The Week In Review
- After a long stretch of not suffering hardly any losses, US investors got a rude awakening to the other side of the return coin – i.e. risk
- International developed markets had the biggest losses closely followed by Emerging Markets – Japan was down the most of the major markets
- In the US the biggest hit was experienced by large-cap stocks
- Stocks in the real estate, telecom and utility sectors have deteriorated the most since the beginning of the year
- We do not see much rhyme or reason behind last week’s relative style performance – the most liquid stocks got sold the hardest regardless of style – defensive sectors provided little relief
- While the US equity market is technically in a correction, our proprietary Risk Aversion Index remains in the Neutral Zone -most of the “fear” is emanating from equity market factors and not from bond market or economic health indicators
- Our view is that this is a technical correction unrelated to market fundamentals. After a historically strong 2017, we see this correction as a reflection of investors wanting to lock in some of their above-average gains from last year
The Daily View
Monday and Thursday were particularly bad for US stockholders
The biggest portion of returns happened from the open to the close
Overnight activity was somewhat muted pointing to the US equity market as the centre of the storm
The range of intraday price action was incredible wide last week
Except for Wednesday the intraday difference between the daily high and low was greater than 4%
The Technical Picture
Stocks in the real estate, telecom and utility sectors have deteriorated the most this year – these sectors are all very interest rate sensitive
About 70% of utilities in the Russell 3000 are in the Down Trend Stage
After a great start to 2018 we are now left with only a handful of stocks in the Up Trend Stage – Health Care and Tech have the most “survivors” in the momentum trade
What We See For This Week:
- My view is that this is a technical correction and it will be over soon
- Investors have been conditioned by 2008, but this is different
- The global economy is growing
- Inflation is low and inflationary pressures are contained by plenty of slack capacity
- Monetary policy has followed a predictable path and remains accommodative
- Earnings – CSCO, AIG, AMAT, PEP, OXY, MRO
- Risk Aversion – expect the RAI to remain in the Neutral Zone
- Expect equity and bond volatility to subside, volatility is mean-reverting
- Look for rebound candidates in Health Care & Energy sectors
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Eric J. Weigel
Managing Partner, Global Focus Capital LLC
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