August into September 2017

The sleuth grows as the herd shrinks

Markets: Confused & Polarising

The charts above and below epitomise the increasingly difficulties faced by investors. The former shows that bearishness is growing amongst voting members of the American Association of Independent Investors and the S & P 500’s faltering progress in August confirms some institutions think the same. However, the normal script is that retail investors  are the last to capitulate and not in the vanguard. Meanwhile, the intriguing checklist from Citi Research in Figure 6 suggests that the equity markets are currently sending fewer sell signals (one red and three amber) than they did in 2000 and 2007. The checklist is not predictive but it does help to explain why there are still thoughtful bulls amongst investors.

Price movements in August and even on the first trading day of September point to increasing polarisation. Investors who are fearful bought into the traditional havens of gold, the Swiss franc, the yen and (albeit with some discrimination) government bonds of developed economies.  In contrast yield hunters have been pursuing more speculative trades in China, Brazil and other Emerging Markets as well as credit and other derivatives bearing various levels of risk.

From an objective point of view, what is really interesting is the ambivalent position of the dollar and its potentaial replacement by the euro as both a safe haven and  currency of first resort. It has not happened yet but there is no doubt that the buck was not the haven of choice in August. The euro is not yet there as the superior performance of SEK and NOK attest and, in fact, its gains vs. the buck are clearly already putting some investors off European equities.

It is not getting any easier for global investors and an intriguing question was posed by Leo Lewis in Friday’s FT as to why markets appear to be reacting calmly to Mr Kim’s ‘antics’.  Are AI investment strategies and passive funds the explanation?  Mr Lewis concludes: ‘flying missiles, blood-curdling rhetoric children diving for cover do not scream ‘’sell’’ to a program that still looks at the Nikkei and detects rising earnings, rising dividends and low interest rates’ . This is troubling!

Don’t panic….yet? Sell signals checklist

Written by: Alastair Winter