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Year 2 of the bull

Summary:
Mid-week market update: The equity bull market began about a year ago. Ryan Detrick observed that the second year of past major bulls have averaged gains of 16.9%, though investors should not ignore pullback risk.  Animal spirits Bullish readings are confirmed from a long-term perspective by a combination of strong MACD momentum and the emergence of market animal spirits. Past bullish crossovers of the monthly MACD histogram have marked strong buy signals (blue vertical line), though bearish crossovers (red lines) have been less effective sell signals. In addition, while most analysts have scrutinized option call and put activity for short-term trading signals, a big picture view of the equity call/put (inverse of the put/call ratio, top panel) shows that a steadily rising

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Mid-week market update: The equity bull market began about a year ago. Ryan Detrick observed that the second year of past major bulls have averaged gains of 16.9%, though investors should not ignore pullback risk.
 

Year 2 of the bull

Animal spirits

Bullish readings are confirmed from a long-term perspective by a combination of strong MACD momentum and the emergence of market animal spirits. Past bullish crossovers of the monthly MACD histogram have marked strong buy signals (blue vertical line), though bearish crossovers (red lines) have been less effective sell signals. In addition, while most analysts have scrutinized option call and put activity for short-term trading signals, a big picture view of the equity call/put (inverse of the put/call ratio, top panel) shows that a steadily rising equity call/put ratio has also defined bull phases. Moreover, a rising 200 dma of the equity call/put ratio (red line) has coincided with MACD buy signals.
Year 2 of the bull
What could dent this bull?

An EM crisis?

Could an emerging market currency crisis halt this bull market? It doesn’t appear so. The Turkish lira came under pressure when Erdogan replaced the head of Turkey’s central bank for raising interest rates. The Turkish lira (TRY) cratered on the news but stabilized within a day.
Year 2 of the bull
BBVA is a Spanish bank that a high degree of Turkish exposure. Its shares fell, but the price action could hardly be described as a crash and it has stabilized.
Year 2 of the bull
The same could be said of the Turkish stock market, which fell dramatically on Monday but it is not trading at a key support level relative to MSCI Emerging Markets ex-China.
Year 2 of the bull
There was also no contagion effect felt in a vulnerable EM currency like the South African Rand.
Year 2 of the bull
The Turkish lira crisis is turning out to be a non-event like the Dubai World restructuring of 2010 when Dubai World teetered on the edge of bankruptcy. Coming so soon after the GFC, there were fears of financial contagion at the time which never materialized.

Seasonal headwinds

What about the recent market weakness? Mark Hulbert found that major sports events can have a depressing effect on stock prices.
If you are a short-term trader, note that tip-off in the first game of this year’s March Madness is 4 p.m. Eastern time on Mar. 18. The tournament ends with the championship game on the evening of Apr. 5.
The correlation between sports and the stock market was documented by a study published a number of years ago to in the Journal of Finance. Entitled “Sports Sentiment and Stock Returns,” its authors were finance professors Alex Edmans of the London Business School; Diego Garcia of the University of Colorado at Boulder; and Oyvind Norli of the BI Norwegian Business School.
After studying more than 1,100 soccer matches, the professors found that, on average, a given country’s loss in the World Cup elimination stage is followed by its stock market the next day producing a return that is significantly below average. Though they focused primarily on the World Cup, they also studied cricket, rugby and basketball matches as well.
Crucially, the researchers did not find a symmetrically positive stock market impact following a World Cup win. They speculate that this is because a win merely means that a country’s team advances to the next round, while elimination is final. As a result, losing teams’ fans are likely to be more despondent than winning teams’ fans will be exuberant.
The logical consequence of this asymmetry: global stock markets should experience abnormal levels of selling during the World Cup and, therefore, below-average returns. And, sure enough, that is exactly what was found by another academic study, this one by Guy Kaplanski of the Bar-Ilan University in Israel and Haim Levy of the Hebrew University of Jerusalem.
Hulbert went on to analyze stock market returns during March Madness and he found a negative effect (caution, n= 7).
Year 2 of the bull

An internal rotation

First, equities have performed so well against bonds that large balanced funds are compelled to re-balance their holdings by selling stocks and buying bonds at or around quarter-end.
Year 2 of the bull
We are already seeing some of that re-balancing effect. Bond prices have exhibited positive RSI divergences for several weeks and they are finally turning up. The open question is how long the rally can last. One key test will be tomorrow’s 7-year Treasury auction. If it doesn’t go well the bond rally could reverse itself very quickly.
Year 2 of the bull
Growth stocks have also been bid while value and cyclical names have weakened. This all appears to be part of the re-balancing trade overhanging the market. Despite the strength in growth stocks, the NASDAQ 100 has yet to regain its 50 dma and it has barely rallied above a key relative support zone as measured against the S&P 500. The high-octane ARK Innovation ETF (ARKK) is also struggling relative to the S&P 500.
Year 2 of the bull
By contrast, the Russell 1000 Value Index remains in a well-defined uptrend, both on an absolute basis and relative to the S&P 500.
Year 2 of the bull
In conclusion, the bull is still alive. The recent market weakness is only temporary. Stay with the market leaders of value and cyclical stocks.
Disclosure: Long IJS
About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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