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Category: Chart of the Week

Breadth Weakens, Tossing Up a Red Flag

By John Del Vecchio and Brad Lamensdorf

One of the defining characteristics of the market advance since the COIVD lows over a year ago has been broad participation from many sectors of the equity markets.

While most stocks have followed the major market trends, there are signs that this massive bullish move may be running out of steam.

The chart below, courtesy of SentimenTrader.com illustrates what has happened when the S&P 500 continues to regularly make new highs, but the majority of stocks start to trade below their 50-day moving average.

One such signal just occurred for only the seventh time since the 1920’s.

The results are sobering.

Breadth Weakens, Tossing Up a Red Flag
Breadth Weakens, Tossing Up a Red Flag

As the chart shows, when this rare signal occurs, losses pile up. Over multiple periods from a month to a year, the historical performance is down. The one-year historical performance shows a decline of 10%. What’s more, the performance has been positive only 17% of the time.

The average maximum loss is 18.5% compared with an average maximum gain of 5.6%. Poor risk / reward ratios don’t get much worse than that.

In fact, in each of the periods, the performance has been positive 50% of the time or less.

It’s time to start rounding up the hedges!

 

To learn more about how these indicators can help manage risk in your portfolio, book a call with Brad.

You may book a call here.

DISCLOSURE: LAMENSDORF MARKET TIMING REPORT

Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA.

This report is not intended, and shall not constitute, and nothing herein should be construed as, an offer to sell or a solicitation of an offer to buy any securities referred to in this report, or a “buy” or “sell” recommendation. Rather, this research is intended to identify issues portfolio managers should be aware of for them to assess their own opinion of positive or negative potential. The LMTR newsletter is NOT affiliated with any ETF’s.  Active Alts  is affiliated with Lamensdorf Market Timing Report. While LMTR uses charts from SentimenTrader, they do not have a financial arrangement with SentimenTrader  Past performance is not indicative of future results.

 

 

Morgan Stanley Issues Rare “Sell” Signal, Are You Prepared?

By Brad Lamensdorf, CEO Active Alts

Morgan Stanley recently issued a rare sell signal on the U.S. market. Are you prepared?

As the chart below shows, Morgan Stanley’s composite market timing indicator has reached new highs, which is bearish for the markets. Previous major signals include 1990, 2000, and 2007, which all preceded dramatic declines in equity indexes.

While the historical track record of the signal is impressive, current conditions in the market suggest that the next decline could be fierce.

Consider that U.S. households are fully invested in equities, and margin debt is exploding. Both are contrary indicators.

As the following chart illustrates, household equities as a percent of total financial assets have hit a new high of 36.5%.

 

Morgan Stanley Issues Rare “Sell” Signal, Are You Prepared?

This tops the previous highs of 29.7% in the late 1960s and 32.5% near the turn of this century that preceded negative 10-year annualized returns in the market.

Quite simply, households are loaded to the gills in equities. Their holdings are more than double that of 2009, which represented a generational buying opportunity in stocks. That cycle may be coming to an end.

Should the cycle be coming to an end, leverage will only add fuel to the fire. The amount of margin debt has exploded and in real dollars is outside the norm of historical ranges.

Real growth in margin debt is literally off the charts. The following charts, courtesy of Advisor Perspectives, show that real growth in margin debt has dramatically outpaced the rally in U.S. stocks over the past 12 years.

The trend has accelerated since the COVID lows were hit last year.

Lastly, negative credit balances far exceed previously known bubbles.

The unwind is likely to happen swiftly and with tremendous damage. Morgan Stanley is making a rare bearish call on the market.

Are you prepared?

 

To learn more about how these indicators can help manage risk in your portfolio, book a call with Brad.

You may book a call here.

DISCLOSURE: LAMENSDORF MARKET TIMING REPORT

Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA.

This report is not intended, and shall not constitute, and nothing herein should be construed as, an offer to sell or a solicitation of an offer to buy any securities referred to in this report, or a “buy” or “sell” recommendation. Rather, this research is intended to identify issues portfolio managers should be aware of for them to assess their own opinion of positive or negative potential. The LMTR newsletter is NOT affiliated with any ETF’s.  Active Alts  is affiliated with Lamensdorf Market Timing Report. While LMTR uses charts from SentimenTrader, they do not have a financial arrangement with SentimenTrader  Past performance is not indicative of future results.

Households are Loaded to the Gills with Stocks

By John Del Vecchio and Brad Lamensdorf

Household ownership of stocks has hit a new high. One might think this is a good thing as Americans have increasingly invested in the market to save and build wealth.

It turns out to be a contrary indicator. Especially at new peaks.

The chart below, courtesy of SentimenTrader, shows that household equities as a percent of total financial assets just hit 36.5%. That exceeds the previous high set around the Internet Bubble of 32.5% in 2000 and the 29.7% mark during the growth stock boom of the late 1960’s.

Households are Loaded to the Gills with Stocks

The prior two peaks saw 10-year annualized returns in negative territory for the S&P 500.

Meanwhile, periods such as 1975 and 1982 where households dumped stocks were met with massive forward gains. Even 2009, which dropped household equities below 20% created a generational buying opportunity.

We are far from those periods. The current situation calls for caution and we continue to believe the stock-picking and alternative strategies will out-perform plain vanilla indexing in a big way over the next cycle.

To learn more about how these indicators can help manage risk in your portfolio, book a call with Brad.

You may book a call here.

DISCLOSURE: LAMENSDORF MARKET TIMING REPORT

Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA.

This report is not intended, and shall not constitute, and nothing herein should be construed as, an offer to sell or a solicitation of an offer to buy any securities referred to in this report, or a “buy” or “sell” recommendation. Rather, this research is intended to identify issues portfolio managers should be aware of for them to assess their own opinion of positive or negative potential. The LMTR newsletter is NOT affiliated with any ETF’s.  Active Alts  is affiliated with Lamensdorf Market Timing Report. While LMTR uses charts from SentimenTrader, they do not have a financial arrangement with SentimenTrader  Past performance is not indicative of future results.

Stock Buybacks Hit Record

By John Del Vecchio and Brad Lamensdorf

As the pandemic wanes and daily life quickly gets back to normal, corporations have been busy buying back their own stock.

Just like the good old times.

Not just normal buybacks. Record buybacks.

This should be expected. Last year, buybacks and dividends were often suspended and now the runway is clear to resume stock buying.

As the chart below shows, corporations are wasting no time in taking stock out of circulation.

Stock Buybacks Hit Record

The figure is almost a $500 billion through April, 2021.

Daily activity is about three times what would normally be considered aggressive buying. This is bullish for stocks in the short-term but does come with a caveat.

Many companies will buy back stock and then assume debt, thus recapitalizing their business. Debt is cheap. Debt may be much cheaper than paying dividends. Finally, all else being normal, debt allows for higher returns on invested capital.

This will work well until it doesn’t. When the next bump in the road comes along, poorly managed companies or those with competitive disadvantages may find themselves vulnerable to a massive butt-kicking.

This is another reason why stock picking, as opposed to blindly buying indexes, may come back into vogue. Stock pickers could very well shine over the next cycle as better returns may be had by differentiating among the best positioned companies.

To learn more about how these indicators can help manage risk in your portfolio, book a call with Brad.

You may book a call here.

DISCLOSURE: LAMENSDORF MARKET TIMING REPORT

Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA.

This report is not intended, and shall not constitute, and nothing herein should be construed as, an offer to sell or a solicitation of an offer to buy any securities referred to in this report, or a “buy” or “sell” recommendation. Rather, this research is intended to identify issues portfolio managers should be aware of for them to assess their own opinion of positive or negative potential. The LMTR newsletter is NOT affiliated with any ETF’s.  Active Alts  is affiliated with Lamensdorf Market Timing Report. While LMTR uses charts from SentimenTrader, they do not have a financial arrangement with SentimenTrader  Past performance is not indicative of future results.

Wealthy Investors Continue to Pile into Stocks

By John Del Vecchio and Brad Lamensdorf

Wealth investors are loaded to the gills with equities. This begs the question, how much more can they pile into stocks?
As the chart from Bank of America shows, the equity allocation among private clients has broken out to new highs at 64.3%. This compares to the previous high of 62.5% in 2015 and 56% in April in 2007 just as many stocks were starting to turn down before the financial crisis was at its worst a year and a half later.

Wealthy Investors Continue to Pile into Stocks

The allocation can certainly go higher from here. As the market marches higher combined with excessive optimism, investors will likely continue to plow money into stocks.

However, this is a contrary indicator. It’s highly likely the easy money has already been made.

Not how far we have some from a generational buying opportunity one month before the bottom in 2009. We very may well see a level of 39% again in the future that will once again present a major level of bearishness and warrant aggressive buying.

Hedging remains virtually non-existent.

All the more reason to continue to monitor these trades and build up hedges. Before it’s too late…

To learn more about how these indicators can help manage risk in your portfolio, book a call with Brad.

You may book a call here.

 

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