Thursday, January 24, 2013

Too far, too fast

Seemingly overnight, it seems that the whole world has turned bullish. According this report from Reuters, the Great Stampede Rotation into equities is just getting underway:

With the whiff of global economic recovery in the air as major central banks floor cash rates, buy bonds and neutralize systemic stability fears, mutual fund and retail investment flows are already on the move in 2013.

According to Lipper, net flows to U.S.-based equity funds in the first two weeks of 2013 was, at $11.3 billion, the biggest fortnightly inflow since April 2000. Including exchange traded equity funds (ETFs), the number tops $18 billion - well over twice the flow to equivalent bond funds.

What's more, fund-tracker EPFR said some $7 billion of inflows to emerging market equities alone in the first week of the year were the biggest on record and these have outstripped demand for emerging bond funds five weeks running.
The BoA Merrill Lynch fund manager survey shows fund manager bullishness at an extreme level:
Investors’ appetite for risk in their portfolios is now at its highest in nine years, while an increasing number judge equities as undervalued – particularly in Europe. Moreover, investors have reduced cash holdings to 3.8 percent from 4.2 percent in December. This marks the most positive reading of this measure of willingness to hold riskier investment assets since April 2011, though it has not reached levels that would represent a contrarian sell signal.

CNBC reports that bears are in the capitulation process:
A powerful rally in which virtually all fears have been bypassed has pushed stock marketdetractors to the brink, ready to wave the proverbial white flag as the only direction for the market seems to be up, up, up.

"They're almost ready to throw in the towel," Scott Bauer, of Trading Advantage, told CNBC. "I don't want to say 'capitulation,' (but) guys down here really are saying, 'All right, I can't fight it anymore, let's go.'"
Bespoke reports that roughly 80% of the components of the SPX are overbought:

The last time the market got to these level of overbought readings was in late October 2011 - and a short, sharp correction followed:

...though the longer term uptrend remained intact.  

I appreciate that there is powerful positive momentum underlying this rally and many of the macro headwinds have turned into tailwinds (i.e., Chinese hard landing becoming a soft landing; the ECB taking tail risk off the table; US fiscal cliff confrontation averted).   However, with the bears throwing in the towel, I am inclined to take some profits and take some chips off the table in the short term. We've come too far too fast. With bullish sentiment at such extremes, a corrective pullback is highly probable in the short term.

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.


Anonymous said...

I'm with you, but it is lonely.

SeniorD said...

I posted this after reading your comments on MunKNEE:

Good article!
I'd like to see a comparison between holding physical PM's and those that buy and hold (long term) PM stocks (not mining stocks).

WimpyInvestor said...

It's been a while since you last commented on your Inflation-Deflation Timer Model. I recall that you have used CRB (commodity prices) as primary trend indicator for global growth. How does the commodity trend (lower highs on long-term weekly chart) reconcile with global equities making new highs?

Another indicator you've used before is the 10-year treasury yield, which has just registered a bullish (higher yield) golden cross. Do you still consider this in your Inflation Timer, even though FOMC is keeping rates low until inflation gets to 2% or unemployment drops to 6%?