As we move into the final 10 weeks of 2019, our sense is many of our institutional investors clients will remain quite active. The reasons are intuitive: (i) too many macro moving parts (disruption/oppty); (ii) performance issues (many are not tracking their benchmarks) and (iii) political risks.
Our stance remains that markets will rally strongly into YE, as we expect the S&P 500 to break to the upside from this ‘markets going nowhere’ for past 20 months (never been more than 20 months, so this month is a test of our thesis).
POINT: When markets up >17% thru 10/15, avg gain thru YE 3.1% (82% of time, since 1930)… implies >3,100 for S&P 500 by YES&P 500 is up 17% thru 10/15 (noted in earlier FLASH, best YTD in 22 years). The table below shows all instances (since 1930) when YTD >17%.
– Notably, avg further gain is 3.1%, which implies 3,100 for S&P 500 (in range of our YE target).
– 1987 is only exception (scary one)
– In years when S&P 500 <17% YTD, odds of further gain is only 63% vs 82% (>17%), so YTD makes a difference.
POINT: ‘Golden 6M’ for Homebuilders (Oct 20 to April 30, 19% gains, 80% of time)
We published our annual ‘Golden 6M’ for homebuilders report (link–>Click here for report).
Since 1999, Homebuilder stocks annual bottom is October 20th (next week) and avg 6M gain is 19% (80% of years). This trade has also worked 9 of last 10 years, including 2018, where homebuilders bottomed on Nov 4th.
– Homebuilders have already done well YTD (up 25%). But this was also true in 2000, 2003 and 2012, and they still saw big gains during ‘Golden 6M’ (+53%, +16%, +18%, respectively).
– Why does this happen? Our best guess is Cyclicals are seasonally strong in 4Q and Homebuilders are beta to this. If you have a view, please email me!!!
POINT: Rising rates actually make this trade work better when rates rise…
Another curiousity is this trade works better when interest rates are rising (next 6M).
– Since 1999, when rates rise, the ‘Golden 6M’ return is 21% and works 89% of time.
– We are also scratching our head–its counterintuitive
STOCK IDEAS: 13 stock ideas.
Here are some stocks that are in the building space and ranked DQM 1 by our quant model.
– Tickers: TPX, DHI, KBH, LEN, MDC, MTH, NVR, PHM, TMHC, AAN, HELE, AWI and JCI.