Stocktake: Market rally continues to broaden


Market rally continues to broaden After a torrid start to 2016, global equities have bounced nicely, recouping more than half this year’s losses since bottoming on February 11th. Are we out of the woods?

Bears see this as a mere technical bounce from deeply oversold conditions, an unsustainable dash for trash where the biggest gains accrued to the most beaten-down names.

Short, swift rallies are a feature of bear markets, so it is certainly premature to view recent gains as proof of a decisive turn.

The “dash for trash” theorists can point to Bespoke Investment Group data showing that 2016’s biggest losers have soared by 18 per cent since February 11th, compared to a rise of just 4 per cent for the stocks that held up the best during the market correction.

However, big gains have not been confined to a handful of names. The average stock has gained more than 10 per cent since February’s bottom.

Last week, 75 per cent of stocks traded above their 50-day moving average, the highest percentage since November.

A majority of stocks in nine of 10 Standard & Poor’s 500 sectors traded above their 50-day average.

Crucially, strength has been especially marked in the industrials sector, courtesy of surprisingly strong manufacturing data, with the Citigroup Economic Surprise Index hitting its highest level since November.

Obviously, sentiment may well turn south again. Broad market strength in the US and double-digit percentage gains in Europe and Asia cannot be dismissed, however. Far from being a dead cat bounce, the rally has looked impressive thus far.

Markets not pricing in Trump Commentators habitually cite various headwinds that could throw markets off course – China, European banks, Brexit and oil prices, to name but a few.

Here’s another potential hurdle that might soon get greater attention: the prospect of President Donald Trump.

Allianz’s Mohamed El-Erian last week cautioned that markets had yet to price in US election uncertainty, a point also made by Pravit Chintawongvanich of Macro Risk Advisors, who notes options data showing markets remain sanguine regarding the potential for election-induced volatility.

This is surprising; a Trump presidency looks increasingly possible.

For weeks, online predictions markets have made Trump the hot favourite to win the Republican nomination, as well as giving him a 25 per cent chance of winning November’s presidential election.

That’s only slightly more unlikely than Brexit (about 30 per cent), the prospect of which has triggered much angst in the UK’s currency and stock markets.

Similarly, stocks exposed to Scotland were hit in the run-up to the Scottish independence referendum.

It may be that investors find the prospect of a Trump presidency too preposterous to merit serious consideration.

Whatever the explanation, it is “rather incongruous”, says Chintawongvanich, that election risk is still not priced into stocks.

A golden cross for gold growth Gold has been the big winner in 2016, with February’s double-digit percentage gain marking its largest monthly advance in four years.

Last week, gold produced a so-called golden cross, its 50-day moving average crossing above its 200-day average for the first time in almost two years.

Is a new bull market under way?

Gold bugs shouldn’t get too excited. In 2013, technical strategist Ryan Detrick noted there were 22 golden crosses in gold over the previous four decades; on average, gold barely budged over the following one-, three- and six-month periods.

Six months later, gold was higher on only 38 per cent of occasions. This is the fourth golden cross for gold since Detrick’s 2013 analysis, with rallies petering out shortly afterwards on each occasion.

The golden cross is a much- watched indicator among technical traders and momentum investors looking to divine if the long-term trend may be changing.

As the stats show, however, there’s nothing golden about a golden cross. Do gold gains signal trouble? Talking of gold, it has long had a reputation as a safe haven asset, somewhere to get shelter from the storm.

Does gold’s recent strength, then, bode ill for stocks? Does it indicate trouble is ahead?

No, it doesn’t. Since 1970, says Michael Batnick of Ritholtz Asset Management, gold has enjoyed 36 months where it rallied at least 9 per cent.

The performance of stocks over the following one-, six- and 12-month periods was no different to any other period.

“Despite what we might hear,” notes Batnick, “the price of gold tells us nothing about the future direction of stocks.”

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