The following is the updated version of the commentary portion from this week's Blue Marble Research Advisory newsletter, "The Effective Investor":
"First, there was the early in the new year rush to invest (January effect) followed by the reach for yield as investors came to terms with the fact that their maturing fixed income vehicles were not going to be rolled over at anything that approached what they received when purchased many years ago. Accordingly, they sought (and bought) the advice of their financial advisors and purchased higher quality/lower risk issues, which just happen to pay above average rates of dividend income*. Then came the pressure on hedge funds to do something about the fact that they were (and are) woefully underperforming the market and it’s only a matter of time before the investors in the underperforming hedge funds say, “give me my money”.
What I have just described is a fair interpretation of how (and in large part why) the US equity market has performed thus far this year. And that interpretation can be seen quite clearly by looking at the above chart (click image to enlarge), which illustrates the S&P Low Volatility ETF (SPLV), the S&P High Beta ETF (SPHB), and the S&P 500. The first wave was led by the January effect of new money pouring in (mainly) to higher risk areas of the market. The second wave was the reach for yield phase with higher yielding issues (like SPLV) outperforming significantly. The third wave was the OMG-got-to-keep-my-house-in-Greenwich phase as the hedgies scrambled for catch up.
Of course, there are many traditional rationales and reasons as to why stocks have performed so well thus far this year (at least in the US and, of late, Japan) - much of it centered on central bank activism and the portfolio-balancing effects** (with its knock-on effects to valuation models, among other things). But it does appear quite plausible that the above description is a good interpretation of some key aspects of this year's market behavior. Which brings us to what lies ahead.
The only thing that remains is for those who have thus far resisted the urge to join the party and capitulate. However, such capitulation tends to occur closer to the end of a bull market than its beginning (or middle, for that matter). After all, if everyone is in then who's left to convert? And should that moment of joyfully bullish embrace occur during the historically weak third into early fourth quarter period (when many market tops are formed and completed), then the conditions will be set for the Mega Trend reversal of fortune for everyone.
Investment Strategy Implications
Summer is the time for phrases like "Are we there, yet?" and blockbuster movies such as "Star Trek: Into the Darkness". As for, "Are we there, yet?" (meaning, have we reached or are approaching a market top), the answer has to be no (see previous blog posting and published Blue Marble Research Advisory reports). That said, the market conditions for a major market top (and resulting Mega Trend reversal) are developing but it is most prudent to let it all play out before jumping the gun and anticipate something that may not unfold. Almost there is not actually there.
As for blockbuster movies and metaphors therefrom, as the Borg of Star Trek lore are fond of saying, “Resistance is futile”. Many yield hungry investors and hedgies have found that to be the case and have been assimilated. The question then becomes, will those left join them and go into the darkness?
*SPLV’s current yield is 2.58%. SPHB’s current yield is 0.74%. SPLV’s yield at the start of the year was 3.06%, well above 10 year US Treasury’s rate of 1.76% at the time."
**See last week's Thematic Thursdays post below.
Technical Tuesdays is a product of Blue Marble Research Advisory and illustrates selected elements of market intelligence analysis. Market intelligence analysis - along with fundamental and thematic analyses - form the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.
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