Tuesday, January 22, 2013

Why I am worried

I suppose that I should be happy and bullish. US equities staged a significant upside breakout last week, indicating positive price momentum.


Mid and small cap stocks have staged upside breakouts some time ago to all-time highs, which is a bullish confirmation of the trend.


As for the current Earnings Season, Bespoke reports that preliminary indications show that the beat rate is consistent with the historical average.



Buy the breakout?
My inner trader has turned more bullish given these developments, but my inner investor continues to be a cautious and worried bull for two reasons: Sentiment and the deterioration in consumer sentiment.

First of all, equity markets are overbought and sentiment measures are overly bullish, which is contrarian bearish (see my comment last week Big test for stocks). Measure of investor sentiment were in the crowded long zone last week and preliminary indications show that they got even more bullish, which is a warning sign that we could be due for a short-term pullback at the very least.

The more worrying sign is the deterioration in the University of Michigan sentiment index, as per Doug Short:


I detailed before the effects of the payroll tax cut expiry has had on the American consumer. Here is analysis from Credit Suisse (via FT Alphaville) showing that the elimination of the tax cut has virtually undone all of the gains that the typical American household had last year:


The US household sector remains fragile. Here is a report, with albeit somewhat dated data, (via Reuters) showing that while employment has recovered, the quality of jobs deteriorated:

The number of U.S. families struggling with poverty despite parents being employed continued to grow in 2011 as more people returned to work but mostly at lower-paying service jobs, an analysis released on Tuesday shows.
Others have jumped on this story, see this Marketwatch article Stocks face hurdle as payroll tax hits wallets,
Average U.S. household has about $20 less to spend each week.
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When will stocks hit these potholes?

My inner trader tells me that these sorts of things don't seem to matter to the market until the market starts to pay attention, so I should relax and enjoy the bullish party. My inner investor is watching very closely for signs of weakness, particularly from the US consumer which could derail this rally.


Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

Anonymous said...

The effects of the loss of the payroll tax cut are just the first of many harse realities that are coming to those that voted for President Obama. The worst is yet to come, and those folks that thought they would be exempt from the unkind effects of his economic policies are going to continue to realize what they got ... and it's not what they thought they were getting. In his first 4 years, President Obama did not do what he said he would do. I don't see any surprise that his next 4 will be the same, only worse, he has no re-election to worry about. You got what you voted for.....