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Key Equity Market Insights – Risk Aversion At Work


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

 

To continue reading download the full report here

 

Eric J. Weigel

Managing Partner, Global Focus Capital LLC


Services

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  • Sustainable Equity

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Research Publications

  • The Asset Allocation Advisor
  • The Equity Observer
DISCLAIMER: NOTHING HEREIN SHALL BE CONSTRUED AS INVESTMENT ADVICE, A RECOMMENDATION OR SOLICITATION TO BUY OR SELL ANY SECURITY. PAST PERFORMANCE DOES NOT PREDICT OR GUARANTEE FUTURE SIMILAR RESULTS. SEEK THE ADVICE OF AN INVESTMENT MANAGER, LAWYER AND ACCOUNTANT BEFORE YOU INVEST. DON’T RELY ON ANYTHING HEREIN. DO YOUR OWN HOMEWORK. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSIDER THE INVESTMENT NEEDS OR SUITABILITY OF ANY INDIVIDUAL. THERE IS NO PROMISE TO CORRECT ANY ERRORS OR OMISSIONS OR NOTIFY THE READER OF ANY SUCH ERRORS

 

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