Wednesday, May 28, 2014

Equities: 2014 as Analog to 2007

We are still in a bull market and markets being perverse we'll probably have a summer rally that drives the Sell in May folks insane. Their prayers for a correction to scale back in on go unanswered and in their madness to participate they put in the top.
Or something.

From Pension Partners:

Back in Time
Are you telling me that you built a time machine… out of a DeLorean?

Of course not. It’s 2014 and the environmentalists would go crazy. We built one out of a Tesla Model S and we’re headed back to…

May 2007. The economy is humming along and we’re over five years into an expansion that began in late 2001. The S&P 500 is hitting new bull market highs almost daily and investors are looking forward to a fifth consecutive year of gains. The credit markets are booming, with record demand for risky debt and high yield spreads hitting new lows.  There is some evidence of weakness in the housing market but this is surely a healthy development considering the incredible advance over the previous few years.

Given this backdrop, Investors are broadly optimistic, with Bulls outnumbering Bears in the Investors Intelligence poll by over 2.5 to 1. Also key to this bullishness is the new “low volatility regime,” with the VIX trading between 12 and 14 after crossing below 10 briefly in January and February. As long as volatility is low, Hedge Funds seem more than happy to increase leverage and net exposure to “boost returns,” creating a strong underlying bid beneath the market.
S&P 500, May 2007: What’s not to like?
While on the surface all is well in the markets, there is a subtle rotation going on underneath. Energy and Materials are the leading cyclical sectors while Consumer Discretionary and Financials are the weakest sectors. Together, this backdrop is classic late cycle behavior and not typically what you see in a strong economy....

HT: Barron's Read This, Spike That who highlights:
"The parallels between May 2007 and May 2014 are unmistakable, with broad market strength masking underlying weakness," according to the post. "That is not to say what happens next will play out in the same fashion this time around as it most certainly will not. But at the same time, to completely ignore what the market is telling us here would be foolish as well."