Large macro themes are driving market activity in 2019 – all of which have the potential to ca...
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Markets Ready to Breakout
05/17/2019 9:17 am EST
Despite the long bull move, most market sectors have been chopping around in a range since mid-February, writes Landon Whaley.
In last week’s note, we evaluated the performance of stocks, bonds, and currencies around the world in the context of the prevailing Fundamental Gravities. This week let’s talk about the fact that the year-to-date gains across many markets have obscured the true pattern in markets: Chop.
Fifteen of the 22 U.S. equity sectors we track have gained double digits year-to-date. Some of these sectors (discretionary, tech, financials) have ripped all four months, but most sectors stalled — from a cumulative return perspective — after charging out the gates to start the year.
- U.S. small caps are up 17.3% for the year but have been chopping along and going nowhere on a cumulative return basis since Feb. 14.
- Industrials are up 18.4% so far in 2019 but are flat since Feb. 15.
- Transports are up 15.6% but have chopped sideways since Feb. 12.
- Energy stocks are up 11.7% but are still trading at their Jan. 31 price.
Even our favored shorts have been doing the sideways boogie for most of the year. U.S. retailers have gained 7.7% year-to-date but have traveled sideways since Jan. 7. Basic material stocks have also chopped along for most of the year, gaining 9.1% but seeing no progress since Feb. 16.
The chop isn’t just an equity issue; we see it in other U.S. markets as well. Until last week’s “no trade deal” induced rally, long-dated Treasuries were still trading near their Jan. 3 price. The U.S. dollar has progressed in a choppy rally in 2019 but is trading only marginally higher than where it was on Feb. 14. And in the commodity space, gold has gone nowhere since the second day of the year and copper hasn’t moved since Jan. 30.
U.S. markets aren’t the only ones dealing with the chop; it’s a global phenomenon.
In South Korea, the Kospi started the year with an11.9% gain but has traded sideways since Jan. 16. The Brazilian Bovespa ramped 14.0% in the first three weeks of the year and has chopped ever since.
The chop has also dominated equities in the world’s largest economies: Eurozone equities (Euro Stoxx 50) have held steady since March 14. Chinese equities (Shanghai Composite) have treaded water since Feb. 25. Japanese equities (Nikkei 225) are in the same place as they were back on Feb. 20.
Global bond and currency markets aren’t immune to the chop, look at the Japanese yen, Aussie dollar, German bunds or the Canadian 10-year government bond, just to name a few.
So why do we care about the chop?
Most of the world’s money is “long-only” or trend following, which means the majority of capital allocators are always looking for markets they can buy and hold for a prolonged bullish move. The implications for the remainder of 2019 are clear: whichever market(s) breaks out of the chop on the upside will see a massive amount of capital flow its way, helping perpetuate that market(s) bull run.
Despite the recent 8.0% pullback off of their 2019 high, my money is on U.S. energy stocks to break the curse of the chop.
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