27 October 2014

Market Update

How's Your Risk Appetite?

Executive Summary: It has been over a week since equity markets bottomed. Whilst it is slightly early to make a concrete assessment, we are watching short term sentiment and technical indicators for a rally confirmation and see more components turning positive. Looking at the various sectors of the market, so far investors have not given up on economically sensitive stocks with risk appetite healthy, and as such we remain bullish on risk assets.

Portfolio Positions: We have recently shifted our Europe allocations to the US market. In addition, we want to take advantage of the recent sell-off to overweight US large-cap equities and will be executing the position this week.

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Market Stability.
Fundamentally, we are bullish on US risk assets as economic data is providing the underlying support to our view. We will remain less sanguine about other regions unless fundamental data begins to turn upwards which we have noted in our 14 Oct update. Studying the latest market price action and the movements of individual sectors provides us technical and sentiment information on how market participants are executing their decisions following this latest global sell-off. This allows us to gauge the sustainability of the rally from a technical perspective.

Image courtesy of Stockcharts.com

Fig 1: Assessing the Relative Performance of Higher Beta Small Cap Equities Will Give Us An Idea Whether Investors Will Overpay For Growth. After Rising Significantly in 2013, Small Caps Are Still in an Overall Downtrend in 2014.

Image courtesy of Stockcharts.com

Fig 2: Investors Preference For Cyclical Sectors During The Rebound Indicates Partiality For Risk.

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Fig 3: Industrials Typically Perform Well In The Final Third Of Expansions. Their Relative Outperformance From Here Onwards May Indicate That The Bull Market is Mature.

Fig 4: Investors Have Shown A Preference To Better Grade Junk Bonds As QE Comes To An End And The Expected Rise In Interest Rates In 2015. We Will Have To Keep A Watch On Whether The Spreads Continue To Widen As Such Behaviour Could Mean Diminishing Risk Appetite.

Image courtesy of Stockcharts.com

Fig 5: Market Breadth Has Come Off Its 2014 Lows and We Would Like To See A More Healthy Level As A Rally Confirmation.

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Fig 6: Investors Prefer The Comfort of Dividends In Uncertain Times As Shown In This Relative Performance Chart. We Will Have To Watch This Relationship As The Rally Continues

Image courtesy of Stockcharts.com

Fig 7: The Oct 2014 Sell-Off Breached Technical Oversold Indicators. Without A Fundamental Underpinning, It Appears To Be Just A Healthy Correction In A Bull Trend.

Conclusion.
It has been over a week since equity markets bottomed. Whilst it is slightly early to make a concrete assessment, we are watching short term sentiment and technical indicators for a rally confirmation and see more components turning positive. There is no negative trend in fundamental data coming out of the US yet and the initial signs are that investors continue to prefer risk assets and economically sensitive sectors. As such, the decline could be technical in nature and we will remain bullish for now.

We have sent out recommendations for rebalancing and if you have not yet approved the recommendation, please try to do so as soon as possible. Please call your adviser if you have any questions or need further clarification.



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