What Our Clients Are Talking About Behind The Scenes
FLASH COMMENTS
Before getting into today’s weekly Whispers note, I wanted to make a couple comments:
- My work remains medium-term bullish.
- Buy tactical dips in Financials and Cyclical/Reflation trades.
- Sell relative strength in defensive areas — Utilities and Health Care.
- Growth/FAANG remains as tilt above benchmark — have less exposure than pre-4Q20 but note they were never suggested to be abandoned — do not chase any tactical outperformance.
More to come on the supporting evidence. Stay tuned.
QUESTIONS AND ANSWERS
What do you make of the decline in 10-yr yields? Should I be making portfolio shifts?
I have stated from time to time I try to refrain from making too many comments about areas that I do not have objective tools/models to support my conclusions. However, the bond market action since March has been extreme in my view and I have received a lot of questions regarding my thoughts.
So, let us do a quick rehash of what has happened and what I have been saying and my current thoughts on this week’s fall in rates (all using the 10-yr US Treasury yield as my interest rate proxy):
1. Yields start rising from the latter parts of January (1.0%) and then in mid-March breaks above technical chart resistance at 1.5% and sprints to a peak near 1.8%.
The narrative shifts to too much growth — my view was this was overdone because of the foreign buyers and that rates would fall once the calendar flipped to April.
2. Calendar flips to April and rates decline sharply till mid-month to roughly 1.5%.
The narrative shifts to growth slowdown fears — my view was this was overdone, and the growth fears were unfounded.
3. Rates begin to work their way higher again till mid-May.
The narrative shifts to concerns regarding rising inflation/hyperinflation/stagflation — my view was inflation was expected to rise from the negative CPI prints during the COVID lockdowns and the sharp upward moves were transitory, which suggested worries were excessive.
4. Yields began to once again moderate and then reached their lowest level since late-February at 1.45%.
The narrative shifts back to growth fears and that inflation is indeed transitory following the combination of the Employment report missing expectations and a CPI print that was not a repeat blowout like the May data release — my view is that there is a short squeeze going on in the bond market which is the main catalyst for this unexpectedly large decline in rates and is NOT a signal to sell Cyclicals/Reflation/Financials. Yields should likely bottom over the next 1-2 weeks and continue their upward drift as the U.S. economy continues its journey toward a full nationwide reopening.
Bottom line: NO portfolio shifts are recommended at this time, and investors should use countertrend relative performance price action to continue to rotate into our main preferred positioning — Cyclicals/Value/Reopening, SMid over Large, and Fins/Industrials/Materials/Energy over Staples/HC/Utilities.
Have there been any significant changes to the earnings revision backdrop now that you have gone through your monthly deep dive?
NO, the revision data has been quite stable and is still flashing the same main messages:
- Constructive and supports additional equity market gains.
- Offense is still relatively favorable versus defense and NOT yet extreme
- Cyclical/Reopening/Epicenter looks relatively better than Secular Growth
Bottom line: From a 3-6 month perspective, our earnings revision based process is still supporting our longstanding positioning recommendations — Cyclicals/Value/Reopening, SMid over Large, and Fins/Industrials/Materials/Energy over Staples/HC/Utilities.
What are your aggressive tactical indicators signaling now?
Still tactically bullish. My key aggressive tactical indicators — HALO-2, and V-squared (see explanations at the end of the note) — are still favorable and not extreme since their last favorable signals that were flashed on March 19th. Hence, I continue to look for the S&P 500 to make a definitive move above the recent overhead resistance at 4238 and make higher highs.
BOTTOM LINE: All of my aggressive tactical indicators suggest that investors should still be looking for further equity gains.
The key indicators that impact my conclusions the most remain supportive for more upside potential for the S&P 500. Despite some recent underperformance, my longstanding portfolio themes that I have been recommending — Value/Cyclicals over Growth/FAANG, and SMid over Large— and preferred sector positions — Financials, Industrials, and Materials as Full Above Benchmark and HC, Staples, Utilities, and Real Estate as Full Below Benchmark — are still favorable in my work.
I have written quite a bit since the end of 1Q21 about my expectations for a potential increase in volatility and intra-market tactical rotations based on headline macro risk. Well, this will likely still be the case until we get into the 2Q21 earnings reporting season that should begin during the back half of July. Importantly, this period should give investors opportunities to use market action to their advantage.
If/when these periods occur, my research still advises that investors use relative weakness in the sectors/stocks that are favorable to raise exposure and to avoid or trim the areas that still remain unfavorable. Thus, I do not have any major changes and my ongoing mantra of STAY THE COURSE is still valid. Even though there are still elevated levels of unease among institutional investors my analysis portends that the U.S. equity market will keep trying to navigate the “Wall of Worry.”
When equity markets churn, there can be a temptation for investors to lose focus. I continue to warn against allowing that to happen to you. The U.S. economy is on the path to a national reopening and each day takes us further down this path towards returning to pre-COVID levels. Undeniably, this has been and remains an important factor that underlies my ongoing bullish equity market outlook, and still see normalization as a beneficial piece of evidence that should help fuel the continuation of the ongoing equity market rally. I am still strongly recommending investors stay disciplined and focused on the bigger picture and not the day-to-day market action so one can keep profiting from the positive backdrop for equities.
Definitions of HALO, HALO-2, and V-squared
HALO = The proprietary Fundstrat Portfolio Strategy Halo Model is a multi-factor model that attempts to predict the forward 1 – 6 month relative performance of a group. The goal is to help both strategic accounts better time their implementation strategies that would be consistent with our more strategic conclusions derived by our sector/sub-industry 8-panels as well as our stock specific Estimate Revisions Model (ERM), and to generate tactical ideas for aggressive trading accounts.
HALO-2 = The proprietary Fundstrat Portfolio Strategy HALO-2 Model is the raw tactical data behind our standard HALO multi-factor model described on the previous page. It is useful for identifying aggressive tactical trading bottoms for the S&P 500.
V-squared = The proprietary Fundstrat Portfolio Strategy V-squared indicator at its lowest level shows the ratio of VXV (the 3-month CBOE S&P 500 Volatility Index) and the VIX (the 1-month CBOE S&P 500 Volatility Index). This tool is also useful for identifying aggressive tactical trading bottoms for the S&P 500.
