Equity markets finally found a floor last week after some of the most volatile sessions in history.
As we expected, a rebound is taking place from extremely oversold levels and the cusp of a bear market in the USA, but the SELL signal triggered the week before last confirms without a doubt that we are trading in a bear market in most of the world equity markets.
There were so many extremes this week, it has led to “extreme fatigue” with each additional extreme in sentiment becoming redundant. Normal investors stayed on the sidelines watching the volatility with disbelief.
Sentiment has become stretched to a historic degree, and this kind of price volatility has preceded an immediate bottoming process
The magnitude of daily price changes in the past week has been historic, as has the swings in breadth and the cluster of 52-week lows among stocks and other securities. Almost always, this kind of pressure has led to medium-term recoveries in stocks, even within bear market environments.
Especially notable are the S&P’s multiple large declines to a new low, ultimately leading to one of its quickest, most severe pullbacks, leading to the most new lows since the two largest crashes in the past 30 years, then finally a record amount of buying interest, which became even more extreme on Friday.
Most of the action took place in America, though. The rest of the world – apart from Japan- was relatively quiet and Europe staged one of its strongest rally in years on Friday. China and Asia were unfazed.
There is every likelihood that the US$ 60 Bln. of institutional money needing to be invested for the year-end had a role to play in the bottoming process and the prevalence of high frequency traders has done the rest, with computerized trading taking the US indexes from sharply negative to sharply positive in one single session.
Another interesting development was the number of corporate executives and officers scooping up shares of their own companies which has doubled in the past two months from the prior two.
As a result, insider buyers are outpacing sellers by the most since August 2011, data compiled by The Washington Service showed.
Insiders are pretty well informed at the micro level of their businesses and It is a good sign that business leaders still see demand at their companies and feel comfortable buying their own stock despite the headline risk.
The last time insider buying spiked in this fashion, in August 2011, the S&P 500 was in the middle of a 19 percent retreat before staging a 10 percent rally in each of the next two quarters.
2018 looms like one of the worst years of the decade for equity markets
Although there is still one trading session on Monday before the year ends, and we shall do a complete review of equity markets then, it is already clear that 2018 will remain the year where the 2008-2018 bull market ended, as we correctly predicted in December 2017
The MSCI WORLD INDEX is down -11.06 % in 2018, clearly its worst performance since 2008
The same applies to the US equity indexes with the Standard & Poor’s 500 Index down -7 % to yesterday, while it barely had a negative year in the past 10 years.
Our Model Portfolio ends 2018 up + 17.16 %
We are proud in a year like this one to have delivered a substantially positive performance with our Model Portfolio, despite 2018 being one of the worst years for equities in general.
Our outperformance was mainly done at the beginning of the year, and we went through extreme volatility in December as we remained fully invested in extremely cheap markets such as China and Asia.
Since December 5th, we gave back almost 14 % and could have finished the year up 30 % had we cut all our positions then, but being in the tail-end of a vicious move, we preferred to stay invested and keep trading our postions in a disciplined way.
Our Model Portfolio is well positioned for the beginning of the year.
We shall perform a full review once the year will have ended net week, but we are already happy with the results, that are in liane with our long term averages.
The next few weeks should be positive for equity markets. The sell-off is over and a rebound will be fueled by the earnings season which should be spectacular again in the 4th quarter of 2018.
Profits from S&P 500 companies are expected to rise to a record $173 a share next year. At 13.6 times forecast earnings, the index is trading at 9 percent discount to the average multiple since the bull market started in 2009.
Value has been restored in equities, even in the US, and the first quarter earnings season will support equity prices.
However, equity earnings are certainly at their peak and quantitative tightening will continue in the US and start in Europe.
Western equities have started a bear market that will last until 2020 and will probably see US equities trading down at least 38 % lower than their September 2018 peak and even possibly 50 % before the bear market is over.
We see the SP500 trying to move back up to 2’650 in the coming rebound but fail to make new highs.
The MSCI WORLD INDEX has a similar configuration and is already in Bear market territory. It should clearly rebound form both the fibonacci support and the short term moving average but the top is a secular top and there again the most likely target is at 38 % from its January peak or 1651.
In the short term, we see rebound towards 1980 before we resume the downtrend and start the second leg of the bear market.
MSCI World Equity Index
The situation in China is completely different. First, Chinese equities have been the worst performers this year, down 25 % from their January peak and their worst performances since 2011.
Chinese equities are extremely cheap, even if corporate earnings have fallen for the first time in three years in November, highlighting the
effects of slowing economic growth, falling prices, and the
trade war with the U.S.
Industrial profits declined 1.8 percent in November from a year earlier, down from a 3.6 percent rise in October.
Total profits for the month were 595 billion yuan ($86 billion), the
National Bureau of Statistics said Thursday.
Profits for the first eleven months climbed 11.8 percent from a year earlier to 6.12 trillion yuan ($887 Billion )
At 10x those depressed earnings and with the perspective of significant stimulus from the Government via tax cuts and easier monetary policies, Chinese equities are at BUY levels and should stage a significant rally in 2019.
We also expect the US – China Trade war to fade away as the recent weeks have shown Donald Trump that he had to change his bullying ways if he did not want to pay an extremely high political price.
The past few weeks have been all about the US and about Donald Trump handling of economic and international affairs, and it is likely that his ways will be amended somewhat on the future.
Turn has nothing to gain from a continuation of the Trade war with china, apart form a significant loss of confidence in the US economy and US corporations.