A choppy month with outsized moves in both directions, the S&P 500 Total Return Index gained roughly 2% in November. On a technical basis, the S&P closed a whisper under its 200-day moving average to finish the month of November. Bulls want to see (should want to see) several consecutive closes over the 200-day to feel like the lows were put in during October. 2018 remains on track to capture some of the highest frequency of large daily moves since 2008-2009.
How large investors are positioned today – and how they were positioned during a painful October – is yet to be determined. Did we see capitulation? Was the move higher in equities last week caused by real buying that will continue, or was it month-end window dressing? Are the systematic strategies such risk-parity and CTA funds turning net long or using rallies to get short/increase short positioning? And are long-only managers using strength to de-risk heading into 2019? We’ve got an important month ahead; seemingly more so than the December’s in previous years where a rally was all but guaranteed.
Here are the key drivers that we see as most important in this market (in no particular order as they are all significant):
The price of oil has shed roughly 33% since October 4: Often seen as a reflection of global growth, oil prices are now negative for the year. Great for the pump, not so great for some economic implications and forecasts. The slump in oil has affected item #2.
There is some notable stress in high yield bonds: Spreads have widened enough in the high yield market to have a trickle-down effect into other asset classes. Equity investors are seemingly paying attention to the noise rattling in credit as the rise in S&P 500 beta to credit spreads is apparent. Since a significant component of the high yield bond market is energy companies and/or companies that derive their profits indirectly from energy prices, the relentless recent selling in oil is very much spilling into high yield. Traders seem to want to shoot first and ask questions later in this macro-driven and highly complex commodity market. This week’s OPEC meeting will be closely watched to see if supply cuts are ahead to ease the selling.
Is the trade war between the U.S. and China getting resolved or just delayed? While President Trump and Chinese President Xi agreed this weekend to avoid the trade war from escalating (i.e. the U.S. will not increase the tariffs from 10% to 25% on January 1), a longer-term resolution remains questionable. The successful G-20 dinner and outcome from this sounds like a short-term solution to a bigger problem. It will likely be rewarded (but remember the S&P 500 gained nearly 5% last week leading up to Saturday’s dinner).
Equities aren’t immediately bouncing to all-time-highs like they have in recent years following sell-offs: For the first time in what seems like many years, the market is not instantaneously rewarding buying the dip. From the FANG stocks to NVDA, many large-cap technology equities lead the October re-pricing. This isn’t to say that certain equities and parts of the sector/overall market aren’t interesting here – there are some very attractive names out there on the long side – it just feels different when a darling like NVDA can lose nearly 50% in a month. That’s significant.
Interest rates and the Fed: There’s clearly a newly and widely held concern about a global growth slowdown at the same time the Fed insists they will continue tightening. The market loved hearing Fed Chair Jerome Powell say that interest rates are “just below neutral,” but we will know more in the next 3 weeks as to whether this statement translates into less action/nearing the ending of rate hikes. It’s important to remember that even if rate hikes slow or stop, the Fed is still early in their balance sheet unwind, which is another form of tightening credit. Additionally, both 3-month LIBOR and the LIBOR-OIS spread are moving higher, not lower.
Other important drivers include lingering geopolitical tensions, the continued strengthening of the U.S. Dollar, market liquidity and technicals.
Wennco Downshift ETF Update:
Since inception (July, 2018), Wennco Downshift ETF is +2.04% (net of Wennco fees) vs. +2.39% for the S&P 500 Total Return (with significantly less volatility). We continue to remain more than 200bps ahead of our hedged equity peers since inception (Ping me anytime for COMPS around these). Our November 2-pgr is attached to this email. And as a reminder, our Downshift ETF strategy is accessible on Schwab’s Marketplace platform for 75bps.
KEY LEVELS IN THE S&P 500
CRUDE OIL HAS TRADED DOWN FROM $76/bl TO $50/bl IN 4 WEEKS
THE OUTPERFORMANCE IN GROWTH EQUITIES VS. VALUE EQUITIES HAS STARTED TO NARROW (I.E. VALUE HAS OUTPERFORMED GROWTH SINCE OCT 1. A BULL MARKET IN VALUE VS. GROWTH MAY WELL BE STARTING)
10-YEAR TREASURY YIELDS ARE BACK @ 3.00% WHICH IS VERY IMPORTANT TECHNICALLY. WHERE WE GO FROM HERE IS KEY
NASDAQ’S KEY UPTREND WAS LOST AND RECLAIMED LAST WEEK; VERY GOOD FOR BULLS
FACEBOOK INSIDER SELLING: OUTLIER OR NOT?
SMALL CAPS VS. THE S&P 500 IS IN THE 6th PERCENTILE SINCE 2010. IS THE SELLING IN SMALL CAPS OVERDONE OR DOES IT MEAN SOMETHING ELSE?
DESPITE TRADING 20% OFF ITS 2018 HIGHS, THE FANG BASKET HAS HAD ANOTHER GOOD YEAR (SO FAR)
SKEW INDEX: ARE WE REALLY OUT OF THE WOODS? THIS INDICATOR, ALONG WITH VVIX (VOL OF VOL) & PUT/CALL RATIO’S ALL POINT TO LITTLE TAIL-RISK HEDGING GOING ON
NASDAQ’S 10-YEAR SEASONALITY CHART: THERE HAVE BEEN SOME HUGE DECEMBER’S FOR THE INDEX (FAR RIGHT COLUMN). WILL WE SEE ANOTHER DECEMBER TO REMEMBER THIS YEAR?
RANDOM CHART OF THE MONTH: TESLA’S 5-YEAR TOTAL DEBT GROWTH
I hope everyone has a great December. Stay nimble out there.
CIO & Head Trader
Wennco Downshift Strategies