Stocktake: Sell the rallies, Merrill Lynch says

Professional investors are bearish but the kind of panic seen at major stock-market bottoms remains absent, according to Merrill Lynch’s latest monthly fund manager survey. A record 85 per cent of respondents believe the global economy is in the late cycle, while the survey also revealed the worst outlook on global growth since November 2008. That might sound exciting to hardy investors – Merrill’s survey is best viewed in a contrarian light, with excessive fear typically seen near market bottoms – but investors are “not bearish enough to signal anything but a short-term bounce”, says Merrill.

Cash levels of 5.1 per cent are higher than usual, but are nevertheless unchanged over the last month. Investors are wary of Europe, with allocations falling to their lowest levels since December 2016. Again, however, they are “far from panicked”; allocations have slipped rather than plunged over the last month and are not that far below historical norms. A short-term bounce is likely; 89 per cent of national indices are below their 50- and 200-day moving averages, notes Merrill, a buy signal that has been followed by decent one-month bounces in seven of the last eight instances. Overall, however, Merrill says this is not like February 2016, when investor capitulation set up an obvious entry point for investors. This time, it expects traders to sell the rallies.

Most stocks are in bear markets

US indices have hit multiple all-time highs this year and the nine-year bull market remains intact, recent weakness notwithstanding. Outside of the United States, however, market action has been distinctly bearish for some time now. In Europe, stocks have fallen to their lowest level in almost two years, with the Stoxx 600 falling 12 per cent since January. The underlying action has been even uglier than those figures suggest: almost half of the index's 600 constituents have fallen into individual bear markets (that is, declines of at least 20 per cent). Emerging markets have had an even tougher time, losing over a quarter of their value since January's peak. Merrill Lynch data shows that globally, 1,557 out of 2,767 stocks – 56 per cent of the MSCI All Country World Index – are in bear markets. An equal-weighted version of the index has fallen 18 per cent, just shy of official bear market territory. On some measures, the US bull market is now the longest in history. Outside of the US, however, disappointed investors will be asking: bull market? What bull market?

US bull market remains alive

A global bear market may be brewing, then, but investors should expect the US market to hit new highs before the year is out, says Fat Pitch blogger Urban Carmel. Carmel, a former president of UBS Securities in Asia, expects things to remain hairy for some time and for last week's lows to be tested. The S&P 500 has logged three consecutive weekly declines, something that has happened more than 20 times since 2003. On every occasion, stocks either retested or exceeded the low over the following weeks. However, market momentum suggests stocks have not yet topped out. Before October, stocks had risen six months in a row. Over the last 60 years, that "has never marked a bull market top", with the S&P 500 typically hitting new highs over the following months. Stocks gained in April, May, June and July, he adds, something that has happened on 11 previous occasions. By the end of the year, the index closed higher every time, bagging median gains of 12 per cent. Similarly, stocks enjoyed a very strong third quarter, and this has historically been predictive of a strong fourth quarter. The recent US weakness "might feel like the start of a bear market", says Carmel, "but that is the least likely outcome".

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Authers takes on online critics

The "catastrophic breakdown in trust" in the financial media was the subject of John Authers's final column for the Financial Times recently. Authers, who has moved to Bloomberg after a distinguished 28-year career at the FT, noted readers were once "deferential" towards the paper, but online comments "are degenerating into a cesspit of anger and disinformation". Where once he debated with specialists, "now I referee nasty political arguments or take the abuse myself". Not that he took such abuse lying down. Last month, one snarky commenter dissed an Authers article, writing: "I'm far from convinced that Authers knows what he is writing about and not for the first time. I fancy that printing money will eventually lead to higher yields and I cannot see why it should be any different this time."

A disgruntled Authers replied: “You ‘fancy’ that printing money will eventually lead to higher yields? Would you care to explain in more detail why you fancy that?”

This “is the first comment of yours I’ve read”, he added, “and I’m far from convinced you know what you are writing about”. Ouch.