Thursday, February 21, 2013

Take some chips off the table

I wrote that I had been watching the behavior of cyclical stocks for a signal that a correction may be starting (see Correction? Watch the cyclicals!) and we may have seen that signal yesterday.

Is the consumer getting into trouble?
Consider, for example, the relative performance of Consumer Discretionary stocks against the market as a measure of risk appetite. This sector began a relative uptrend against the market last August but declined through a relative uptrend yesterday. This move, in conjunction with the behavior of other key sectors, may signal the end of the risk-on trade for the time being.

I would also point out that we have seen two consecutive housing related releases come in below expectations (homebuilder sentiment and housing starts). The housing sector, which recently turned from a train wreck into a recovery, has been a mild economic tailwind for the economy and consumer. Cullen Roche at Pragmatic Capitalism is not as sanguine about the housing recovery as many other analysts:
I still don’t see the recovery in the various housing indices that many are raving about. To me, this looks almost exactly like what I’ve been predicting all along. A sideways market that is consistent with past bubble experiences. Think Nasdaq, Shanghai, Gold in the 80s, etc. In essence, it looks like a big L.

CNBC reported that Americans are tapping home equity again as home prices have bottomed and started to appreciate again. I believe that HELOCs have been one reason why consumer spending has held up well despite the increase in payroll taxes this year.

So what happens to the consumer if the housing price recovery were to pause here?

Cyclical stocks rolling over
Another measure of the risk trade is the behavior of cyclical stocks. Business Insider highlighted the fact that CAT, which is highly cyclically sensitive on a global basis, just posted some disappointing sales statistics:

Caterpillar, the industrial behemoth that makes earthmovers, regularly publishes its rolling 3-month dealer sales statistics.

This gives us a sense of capital equipment sales in various global regions, which in turn serves as a proxy for economic activity.

And the latest numbers aren't good. Worldwide dealer sales accelerated in the three months ending in January. The North America and Asia/Pacific regions posted double-digit declines.
The chart below of the Morgan Stanley Cyclical Index against the market shows a pattern that is very similar to the Consumer Discretionary sector. Cyclical stocks have also violated a relative uptrend yesterday, which is another bad sign for the bulls:

I also don't like how Dr. Copper is behaving:

Note that this is not a "dive in the bunker" bearish call, but a warning that it may be time to take some chips off the table and to re-balance portfolios toward a greater emphasis on risk control.

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.


rp1 said...

Yes we're being boiled, but jump out of the pot and you'll freeze.

Anonymous said...

Great post and great blog! What suggestions do you have around greater risk control for our equity portfolios?

Don Ake said...

I agree. It is time to start a drawback plan -

Anonymous said...

This guy is just another market timing idiot! Don't follow him or you'll be an idiot too.