Stocks closed at a fresh cycle high on Friday as the S&P 500 has been enjoying a 7-day win streak, which is the longest in 18 months. Don’t look now fans, but the venerable blue-chip index is now just 38 points or 1.3% away from its all-time high. And unless the upcoming earnings season provides a big downside surprise, it appears that the old high is acting like a magnet.
Yet, at this stage of the game, a lot of folks are concerned that stocks have gone too far, too fast and are now “set up” for a fall. But then again, these same folks have been singing this song for a couple months – and a couple hundred S&P points. And while stocks are clearly overbought and the S&P is either quickly approaching or has already exceeded many Wall Street firm’s year-end targets, some argue there is still room to the upside.
One such upbeat analyst is Marko Kolanovic. Mr. Kolanovic is a Senior Analyst and the Global Head of Macro Quantitative and Derivatives Strategy at JPMorgan. Cutting to the chase, “the man who moves markets” (as dubbed by CNBC’s Fast Money gang), Kolanovic says that new highs are coming soon.
To be clear, I don’t listen to very many interviews on the financial networks. I learned a long time ago that in order to be successful in this business, you have to make your own decisions. And since most folks that show up on TV provide little more than their personal opinions on what is going to happen next (often with very little in the way of facts or research rigor), #OnMute is my modus operandi.
When Marko Kolanovic Talks, I Listen
However, when Marko Kolanovic is interviewed on TV or writes a blog post, I sit up and pay attention. Why? Because his research team covers something that is difficult to come by; namely, what the big boys and girls (i.e. the hedgies and systematic traders – the “quants”) are doing with their portfolios.
I have long believed that in addition to focusing on my market models, the economy, and the primary market trends, it is important to understand what the major players in the game are doing, and why. But first, you have to know who the players are.
In the early 1980’s, the “institutions” such as pension funds, banks, and insurance companies dominated the stock market game. Starting somewhere in the 1990’s, the mutual funds became the big players. And today, it is important to pay attention to what the hedge funds and “systematic traders” (think risk parity strategies and all the variations thereof) are doing, because these are the folks running the algos that tend to move markets.
The Big Players Were Caught Flat-Footed
Marko Kolanovic’s team studies these quant traders. And the bottom line here is that relative to historical averages, these players are currently underinvested – big time.
Kolanovic notes that according to his team’s research, hedge funds’ “beta to equity” – meaning their net exposure to the market after the short positions are factored in – is very low. As in an all-time low.
Yep, that’s right, while stocks have been ramping, the hedgies have been “playing it safe.” And given the shellacking stock market investors received at the end of last year, this makes total sense. Those players who “hedge risks” did their jobs. But apparently, they’ve been slow to pivot.
As for the “systematic traders” – those players utilizing computer-driven allocation and trading strategies – Kolanovic sees a similar situation. The JPM analyst says the stock market exposure of systematic traders is currently only 30%-40% of their historical average.
While it sounds amazing that some of the market’s big, dominant players have been caught flat-footed by the V-Bottom and this year’s relentless rally, the data from Marko’s team appears to confirm this fact. As such, Kolanovic argues there is plenty of fuel to keep the uptrend’s fire burning.
Important Info To Have
To me, this is VERY important information. This helps “esplain” why this rally has refused to yield. Why there have been no pullbacks to speak of. Why the dips – including the intraday dips – have been bought. And why it has been tough to “get in” if you were silly enough to manage the risk of Q4’s market debacle by raising some cash.
So, while the major indices could certainly pull back and perhaps test the breakout above important technical levels such as the S&P’s 200-day moving average, it will be important to watch the action during such a dip. Unless the fundamental backdrop changes (as in economic growth expectations, inflation, or rates), my guess is that the big players will continue to reallocate funds to the stock market.
Well, at least until the “Sell in May” season comes around – LOL!
Thought For The Day:
If it’s fun, it’s not work. And if it’s not fun, it will never work. -Hobie Alter
All the best, David D. Moenning Chief Investment Officer
At the time of publication, Mr. Moenning and/or Redwood Wealth Management, LLC held long positions in the following securities mentioned: None
Note that positions may change at any time.
NOT INVESTMENT ADVICE. The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as investment recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
Mr. Moenning may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.
The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.