Stocktake: US equities are a hard sell


Just as ordinary investors appear to be being gradually seduced by stocks, institutional investors are falling out of love with the US market, according to Bank of America quantitative strategist Savita Subramanian.

Bank clients have been net sellers of US equities for six consecutive weeks, she said, while institutional client sales were the third-highest since 2008.

Hedge funds, too, have been selling, with private clients the only net buyers.

In fact, private clients have not only been net buyers for 24 of the last 27 weeks, they have been the only net buyers during this year. Institutional clients, in contrast, appear to be rotating out of US stocks and into global equities, she said.

Given how pricey US equities look relative to global indices, that trend might well continue for some time to come.

Newsletter writers in realms of euphoria
Market sentiment continues to look toppy. Despite recent declines, sentiment remains euphoric, says Citigroup’s panic/euphoria sentiment model.

This euphoria is particularly marked among investment newsletter writers, as measured by the Investors Intelligence surveys, with 56 per cent describing themselves as bullish and just 14 per cent as bearish – the lowest reading since before the 1987 market crash. Newsletters have been very bullish all year, but the bull: bear ratio has spiked higher in recent weeks, generating its first technical sell signal in almost three years.

Similarly, the weekly survey of the National Association of Active Investment Managers shows equity exposure is at its highest level since early 2011.

Ordinary investors don’t appear giddy, but they have become more bullish.

Bespoke Investment Group notes that, despite eight consecutive weeks of gains for the S&P 500, bullish sentiment never topped 50 per cent in the weekly American Association of Individual Investors surveys. However, bearishness is very low, and the bull:bear ratio looks frothy.

Retail investors have been cautious since the March 2009 bottom, but that wariness has dissipated, with inflows to stock funds this year hitting their highest level in 13 years.

Tactical caution seems wise although, with the market now in its seasonally strong period, a short-lived pullback appears more likely than a serious correction.

Looks like it’s going to be another Santa Claus rally
We noted earlier that seasonal patterns suggest any market pullback is not likely to be significant, given the propensity on Wall Street to enjoy an end-of-year Santa Claus rally.

That period aside, there is nothing especially remarkable about stocks’ performance during December.

However, indices are up 25 per cent so far this year, and market declines in December are very rare in bullish climates.

Since 1985, markets have risen on 20 occasions between January and November.

On all but two of those occasions, December turned out to be a winning month.

When gold loses its lustre
Investors’ view of gold is another matter, with a slew of analysts recently cutting their price targets.

Gold, which has already fallen 27 per cent this year and is about to suffer its first yearly decline since 2000, is “unlikely to regain its former appeal”, UBS cautioned, cutting its average price forecast for next year to $1,200 from $1,325.

Going short on gold is one of Société Générale’s main calls for 2014, predicting “more pain” for the precious metal, which has dropped to $1,225 from its all-time high above $1,900, and which SocGen sees at $1,050 by the end of 2014.

Bearish bets among hedge funds recently hit a four-month high, and last week’s ECB warning that Europe may witness a “prolonged period of low inflation” only added to bearish gold sentiment.

Price targets are a bit gimmicky, of course, but it’s hard to disagree with UBS’s warning that gold has “limited positive catalysts looking forward”.

Just as crucially there is, as Credit Suisse observed, “no doubt that gold is in a bear market”, with gold’s parabolic surge in September 2011 looking more and more like a quintessential blow-off top. Selling into rallies remains the obvious trading move.

Can Europe outperform the US next year?
European stocks last week suffered their longest losing streak in five months, with major indices in Britain, France and Italy all breaking below their 50-day moving averages.

In fact, the FTSE 100’s near 5 per cent decline since October’s peak means it now hovers around its 200-day moving average – a key support level investors use to gauge the longer-term trend. Like in the US, seasonal trends favour the bulls. The FTSE has risen in 18 of the last 20 Decembers, with outperformance tending to be concentrated in the second half of the month.

Whatever about the FTSE, bank strategists don’t seem worried about recent European declines. UBS, Credit Suisse, Deutsche Bank, Citigroup and Société Générale have all issued 2014 forecasts predicting Europe will outperform the US in 2014, driven by low valuations, ECB support and belated earnings growth.

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