reported unusually bearish sentiment toward stocks among fund managers and other professional investors, a condition that tends to precede rallies because it suggests that they are out of the market and that there is comparatively little selling left for them to do.
There is evidence to indicate that these normally reliable measures may be sending misleading signals this time around, because of what fund managers are doing and how they’re doing it. The most recent edition of Bank of America Merrill Lynch’s monthly survey of global fund managers, released in mid-July, found that managers had made a big move into U.S. stocks in the previous month, far more than any other change they made to their portfolios.
More managers say they are overweight in U.S. stocks than at any point since early in 2015. However disdainful they may claim to be about stocks, they are putting their money exactly opposite of where their mouths are.
Read: Just like 1999? 3 reasons this U.S. stock market is different
In a separate BofA report, the strategist Savita Subramanian confirmed the reluctant stock ownership of asset managers. While acknowledging the expressions of bearish sentiment, she noted that the “beta” of large-company stock funds, meaning the extent of exposure to the market, is the highest it has been at least since 2008.
A beta of 1.0 means that a portfolio perfectly tracks whatever measure of the market is being used as a benchmark, the S&P 500 in this case. The latest reading of about 1.05 indicates that managers are gaining exposure to the market and using a bit of borrowed money to try to goose returns rather than doing it through stock picking. If they have been buying the market broadly and indiscriminately, it would explain the strong advance-decline line amid a technically weak backdrop overall.
Read more - http://www.marketswing.us
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