Black Swans and Crowded Trades
The primal emotion of fear certainly does not appear on many traders and fund managers radar screens at least for now despite the knee jerk reaction on the last trading day of November.
S&P Breaks 1928 Record – Black Swan?
Equities continue to rally and making new all-time highs almost on a daily basis. If that doesn’t concern you perhaps this will: the S&P 500 just a broke a record last broken in 1928. The S&P managed to close above its five day moving average for 28 consecutive trading sessions which is an all-time record breaker. The last time this happened was in 1928 and that record was for 27 consecutive trading days.
Why is that important you might ask?
Everyone who has been around the markets long enough and has a grasp of market history understands that something is seriously amiss at the moment. Outlier price runs just like the one the S&P has just had are indeed a tail event and possibly the canary in the coal mine. Such runs in combination with volatility expansion usually suggest an overall change in attitude towards the market direction which may not always be felt initially but becomes obvious with hindsight.
With that in mind it’s probably worth mentioning that the only thing history teaches us is that we continuously fail to learn from it and those who ignore it are condemned to repeat it. Even more dangerously those who rely on it religiously, blow up. The recent bull-run has seen many a perma-bear being carried out on a stretcher.
Another indicator that might also be somewhat worrisome for bullish traders might be the fact that approximately 80% of S&P 500 stocks are above their 200 day moving average; a broad measure of whether the specific stock is in a bull or bear market.
Is this a problem? In the grand scheme of things this is not necessarily an issue when an economy is working on all cylinders and close to full capacity and might even be a good thing when accompanied by real economic growth. One may argue that this is not necessarily the case with the US economy. A closer look into the numbers suggests that something unpleasant might be brewing in the background.
The run up from October lows has surely been spectacular but coming into the close of November the continuous piling in of equity bulls, ran out of steam. Small caps and commodity related equities showed particular weakness more specifically in the energy sector where the slide of Crude Oil has particularly put a squeeze on the oil producers, specifically the junk rated ones who have issued debt to the tune of $90bn in the past three years.
The general market appears to be in bullish mode while divergences are increasingly evident in the raw materials, energy sectors and overall small and midcap equities. This type of behaviour is consistent with the behaviour seen at the top of bull runs where the weaker sectors start to turn bearish first.
This increasing selectivity by market participants is one of the warning signs to look for that suggests that the recent mega bull run might be coming to an end. As more investors start to believe that the market has run its course and upside risk/reward starts to tip more onto the risk side of the equation they start to look for defensive stocks that provide protection from any sustained downfall.
With that in mind we have just entered the festive season. Despite volatility increasing December is usually a good month for the equities markets. Crude Oil prices continue to decline, consumers are preparing to increase their spending for a big Christmas as the feel good factor is now stronger and more prevalent and money managers traditionally reposition themselves and close off their books for the year. Overall a mixed bag of potentially good and bad for markets. The main question is whether Santa Claus will deliver a rally into the new year or we are setting up for a rather ominous end to the a gigantic bull market.
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