Good morning,

The market continues to be very resilient but the market participation is dropping off a cliff this week ahead of Thanksgiving. Equity volumes yesterday were 35% below the average, the situation was even worst on options were volumes were 50% below the average. Today we should expect a muted reaction despite the negative data in China and profit warning of Dell.. what matters is that Trump said that the deal with China is on the “final throes” and “it’s going very well”.

Overnight we had a further evidence of China’s economy continuing to slow. The Bloomberg Economics’ gauge of early indicators shows a worsening picture for trade, sales manager sentiment and factory prices. The faster drop in prices of goods from Chinese factories also indicates domestic demand is weak. GDP growth was already the slowest in almost three decades in the third quarter. Official data showed industrial companies’ earnings fell 9.9% in October, the most since 2011.

Mixed data in US on Thursday. On one side, the Housing market is recovering with the S&P CoreLogic Case-Shiller index up 2.1% vs 2% consensus, confirming that lower mortgage rates and a solid labor market are generating buyer interest. Sales of existing properties up in October for the third time in four months. On the other, Consumer confidence unexpectedly fell for a fourth straight month, 125.5 vs 127 consensus, the longest decline since 2012, showing cracks may be emerging in consumer spending. In addition, November Richmond manufacturing down -1 vs 5 consensus.

We thought it would have been a good idea to show you which are the current positive (10) and negative points for the market (6).

POSITIVE POINTS FOR THE MARKET (10) 

  • Improving US-China trade deal news-flow and a potential roll-back of existing US tariffs along with delaying the 15th December tariffs next year is probably one of the most important hope of this market.

 

  • Central Banks trying to stabilize global growth and sustaining equity markets. Global Central Banks are having the most synchronized global easing cycle in a decade with the majority of CBs participating. The only difference vs the past is that this time the stock market is at an all-time high!The latest help is coming from China where the PBOC is trying to stimulate the economy, the latest tool used was lowering the LPR (loan prime rate) but as you can spot from the chart below, the 3-Month interbank borrowing costs, known as Shibor, climber to its highest since January.The actual combined effect of FED, ECB, PBOC and BOJ since October is very powerful now and is helping the markets to continue the climb higher to new highs every day.

 3-month Shibor in China                                                                                             

           

      % of Central Banks cutting rates                

 

  • Macro numbers getting better, along with rising investor expectations in real economy growth. Global data was much more constructive last week as Markit manufacturing PMIs in the US, Europe, and China turned higher; Korea’s first 20 days exports improved; and the US consumer remains a sturdy pillar of growth given housing strength and consistently supportive sentiment.                                                                         

                              US PMI                                     

  • TINA, There Is No Alternative to Equities. As flagged several times, there is a massive amount of liquidity on the market. Negative-yielding debt makes up 25% of global debt, with the Euro area driving the most recent rise in negative-yielding assets. In contrast, the earnings yield on SXXP is above 7% and dividend yield alone is 3.6%, showing that there is no lack of yield in equity.

                Stoxx 600 dividend yield higher than corporate yield (blue) vs

                   S&P500 dividend yield higher than corporate yield (light)

           

Looking at US equities, the cushion from dividends and buybacks indeed looks attractive. The S&P 500 dividend and buyback yield is at 5.3%, vs the 10-year UST’s yield of 1.8%: the spread of 4.1pp is, for now, acting like a support for the S&P 500. We continue to gear to S&P 500 dividend aristocrats.                                                               

            

Equity yields vs Bond and Cash yields

        

  • Positioning / Flows. While equities have performed well this year, they had outflows throughout. European Equities have seen the largest outflows over the last two years. After 85 consecutive weeks of persistent outflows, we have now seen 1 month of inflows, supporting our view that global investors are beginning to consider increasing their low exposure to the region.

Europe inflows

We believe that over next year we could see a period of outflows from bonds and some inflows into equities. According to ICI data, US bond mutual fund inflows have totaled over $500Bln since January ’17. Over the same period equity-focused US mutual funds have witnessed outflows to the tune of $700Bln.

The gap between equity dividend yields and bond yields across key regions is at present much larger than typical.

Difference between flows into equity and bond funds 

  • Q3 reporting season not as negative as expected.

 

  • Buyback should continue to support markets in 2019 and 2020. US corporates are now out of their Buyback blackout window and the largest buyer of US equities is now fully back. It is estimated that  Q419 executions to be ~$185Bln – and total FY 2019 executions to be ~$785Bln.Furthermore, the lack of market liquidity has exacerbated the impact of share repurchases on US equities. Reduced trading liquidity in US equites for the S&P, an all-time low! Chart showing monthly turnover as ratio of traded volumes vs free-float market cap.

JPMorgan analysis shows 10% of US equity market trading volumes now comes from fundamental stock investors with most of the rest coming from index derivatives and passive funds.

  • Seasonality. Looking back over the past 10 years, November has averaged a gain of 1.86% and December (apart from last year) has always been a positive benign month.

 

  • Global M&A. Since our last update we saw an intense M&A activity in Europe and US:
  1. Proposed deal value of $30Bln, Sanofi, healthcare sector, is considering to sell its consumer-health business.
  2. Proposed deal value of $26Bln, Charles Schwab, US financial services sector, announced the acquisition of TD Ameritrade, US competitor.
  3. Proposed deal value of $18Bln, Louis Vuitton, luxury sector, announced the acquisition of Tiffany, jewelry specialist.
  4. Proposed deal value of $7.5Bln, Novartis, healthcare sector, announced the acquisition of The Medicines, US biotech.
  5. Proposed deal value of $5.3Bln, Aroundtown, European Real Estate, announced the acquisition of TLG Immobilien, German competitor, to create the biggest Germany’s commercial landlord.
  • US Housing getting more bullish. Robust demand and tight supply are aided by better affordability, leading to accelerating HPA (+4%), increasing existing (+3%) and new home sales (+6%), and climbing single-family housing starts (+8%). This is in contrast with the view we had last year.

NEGATIVE POINTS FOR THE MARKET (6)

  • Technical. Bearish shooting star signal shows that a bearish technical pattern might be possible in the short run. Also combine this with stretched sentiment measures (AAII BULLBEAR +16) and increased equity positioning (US Street Prime Brokerage nets in 94%-tile on 12-month basis). It means everyone is long.As we said over our last updates, positioning has been shifting from light to heavy.

Eurostoxx 50 chart Bearish Shooting Star technical pattern

Nearly 30% of stocks within the S&P 500 have triggered MACD sell signal, similar situations have led to a correction for the market.

At the same time the short positioning on VIX (volatility futures on S&P Index) have a reached a new high. This is quite dangerous as it could easily led to a reversal and a spike in volatility (often associated with a market correction).

The DeMark indicator is now giving an important daily exhaustion/sell signal on the Eurostoxx future which should be further validated with a close below 3701 on Friday. Similar signals are present on the major indexes.

  • Valuations are expensive. S&P forward P/E multiple is approaching 18x, the most expensive since January 2018.

  • Some concerns on US consumer. We had over the last few days some profit warnings on US major retailers. We always mentioned the US consumer component as crucial for the US GDP (60%) and there are now some concerns about the spending not as strong as expected. We will have a proper test over the next days for Thanksgiving.

 

  • Lack of protection for the markets. Despite the high political uncertainty (constantly rising as shown on blue line), there are very little investors willing to protect their portfolios… complacency is high and dangerous.

We already talked about the bearishness of Mr. Dalio, Bridgewater hedge fund’s founder, but we had no idea about his next moves. According to several newspapers, Bridgewater spent approximately $1.5Bln of premium to buy several puts expiring March 2020 on the S&P500 and the Eurostoxx50, covering a monster nominal of $100Bln. To put that in context it means Dalio bought protection for a position of $100Bln, almost 70% of Bridgewater’s total AUM.

  • Positioning is not light anymore.

Systematic funds have continued to add to positions and leverage is increasing. Global CTA funds equity leverage has now reached the 83th percentile since 2011 while Volatility Target have reached their 80th percentile. These levels are the highest since June last year. Volatility Target funds manage roughly $450Bln AuM, considering that over the last 8 trading days they have increased their weight from ~77% to 86%, it has a direct effect on markets of roughly 5bn$ to buy every day. If you add the Risk Parity (AuM of $500Bln) and CTAs, that’s an additional $3/5Bln of daily purchases. However, considering the recent positioning, their buying contribution should therefore start to slowdown.

On Emerging Markets futures, there has been a consistent buying flows by Asset Managers initiation new longs for the 5th consecutive week. Since the middle of October, it is estimated that have been bought more than $10Bln of MSCI EM futures, the most over any 5-week period since January 2019.

  • Level of High Yields, which is also high correlated to equities. The iShares High Yield corporate bond ETF is not far from the support of the 200-day moving average… to be monitored as a breakout will be a negative message for the market.