Sept 7: Markets are open: What do we see?

Well, the US equity markets are up slightly and stronger today. This is welcome news for us personally, as our personal holdings are down > 50%.

The supporting financial assets are as follows:

• VIX, down
• Bond yields, down
• Energy, down (not good for energy stocks, but good for consumers and producers)
• Copper, down (lower inflation and lower industrial demand)
• Silver, up (risk on and positive on industrial demand)
• US Dollar is up against all major currencies (including the Chinese Yuan). This is likely due to our narrowing trade deficit, higher interest rates, and general malaise in global markets (flight to quality of the US).

Yesterday, we saw corporate fixed income have the worst New Low / New High market breadth we have seen in ages. 100 new lows for every 1 new high (see pix below) and data here from FINRA. From the same site, we see the US Treasury Yield Curve (riskfree yields across maturities) is higher and very flat. All money now costs around 3% to 3.5%, regardless of duration or maturity date. This is expensive for short-term money, which could be what is driving the market lower. Expensive short-term money makes speculation and trading more costly, and therefore selling short could be even more attractive (sell first, then buy later).

Some of these movements could be due to the global energy shock as the world realizes that clean energy may not be plentiful enough, and that Coal, Oil and Sweat may be required for the foreseeable future. Sacrifices in demand must be made if we are to live with less energy, or we need innovation to leverage higher energy alternatives (like nuclear fusion, fission, and space-based. In fact, I am getting up now and turning off our AC (true).

We are reflecting today on the sector rotation underway in the US equities market for the past year. Energy stocks have risen while consumer / communication stocks have fallen. It may be time for that rotation to reverse itself. Take a look at relative performance at Finviz here. 

Our model suggested a move into more commonly held stocks, and more of them. It takes 25 stocks, evenly held, and hedged against the SPY, to create an edge (or alpha) that can be captured regardless of market movements higher or lower. This is because variances are up, risk-free rates of return are up, and market expectations of new risk capital returns are lower.

In terms of sectors, retail looks strong. Coal is weak. Retail Banks are doing ok (mixed but higher), and the rest of the industry sectors are mixed. Not to say 50%/50% up and down, but almost every sector is mixed.