Market Risk Outlook April 2015

Market Risk Outlook

17 Mile General Write-Up

April 27, 2015


DISCUSSION

With the “sell in May & go away” season forthcoming, and an above-average amount of skepticism exhibited in this weekend’s Barron’s Big Money Poll, in addition to looking at the Big Money poll results side by side with the April 2011 Big Money Poll – which hit the tape just prior to the 2011 mini-bear market – I thought it would be worthwhile to compare & contrast 2011 and 2015 market conditions as of the fourth weekend in April.

BIG MONEY POLL

Market Valuation

  • Overvalued
    • 2015: 21%
    • 2011: 13%
  • Fairly Valued
    • 2015: 71%
    • 2011: 48%
  • Undervalued
    • 2015: 8%
    • 2011: 39%

Market Stance

  • Bull
    • 2015: 45%
    • 2011: 59%
  • Neutral
    • 2015: 50%
    • 2011: 30%
  • Bearish
    • 2015: 5%
    • 2011: 11%

10% Correction

78% believe there will be a 10% correction within the next 12 months, versus ~66% in 2011.

MARKET RISK OUTLOOK

Economic Conditions. Though 1Q15 economic growth has decelerated, the underlying economy continues to plod along. There are always downside risks, but with an easy Fed and extremely friendly credit conditions in place, the “risk” is to the upside. Interestingly, looking back at early 2011 reveals a similar deceleration story; but the economy never entered a recession despite material global headwinds later in the year. (Draw.)

Monetary Conditions. The US High yield OAS was 4.56% as of the 4/24/2015 market close, versus 4.65% at the 4/21/2011 market close. While conditions are similar based on this metric, globally the monetary environment is far easier with the ECB and BOJ conducting full-fledged open-ended QE. (2015.) 

Valuation. The Schiller CAPE currently sits at 24X versus 21X in 2011. The 2015 market is decisively more overvalued than the 2011 market, but not by as much as one might expect given the run the market has had between 2011 and 2015. (2011.) 

LT Trend. The S&P 500’s 200dma is currently 10.3% higher than it was 200 trading days ago (call it the “200dma GR”); and the 100dma of this 200dma GR is 11.8%, indicating the market is in a firm uptrend. As of 4/21/2011, these two metrics were 9.2% and 8.1%, respectively. The 2015 market has a reasonable edge, it appears. (2015.)

P/200dma. The S&P 500 currently sits 5% higher than its 200dma, versus 10% on 4/21/2011; both of which are bullish – though at times, 10% higher than the 200dma can be a sign of overheating. (Draw.)

CONCLUSION

It is easy to jump to the conclusion that the 2015 Big Money Poll is bullish due to the above-average number of skeptics (I did it this weekend); but the skepticism must be looked at within the context of broad market conditions. The crowd is not always wrong. So, if the above-average number of market skeptics was paired with weak market conditions, it would be wise to consider reducing exposure into the “sell in May” season.

While the 2011 mini-bear was very difficult to predict based on the factors above (which I believe was for good reason, as the market snapped back very quickly due to the bullish underlying conditions), I believe the current market is slightly “healthier” based on the Market Risk Outlook; and when paired with a high level of skepticism, I am skeptical myself that we are in for another 2011-type mini-bear. If anything…

I imagine the current level of skepticism could carry us through a summer “melt-up”, before running into problems in the historically rough September/October time period.

Bottom line – the high level of skepticism exhibited in the Barron’s Big Money Poll paired with a a “healthy” market is a bullish recipe.

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