Realm Investment Management Market Update – November 2018
In our post of 16th October we wrote about the recent sell-off in global equities. We detailed technical Support levels for the leading region, namely the U.S. market, as follows “for the S&P 500 ETF the level is 271.70 and for the Russell 2000 (small-cap) ETF the Support is at 153.50” – we went on to say “we have raised cash recently, and if those levels are broken we would be looking to take further defensive action“. Subsequently those Support levels were broken and further defensive action was taken. We would want to see those levels recovered and for now we remain cautious. We will be closely monitoring the markets (as always) for further signs of global weakness that would trigger additional defensive action. For example the major Support for the Ftse 100 is at 6820 – we believe that price below that level would indicate further weakening.
Every Monday in our Market View we publish our Market Timing indicators as weekly charts. Below we present the same indicators on a monthly timeframe to show more data and give a longer term perspective.
Firstly, the UK Market Chart
The UK Market Chart has deteriorated in recent months. The Breadth Indicator, shown as colours on the price bars, is a negative red colour and the Momentum Indicator is now worryingly close to turning negative. We are underweight.
The US Market Chart, below, looks more positive, but much less so than it did at the end of September.
Here, Breadth has turned negative (red price bars) and Momentum has started to roll-over.
Next, we look at our Risk Barometers, again on the monthly timeframe.
Risk Barometers explained here
Firstly, the US
Again, there is deterioration here with the indicator turning down but it is a long way from turning negative.
Our European Risk Barometer:
The monthly price bars will be a red colour if the Risk Barometer is below zero at the end of the month. This could quite easily happen at the end of November.
With Brexit each new twist and turn is having an impact on the Pound. On Thursday it was the news that EU and UK officials have agreed a Brexit deal in principle, and the Pound rallied sharply. This day-to-day volatility should be largely ignored. Our analysis tells us to remain negative on GBPUSD if price is below 1.3200. We see this level as critical and have held this view for some time. From our post in September: “if the chart manages to spend time above that point (1.3200) it would imply further strength in our view and we would look to reduce our exposure either by cutting back on relevant funds or hedging.” See updated chart below. From our technical perspective the Pound versus Euro relationship is more difficult to assess (not surprisingly) with EURGBP staying close to 0.877, again a critical level in our view.
We show below a chart of the U.S. Dollar Index, which measures the performance of the U.S. dollar against a basket of major currencies. Note the recent strength in the index.
The rally in the Dollar this year has had a negative influence on Emerging Markets and has likely dampened the response of Gold to the recent bout of market weakness. Historically, during weak periods for both equities and bonds, Gold will often attract safe-haven money. Currently though, despite the recent market weakness, the rally in Gold has been quite muted. A stronger dollar and rising rates have held it back. A rising dollar also tends to favour US small-caps over large-caps due to small-cap stocks generating most of their revenue domestically. We are currently skewed towards small-caps in our U.S. exposure. No doubt, the dollar could falter, and we note that in the recent BoAML Global Fund Manager report, managers see the US dollar as overvalued. For the U.S. Dollar at least, managers have a good record of prediction and so their current view may indicate a turn lower. We will watch for that but in our view as long as the index holds above 94.80 (see chart above) we believe it is in a strong position.
We have also seen from recent BoAML Manager Surveys that managers regard the trade tensions between the U.S. and China as the biggest risk for the market. We have written before that this is the wild card that could potentially cause further problems for the market – but there is also the possibility that the recent sell-off has discounted a bad outcome here. To what extent of course, we do not know. What we do know is that President Trump and Chinese President Xi Jinping are scheduled to meet at the G20 summit in Argentina at the end of the month. The hope was for signs of a settlement in the trade dispute but many commentators say they do not expect to see major progress from the meeting. There is a cynical view that says Trump will prefer to settle the dispute further down the line when he is closer to the 2020 presidential election and recent comments from both sides in the dispute have not helped as the meeting approaches.
In September we noted that “Currently Global Bonds is our highest ranking Bond Sector with a current Relative Strength % Number (%Rank) of just 47. This means that, according to our criteria, the Global Bonds Sector is out-performing 47% of all other Sectors.” Since then (seven weeks ago) our Global Bonds Sector has achieved a positive return. Likewise the Gilts and Index Linked Sectors. Other Bond Sectors have not. Global Bonds are still ranked the highest bond sector, now 82% – see chart below. We are overweight Global Bonds and have allocations to Gilts and I/L Gilts. We are underweight other Bond Sectors.
Finally, we take a look at Market Sentiment. We noticed just this week that there has been a shift in sentiment by both the public and by money managers. Remember that sentiment measures in investment markets are usually viewed from a contrarian perspective. In other words, following a sell-off you would look for very bearish sentiment readings to indicate a possible low for the market. One of our indicators that measures public opinion is the sentiment survey from the AAII, the American Association of Individual Investors. This week’s reading sees public sentiment regarding equities at the most bearish level since the market low in February 2016. The other indicator is the Exposure Index from NAAIM, the (U.S.) National Association of Active Investment Managers, which measures current equity exposure of Active Money Managers. This indicator shows investment managers at their most bearish since 2016. As these indicators have a habit of reaching extreme bearish readings close to market lows their current readings could be a positive sign for the market.
Sentiment indicators are often useful, see our July article Some Numbers to Bear in Mind where we interpreted extreme bearish readings as bullish for the US market. Note also that that bearish sentiment can become more bearish and we never make investment decisions based on this analysis alone.
We hope you have found this latest update of interest. Thank you for reading.
Disclaimer: ‘Where the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. The information contained within this communication is believed to be reliable but Realm Investment Management Limited does not warrant its completeness or accuracy.
This communication is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell investments.’