Signals Project (BETA)

An ambitious - and ongoing - project to catalogue and classify major drivers of various global asset classes based on real-world commentary by leading market observers (italicized). The long-term goal is to automate strategic investment bias based on signals derived from these drivers.

[Global Equities] : [Fundamentals] | [Valuations] | [Technicals]

[Global FX] : [Fundamentals] | [Valuations] | [Technicals]

[Global Fixed Income] : [DM Government Bonds] | [EM LCY and HCY Sovereign Bonds] | [Global Credit]



Twitter: [US equity] [EZ equity] [Global equity]


  • Macro outlook

    • Growth/activity outlook​: Positively correlated with equity performance

      • Overall GDP

        • Sample (AQR Capital via Bloomberg DAYB 22 Mar-18): ​Forecasts of real long-term GDP growth come in around 1.5% to 2.5% a year. If the stock market outperforms GDP by 5% per year, total stock market capitalization will double as a fraction of the economy every 14 years. Is that sustainable for any extended period of time? 

          • Only investors who started in the mid-1960s or later — pretty much anyone under retirement age —experienced sustained equity returns significantly more than twice GDP growth. If future real GDP growth is under 2%, as the trend suggests, and equities revert to a normal relation to GDP, long-term real equity returns are under 4% a year.

          • That may be too optimistic. Profits as a percentage of GDP and price/earnings ratios both appear to be near natural limits. Typical profit margins for large businesses are around 5% to 8%. Sure, some industries have higher margins, but those invite competition and demand for increases in wages, taxes and the prices of inputs. So even if all of GDP represented corporate revenue (it doesn't) there isn't a lot of upside for corporate profits to increase their share of GDP from current values.

          • Over the last 35 years estimated corporation capitalization as a multiple of GDP soared from 33% to almost 300%, fueled by stock returns much higher than GDP growth. Let's be generous and assume P/E ratios can get to 35 and stay there for the long run, while corporate profits as a share of GDP climb to 12%. That implies corporate capitalization of 420% of GDP. If stocks give a real return of 6.6% while real GDP growth is 2%, we hit that limit in less than nine years.

      • Business/economic growth cycle and momentum:

        • Example - Defensive vs cyclicals (FT Authers, 8 May-18): With regard to the change in market sentiment around this reflation to inflation dynamic, we think the relative performance of cyclical over defensive equities versus the US 10Y yield is quite telling. Over the last 5 years, the two series have trended together as lower rates reflected fears of  a deflationary environment in which cyclicals do poorly and defensives do well. Conversely, higher rates reflected hope of an exit from such a deflationary trap and better performance of cyclicals versus defensives. The large divergence this year tells us that the forces supporting this relationship are changing as we move from a reflationary environment into a more rapid rise in inflation that could ultimately be a negative for cyclicals and the economic cycle. This aligns with our view from 18 months ago that suggested fiscal support was coming and would lead to a Boom/Bust. With the boom clearly here, we think it is time to start preparing for how the market will think about the potential bust. - MS equity strategy

        • Example - Surprise indices trough (FT, 30 Apr-18): Even if European equities are not compellingly cheap, could this be a good time to buy? Jonathan Stubbs, Citi’s European equity strategist, suggests that his own bank’s surprise index could show a contrarian buying opportunity. When the macro has been very disappointing, stocks tend to be available a little too cheap. A surprise index of -70 or lower (it is now down to -90) is historically followed by good returns for the Stoxx 500. Europe has outperformed the US since March, buoyed by the weak dollar.

        • Example (FT, 30 Apr-18): US companies are reporting their best profit gains in more than seven years and a record number are beating Wall Street forecasts — so why are stocks not responding? It could be that investors are beginning to worry that the turn in the business cycle may be in sight.

        • Example - Brookings-FT Tracking Index for the Global Economic Recovery (Tiger) (FT, 16 Apr-18): Brookings (Apr-18 update)

        • Example (Fidelity via Bloomberg, 6 Feb-18): "Until the economic cycle actually peaks and earnings become negative, I do not see the makings of a decline more than your garden-variety correction”​

        • Example (adage): "Recessions, and not valuations, trigger bear markets and no one is calling for a recession anytime soon"​

      • Growth composition matters for sectoral performance​

    • Central bank policy outlook​

      • Change in policy

        • Example (Bloomberg DAYB, 6 Feb-18): The market plunge is a signal of the trouble Jerome Powell may have in unwinding the Fed's QE program, the WSJ editorial board writes. The correction is taking place even as the real economy looks strong because investors may finally be figuring out that the global QE monetary party is ending. Powell's curse is that he gets to preside over the return of normal growth and volatile markets.

      • Sectoral considerations: Higher rates are generally seen as positive for banks​ as NIMs improve insofar as lending volumes rise

    • Financial conditions

      • Example (WSJ Morning MoneyBeat, 24 Apr-18): The combination of tighter U.S. monetary policy and higher U.S. government bond yields can be negative for stocks even though they often reflect optimism about economic growth. Higher yields on ultra-safe government bonds can sap demand for stocks, while rising rates can also weigh on corporate profitability by increasing borrowing costs.

        • At the same time, a stronger U.S. dollar--which often accompanies rising rates--can weigh on companies by making their products more expensive abroad and by reducing the value of overseas earnings.

      • Example (Bloomberg DAYB, 6 Feb-18): Two-year U.S. yields closed Thursday 90 basis points above their finish on Sept. 8. That speed of tightening hasn't been seen since the first half of 2008. And we all know how that year ended out. There's more from this angle: five-year U.S. yields also tightened by more than 90 basis points over the same period. That has severely diminished the net-present value of expected future cash flows from stocks, effectively making them look more expensive on this basis.

      • Sources: ​

        • Reference: [St Louis Fed:]

        • Bloomberg US Financial Conditions Index (ticker: BFCIUS Index) tracks the overall level of financial stress in the US money, bond​ and equity markets to help assess the availability and cost of credit. A positive value indicates accommodative financial conditions, while a negative value indicates tighter financial conditions relative to pre-crisis norms. Example (Bloomberg, 6 Feb-18): Equities tend to have their worst hair days/weeks following sudden tightening in these conditions.

    • Regulations, in particular de-regulation​

    • Fiscal stimulus, tax policy

      • Tax cuts are positive for highly-taxed companies (or companies with high effective tax rates)​

        • Example (FT, 28 Sep-17): According to Goldman Sachs’ David Kostin every one percentage point fall in the corporate tax rate adds a dollar to expected earnings per share for the S&P 500, which currently stand at about $130 for next year, and have been drawn up on the assumption of no tax cut. That implies that the tax cut, if passed by the end of the year, would drive a one-off increase of about 11.5 per cent in expected earnings for next year. Obviously, that is a big deal.

  • Earnings: 

    • PE and EPS:

      • EPS is the bottom-line measure of a company’s profitability defined as net income divided by number of outstanding shares. Basic EPS has the basic number of shares outstanding in the denominator, while fully diluted EPS (FDEPS) uses the number of fully diluted shares in the denominator.

      • PE: 

        • Trailing P/E: PE ratio based on EPS for the trailing four quarters or 12 months.

        • Forward P/E: PE ratio based on future estimated EPS, such as the current fiscal or calendar year, or the next year.

          • Example - Peak earnings (FT Authers, 8 May-18): ​The better results are, the harder it is to improve on them. So earnings this good naturally point to a peak in the cycle, and a shift towards slowing rather than accelerating growth (if not necessarily to outright declines). High-water mark earnings imply bad things for stock markets, as Charles Schwab's Liz Ann Sonders made clear in her latest note.

            • Not to throw cold water on the story, but there’s a contrarian story to tell when earnings growth joins the > 20% club. In keeping with the “better or worse tends to matter more than good or bad” message I give to investors consistently, the stock market has a keen ability to sniff out inflection points in advance. Yes, 20%-plus earnings growth is good news in an absolute sense, but it also likely represents a rate fairly close to the ultimate peak growth rate — beyond which the growth rate will inevitably slow.

            • Investors should not be extrapolating the boost to earnings from tax (and regulatory) reform too far into the future; while questioning whether the boost is already reflected in stock prices.

            • As you can see in the table below, stocks have actually had fairly weak (albeit positive) returns historically when S&P earnings growth has exceeded 20%. Notice as well that the best zone for earnings growth has actually been when earnings are declining by double-digits (reflecting the market’s tendency to discount what’s going to happen, not just react to what’s already happened).

            • The table to which she refers shows that subsequent annualised stock market gains were only 2.6 per cent after quarters in which earnings growth exceeded 20 per cent; the average gain was 25 per cent following a decline in earnings of between 10 and 25 per cent, ramming home that investors might indeed be quite sensible to ask themselves at this point if the end of the cycle is at hand.

        • Relative PE: 

          • Vs peer group PE: Helps determine whether the stock is trading at a premium or discount valuation in relation to its peers.

          • Vs historical PE: Comparing the stock's P/E with its P/E range over a period of time provides an indication of investor perception. A stock may be trading at a much lower P/E now than it did in the past because investors perceive that its most rapid growth is behind it.

            • Example (WSJ, 12 Apr-18): Even though earnings have been growing briskly in recent quarters, some measures suggest they haven't grown quick enough to make equities look cheap. S&P 500 earnings had grown 9.9% over the last year but would need to rise an additional 28% for the trailing price-to-earnings ratio to be in-line with its 10-year average, according to The Wall Street Journal's Market Data Group.​

          • P/E to Earnings Growth (PEG Ratio): Compares the P/E to future or past earnings growth. A stock with a P/E of 10 and earnings growth of 10% has a PEG ratio of 1, while one with a P/E of 10 and earnings growth of 20% has a PEG ratio of 0.5. Lower PEG suggests undervaluation.

        • Cyclically-Adjusted Price-to-Earnings (CAPE) ratio: Price divided by average earnings over a period of time (e.g. last 6 years) and adjusted for inflation

          • Example (BAML FMS via FT Authers, 14 Mar-18): Global investors' allocation to European equities dropped to net 41% OW from net 45% last month, the lowest since March '17. Meanwhile, UK equities have been underweighted for 47 consecutive months. Intentions to own Europe are waning, but this seems more of a "relative" call. Despite improving confidence in European earnings, the US and EM profit cycles are seen as increasingly favourable compared to the European cycle.​

        • Index PE adjusted for distortions:

          • Excess cash distorts PE upward (McKinsey, Jan-18): Four megacap companies—Amazon, Facebook, Google (Alphabet), and Microsoft—together valued at more than $2 trillion, account for 10 percent of the index and, as a group, trade at a PE ratio of 29. Excess cash among the remainder accounts for another $1.2 trillion. (The S&P 500’s total market capitalization at the time of this writing in December was $23.4 trillion.) Excess cash distorts the index because it generates very little in earnings, leading to an implied high PE multiple. This is the case with the unusually large levels of cash held by a number of companies today. Removing the four companies mentioned above from the calculation and adjusting for the excess cash that companies hold as they await changes to tax laws before repatriating foreign profits reduces the current PE ratio to 16.9. This is much closer to the range typical in “normal” economic times such as the mid-1960s, the late 1980s and early 1990s, and the years 2003 and 2004, when the US economy was growing and inflation was under control.

          • Changing assumptions about future growth and cost of equity (McKinsey, Jan-18): PE ratio is very sensitive to small changes in assumptions

      • Dividends​: Expectations of higher dividend payments due to flexibility from earnings growth​

      • Company guidance

      • Index composition:

        • Example - UK equities outperformance (WSJ, 13 Apr-18): ​John Higgins, chief markets economist at Capital Economics, analyzed the makeup of MSCI’s U.K. and U.S. indexes--which mirror the FTSE and S&P, respectively-- to explain British stocks’ resilience.

          • Mr. Higgins found that the U.K. index is benefiting from high exposure to so-called defensive stocks, which tend to do better in times of market turmoil, and low exposure to the tech sector.

          • Defensive sectors--such as energy and consumer staples--have a 48% weighting in MSCI’s U.K. index, according to Capital Economics, compared to 31% for U.S. stocks. The surge in global oil prices is also aiding the U.K. index, whose third-biggest weighting is the energy sector.

          • Another big factor helping the U.K. index is its limited exposure to technology companies--a less than 0.1% weighting compared to about 25% for the U.S.--which has helped insulate it from the data privacy and regulation fears that have battered the tech sector lately.

    • Analyst forecasts

      • Forecast earnings growth

        • Example (JPM via FT Authers, 12 Apr-18): The Street is expecting strong consensus 2018 EPS growth of ~20% y/y (vs. 12% at start of the year) on higher sales growth of 6.7% (vs. 5.8%) and lower effective tax rate of 22% (vs. 27%). In our view, there is still room for estimates to move higher given second order tax reform benefits are difficult to model (i.e., the impact of dynamic scoring, rising disposable income, lower utility bills, higher business investment, etc) and more likely to be reported than projected in advance by the Street and corporates...

          • This earnings season comes at a time when valuation is below historical median (1yr fwd PE of 16x and 15x net of cash) and corporates are accelerating buyback programs (~$800b) as well as M&A (small cap year-to-date deal activity at a cycle high). No other time in history have companies held so much cash (~$2tr) in a low rate environment.

        • Example (FT Authers, 12 Apr-18): Brokers are braced for a monster quarter, with earnings up more than 20 per cent from the first quarter of last year. This is how Credit Suisse's Jonathan Golub does the mathematics:

          • EPS is likely to finish up 11½% excluding tax benefits. Assuming a typical pace of beats, this should come in closer to an impressive 15½%. 

          • Revisions — While analysts have revised up their estimates for recent tax changes, underlying fundamentals have also improved (see Figures 2-3).  

          • Taxes — Based on 4Q guidance, the S&P 500’s effective tax rate is projected to fall to 22-23% from 27½%. This should add 7% to growth.  

          • Return of Capital — Following several quarters of weak buybacks, companies are forecast to increase repurchases, contributing 2% to EPS.  

          • Beats — Results for early reporters have been very strong. This is consistent with the pattern of beats when the ISM/PMIs are elevated.

        • Example - Expectations can be too high (FT Authers, 12 Apr-18): Quarterly earnings reports offer important and largely truthful snapshots of the health of the corporate sector and of the economy, and more than any other single factor they underpin the value in stocks. So they unquestionably matter.

          • But after many years of covering them, it has hard not to be heartily sick of the expectations game, as companies talk down their prospects as the earnings announcement approaches, only then to spring a "surprise" by beating the lower bar they have set for themselves. That suckers those of us in the press into giving them good coverage, and suckers investors into buying their shares. And as the process is so predictable, we also now have the Lewis Carroll-esque logical impossibility that investors expect to be surprised. Whatever the consensus earnings forecasts for year-on-year growth are, expect to be surprised and add on another three percentage points or so.

        • Example (WSJ, Jan-18): Overall, analysts expect S&P 500 companies to mark their sixth straight quarter of earnings and revenue growth. Profits are expected to jump 11.9% over the final quarter of 2016, while revenues are expected to rise 7%, according to a projection from Thomson Reuters. As of Tuesday afternoon, just 30 index companies had reported their latest results.​​

      • Earnings surprises

        • Example - Thomson Reuters I/B/E/S Surprise Factor (FT Authers, 28 Apr-18): Investors were expecting something good, but this has been far better still — one of the most positively surprising quarters on record

        • Example - StarMine Earnings Surprise Forecast (Thomson Reuters): Looking forward at quarterly performance, we use StarMine’s SmartEstimate® to determine which companies in the S&P 500 are better poised to beat earnings estimates. The SmartEstimate® is a weighted average of analyst estimates, with more weight given to more recent estimates and more accurate analysts. Our studies have shown that when the SmartEstimate® differs significantly from the consensus (IBES Mean), the Predicted Surprise accurately predicts the direction of earnings surprises or further revisions 70% of the time. When significant Predicted Surprise for revenue is also present for the period, the accuracy improves to 78%. ​

      • Revisions: Direction, magnitude and dispersion of analyst revisions​ to forecast earnings/EPS

        • Earnings Revisions Ratio: Total and sectoral breakdown

        • Example - StarMine ARM (Thomson Reuters) is an analyst revisions stock ranking model, designed to predict future changes in analyst
          sentiment. Incorporates more accurate earnings estimates through the SmartEstimate prediction service.

        • Example (FT, 2 Jan-18): SPX earnings revision ratio (proportion of forecasts going up divided by those going down) is as high as it has been since rebound post-GFC - BAML via FT Authers

        • Example (Bloomberg, 10 Jan-18): Citi Global Earnings Revisions Index shows upgrades outnumber downgrades by most ever. 2017 worldwide earnings upgrade cycle first rise in years

      • Sources: Bloomberg, Reuters surveys

    • Currency impact on earnings: Typically there is an inverse correlation between fluctuations in the home currency and stock prices, in particular those that earn revenues abroad. Overseas earnings vary by company, sector and index.

EM - EEM vs GS fin conditions - FT Authers 18-05-09
EM - EEM vs GS fin conditions - FT Authers 18-05-09
US eqty - Avge px reaction to earnin
US eqty - Avge px reaction to earnin
US eqty - Avge intraday move - Bespoke via FT Authers 18-04-28
US eqty - Avge intraday move - Bespoke via FT Authers 18-04-28
US eqty - EPS growth - CS via FT 18-04-28
US eqty - EPS growth - CS via FT 18-04-28
US eqty - Thomson Reuters surprise factor 1Q18 - FT 18-04-28
US eqty - Thomson Reuters surprise factor 1Q18 - FT 18-04-28
US eqty - Goldman Sachs thematic baskets - Bberg 18-04-26
US eqty - Goldman Sachs thematic baskets - Bberg 18-04-26
US eqty - EPS SPS - FT Authers 18-04-12
US eqty - EPS SPS - FT Authers 18-04-12
US eqty - Prospective earnings multiple - FT Authers 18-04-12
US eqty - Prospective earnings multiple - FT Authers 18-04-12
US eqty - Net income margins - FT Authers 18-04-12
US eqty - Net income margins - FT Authers 18-04-12
US eqty - Labor costs - FT Authers 18-04-12
US eqty - Labor costs - FT Authers 18-04-12
US eqty - EPS sector growth dashboard - FT Authers 18-04-12
US eqty - EPS sector growth dashboard - FT Authers 18-04-12
US eqty - Pre-earnings season estimated revisions - FT Authers 18-04-12
US eqty - Pre-earnings season estimated revisions - FT Authers 18-04-12
US eqty - Company guidance - JPM via FT Authers 18-04-12
US eqty - Company guidance - JPM via FT Authers 18-04-12
US eqty - EPS breakdown - CS via FT Authers 18-04-12
US eqty - EPS breakdown - CS via FT Authers 18-04-12
US eqty - Pre-earnings season estimated revisions EPS% - DB via FT Authers 18-04-12
US eqty - Pre-earnings season estimated revisions EPS% - DB via FT Authers 18-04-12


  • Relative to Bonds: Rising bond yields can undercut equities by lifting borrowing costs for companies and making returns from stocks look relatively less attractive.

    • Dividend yield: A financial ratio that indicates how much a company pays out in dividends each year relative to its share price. A high dividend yield could reflect stocks that are undervalued and will provide a higher return. To determine if a dividend yield is high, it is often compared to the market yield. For example, the average dividend yield for the S&P 500 over the the last six decades leading up to 2013 is 3.4%. Using this as a benchmark, any yield above this mark is attractive. Rising dividend yield can be the result of two occurrences: a falling stock price or a rising dividend payout, the latter being preferable. Another use of dividend yield is to compare it to the yield on 10-year treasuries.

      • Example (Bloomberg, 8 Jan-18): Dividend yield on S&P 500 Index has fallen below yield on the two-year UST for the first time since 2008

    • Earnings yield: Earnings yield is the last 12 months of earnings per share divided by the current price per share. The earnings yield measures how much return an investment in a company earned over the past 12 months. Earnings yield is the inverse of the popular price/earnings ratio. Like the dividend yield, the higher the earning yields, the more attractive the investment. If the current 10-year treasury yield is 3.5% and the earnings yield for S&P 500 is 5%, then the stock market is undervalued on an earnings basis compared to the bond market. Company shares trading at an earnings yield greater than 5% will be considered undervalued compared to the market. The criticism of using the earnings yield, like the P/E ratio, is that earnings are easily manipulated. And because of the potential for creative accounting to impact earnings, some investors prefer to use free cash flow yield as a truer measure.

      • Modification: Real earnings yield (nominal earnings yield minus inflation rate)

      • Example (Bloomberg, 24 Apr-18): Since the financial crisis, stocks have paid out more than fixed income, but the premium is waning: The spread between the S&P 500’s earnings yield and that of the 10-year Treasury is hovering near the lowest levels in eight years.

      • Example (Bloomberg, 5 Feb-18): The rally in bond yields may sow more doubt in U.S. equities, according to one measure. The spread between the S&P 500 earnings yield and the 10-year Treasury has narrowed to the smallest in eight years. "At the margin, the buyer, the asset owner, is slightly enticed to put more money into fixed income than into the equity market," according to Wells Fargo.​

    • Free cash flow yield: ​Free Cash Flow (FCF) yield is the annualized FCF per share divided by the current share price. FCF yield is popular with investors who believe the true measure of a company’s operating strength is sought by following the cash. FCF is the cash left over after paying all the operating expenses and capital expenditures, or operating cash flow minus capital expenditures. Determining how much cash a company generated, after paying its operating expenses and other ongoing costs to keep itself operating, and comparing that to the price per share provides the company's true value. The higher the FCF yield, the more attractive the investment. The FCF yield points to the fact that investors would like to pay as little as possible for as much earnings as possible. Similar to earnings yield, the FCF yield can be used to compare companies across the same or different industries.

    • Relative to bond movements: Typically, bonds and stocks move inversely, but this depends on monetary and economic cycle:

      • Stocks interrelated with stocks in different ways at different times: When bond yields rise, they become negatively correlated with equity markets, as they increase interest costs and make rival fixed-income investments more expensive. However, rising yields from a low level tend to indicate increasing confidence in economic growth, and bond yields and share prices can rise together.

      • Example (Bloomberg DAYB, 6 Feb-18): Two-year U.S. yields closed Thursday 90 basis points above their finish on Sept. 8. That speed of tightening hasn't been seen since the first half of 2008. And we all know how that year ended out. There's more from this angle: five-year U.S. yields also tightened by more than 90 basis points over the same period. That has severely diminished the net-present value of expected future cash flows from stocks, effectively making them look more expensive on this basis.

    • Relative to corporate credit bonds: ​Corporate spread widening may be a warning sign for equity markets as they typically coincide with an equity market dip (Bloomberg, 22 Jan-18)

  • Relative to Currency

    • Relative to currency fluctuations

      • Example (Bloomberg DAYB, 26 Apr-18): Chart of the Day: Yields are soaring and the dollar is rising. So what's hurting the market more? Using some Goldman Sachs thematic baskets as a proxy, it looks like the dollar may be a bigger drag. The Bloomberg Dollar Spot Index has jumped 2.2% in five days, its sharpest rally since November 2016. Over the same period, companies with high international sales have done the worst and those with high domestic sales have performed the best.

      • Examples: An equity index may appear cheap versus movements in its base currency. Typically there is a strongly inverse relationship between some stock indices (eg Eurostoxx and Nikkei) and their currencies (EUR and JPY). Correlations may strengthen and weaken over time.

  • Relative to volatility, VIX

    • Rising VIX during a period of calm markets reflects hedging demand and could presage a market correction.

      • Related measures of VIX include open interest (high = lower VIX expected), put/call ratio (low = lower VIX expected)

      • Example (pi Economics via FT Authers, 15 Feb-18): ... in the post-crisis era of the “central bank put”, the Vix becomes “the closest thing there is to the price of money”. Selling volatility uses leverage to provide liquidity to the markets. With an unnaturally low Vix, investors “could insure long equity portfolios very cheaply, meaning they could benefit from equity market appreciation with very limited risk”. It acted like the funding currency in a carry trade. A rise in the Vix becomes an equivalent to a rise in interest rates.

      • Example (Bloomberg DAYB, 6 Feb-18): Now we also have an explosion in volatility and that will have a lasting impact on VAR (value-at-risk) calculations, sustainably reducing potential leverage levels for both banks and hedge funds for the rest of this year. Another severe blow to liquidity.

      • Example (BusinessInsider, 29 Jan-18): Goldman notes that its proprietary GS Risk Appetite indicator is close to its highest ever, which reflects a sharp increase in investor optimism. The firm also points out that the Cboe Volatility Index, or VIX, has been rising alongside the S&P 500, reflecting increased risks, since the two gauges usually trade inversely to each other.

  • Relative to Credit: Credit-spread widening is often seen as a precursor to a stock market sell-off

    • Example (JPM via Bloomberg, 29 Apr-18): The strategists say they’ve been comfortable underweighting credit versus equities pre-emptively in multi-asset portfolios, though they called credit metrics more mixed than deteriorating. They noted that credit spreads tend to bottom out well before equities reach a top.

      • “A peak in equities this soon in the late cycle has no precedent,” the strategists wrote. “Peak margins mean less equity outperformance, not losses.”

      • They added that “2019 could be the true late-cycle year when almost every asset underperforms cash. But that scenario is too medium-term to price in now such that equities never reclaim or surpass their February highs.”

    • Example (Bloomberg, 9 Nov-17): History suggests that role of credit as "canary in coal mine" is leading, not coincident indicator. Over past 2 cycles there was time to get out of risky assets once spreads started to widen. In 2007, US HY spreads bottomed in June, but SPX didn't peak until Oct after Bear Stearns credit funds blew up, European money market debacle, trough-to-peak spread widening of 220 bps. Latest +35bp widening is peanuts.

  • 'Intra-market' valuations

    • Example: China A-shares vs offshore listings

  • Equity bull market life cycle

    • Example (Longview Economics via WSJ, 16 Jan-18): In previous bull markets. On average, roughly 40% of gains accrue in first 12mths and additional 32% during the final 12mths​

  • Perceived over/under-valuation:

    • Technical indicators:

      • Relative Strength Indices​: Indicate overbought/oversold

        • Example (Bloomberg, 9 Jan-18): Based on 14-day RSI, S&P 500 Index, MSCI Asia Pacific, MSCI World, Nikkei 225, MSCI EM are all in overbought territory, while Euro Stoxx 600 Index lingers just shy of it

      • Daily moving averages: 20-, 50-, 100- and 200-dma often signal key support or resistance levels

        • Example (SmartKarma, 5 Feb-18): German stocks last week sold-off at a fast clip in part due to the failure of the DAX index to stay above the 50dma level at 13150 (current 12785 is <40pts away from 200dma), helped by weak earnings reports from Daimler-Benz and Deutsche Bank. Potential US equity dip-buyers appear to be watching whether the following 50dma levels hold in the coming days: 2715 (SPX, -1.7% from Friday close), 25016 (DJIA, -2%), 7068 (Nasdaq, -2.4%).

        • Breadth of market rally: % of stock index constituents above a dma level

      • Fibonacci retracement levels​

        • Example (Bloomberg DAYB, 6 Feb-18): Yesterday's S&P 500 plunge took it within striking distance of the intersection between its 100-day moving average, which provided solid support on the way up, and a key Fibonacci retracement level. If those don't hold, the next support level may lie at the 200-day average, a drop of another 4.4%.

    • Pace of increase or decrease: Strong momentum in either direction - if deemed excessive - may attract contrarian interest 

      • Sharpe ratio: ​

        • Example (FT, 26 Oct-17): SPX Sharpe ratio of 4.5 over the last 12mths = 99.7 %tile since 1900 - INTL FCStone via FT Authers​

    • Persistence of rally: ​

      • Measures: Days since major correction​

    • Breadth of rally: 

      • Example (Bloomberg, 22 Feb-18): Through the last two weeks, the proportion of advancing shares on the New York Stock Exchange has stayed below 90 percent, a threshold sometimes referred to as “breadth thrust” that’s viewed by technical analysts as a sign of sustained advance. The absence leaves the door open for a trip back to the lows, according to Russ Visch, a technical analyst at BMO Nesbitt Burns Inc.

    • Influential alternative indicators:

      • BAML Bull & Bear Indicator​: Composite index of equity fund flows, Earning Revision Ratio (ERR)

        • Example (Business Insider, 2 Feb-18): Now that the Bull & Bear gauge is finally flashing a firm sell signal, the firm says it’s time for US stocks to sell off. The indicator has portended a sell-off on 11 out of 11 occasions since 2002, according to BAML, which forecasts that the S&P 500 will drop to 2,686 by the end of the first quarter. That’s roughly 4% below current levels.

      • Goldman Sachs Bull/Bear Market Risk Indicator - Example ​(BusinessInsider, 29 Jan-18): Composite of ISM, UST yield curve slope, core CPI, unemployment and Shiller P/E

      • UBS valuation model (Business Insider, 10 Nov-17): Equity appreciation has four key components: CPI inflation, income (dividends, buybacks, reinvestment), real equity risk premium, and the real risk-free rate

      • Investor surveys

        • "When do you think equity market will peak?" - BAML FMS​​

US eqty - GS thematic baskets - Bberg 18-04-26
US eqty - GS thematic baskets - Bberg 18-04-26
US eqty - Valuations multiple - FT Authers 18-04-12
US eqty - Valuations multiple - FT Authers 18-04-12
US - SPX breadth thrust - Bberg 18-02-22
US - SPX breadth thrust - Bberg 18-02-22
US - SPX dividend yield vs UST 2 - Bberg 18-01
US - SPX dividend yield vs UST 2 - Bberg 18-01
US - SPX dividend yield vs UST 10 - Bberg 18-02-05
US - SPX dividend yield vs UST 10 - Bberg 18-02-05
US - SPX earnings yield vs UST - Bberg 18-02-05
US - SPX earnings yield vs UST - Bberg 18-02-05
US - Stocks-bond correlation vs UST 10yr level - ING 18-01-31
US - Stocks-bond correlation vs UST 10yr level - ING 18-01-31
Eqty - All global eqty overbought - Bberg 18-01-10
Eqty - All global eqty overbought - Bberg 18-01-10
US - SPX Fibonacci - Bberg 18-02-06
US - SPX Fibonacci - Bberg 18-02-06
US - SPX days since 5% fall - GS 18-01
US - SPX days since 5% fall - GS 18-01
US eqty - SPX streak 0.60% - Bespoke Investment 18-01-25
US eqty - SPX streak 0.60% - Bespoke Investment 18-01-25
US - SPX RSI - Bberg 18-01
US - SPX RSI - Bberg 18-01
US - SPX breadth - Bberg 18-01
US - SPX breadth - Bberg 18-01
US - SPX sharpe ratio - FT 17-11
US - SPX sharpe ratio - FT 17-11
US - BAML Bull and Bear indicator - BusinessInsider 18-02
US - BAML Bull and Bear indicator - BusinessInsider 18-02


  • Positioning:

    • Level (vs history and benchmark)

    • Delta (change and trend)

    • By investor type: RM, HF, retail

    • Short interest: 

    • Cash balances: Considered a contrarian indicator, where a high/low cash balance - relative to recent history - suggests room to add/sell, respectively, equity or other risk positions.

    • Sources: Bloomberg country-level flows (WFII), State Street flows, BAML Fund Manager Survey

  • Supply

    • IPOs​: Typically reflects favourable sentiment and market conditions rather than seen as harbinger for down-market. However, often IPOs are brought forward to present an opportunity for stakeholders to exit in more favourable terms.

      • Example - Tech IPOs (WSJ, 12 Apr-18): Some bankers and lawyers say recent stock-market volatility and a selloff in technology stocks has induced companies and their boards to consider moving more quickly to the public markets, fearful of a broader selloff that could make it more difficult to get out next year.

    • Net sales by investors - both traditional and non-traditional investors (eg central banks)

  • Demand

    • Corporate demand: Markets often glean signals from the behavior of corporates and their employees

      • Share buybacks

        • Example (FT, 16 Apr-18): US companies are expected to shower investors with a record amount of share buybacks in the current earnings season, as corporate executives take advantage of major tax cuts and a faltering stock market to increase their repurchase programmes. S&P 500 companies have already announced about $167bn of new buyback authorisations this year, and analysts at JPMorgan predict that trend will accelerate this quarter as boardrooms digest the full scale of the tax cuts passed in December, which Republicans have touted as aimed at individual taxpayer relief.​

      • M&A

        • Example (WSJ, 8 Jan-18): “This is a major wild card for tech names over the next 6 to 12 months, especially on the large cap front, around how this cash is deployed between buybacks, dividends, M&A, as well as towards significant R&D initiatives and cap ex projects that now could possibly get the green light for 2018 in our opinion,” said Daniel Ives, head of technology research at GBH Insights, in a note to clients last week. He wrote that he believes Apple will distribute its cash between more buybacks, a dividend hike and possibly some larger deals.

      • Corporate insiders​

        • Example (WSJ Moneybeat, 5 Feb-18): One group of investors that hasn't been buying: employees and directors who must report their purchases of stock in the companies they work for. The ratio of these so-called insider buyers to insider sellers in January was the lowest of any month in records going back nearly three decades, according to market-wide data from the Washington Service, a provider of insider-trading data and analytics.​ Some see that as another contrarian indicator, though it comes with caveats. Insiders tend to sell for any number of reasons, including automatic selling programs, the exercising of options, or even just to make a big purchase. On the other hand, they tend to buy largely because they think their stock is undervalued. Still, the count of buyers has been unusually low while the count of sellers has been high, suggesting some smart money isn't biting as stocks remain near record levels.

    • Retail investor demand: Most market obrservers tend to view this as a contrarian indicator and/or a sign that the market is nearing a peak.

      • Retail fund inflows

        • Brokerage inflows

          • Example (Bloomberg, 9 Jan-18): Retail clients at brokerage TD Ameritrade are among those shrugging off valuation concerns and loading up on shares. They boosted equity allocations in December for an 11th straight month, one of the longest buying streaks for retail investors the firm has ever recorded. That helped push TD Ameritrade’s Investor Movement Index, a measure that has tracked client positioning in the market since 2010, to a record for the second month in a row.

        • ETF inflows​

          • Flows into main ETFs are indicative of retail demand (e.g. EEM for EM equities)​

            • Example (Bloomberg, 20 Jun-18): Investors are deserting the second-largest exchange-traded fund tracking emerging-market equities amid a currency rout for the developing nations and higher U.S. interest rates. The iShares MSCI Emerging Markets ETF, or EEM, saw over $1.4 billion worth of outflows on Monday, the most since two days after President Donald Trump’s election in November 2016. This exodus has continued from last week, when investors yanked $2.2 billion from the fund, the most for any week since January 2014

      • Retail investor trading activity

        • Example (Bloomberg, 31 Jan-18): Client activity at TD Ameritrade Holding Corp. hit a record as the number of daily trades surged almost 50 percent in the past year. At E*Trade Financial Corp., the number of trades from which a broker can generate revenue is the highest ever.

        • Example (Bloomberg, 8 Jan-18): Clients at TD Ameritrade added to stock holdings for 11th straight month in Dec, one of the longest buying streaks for retail investors ever recorded

        • Margin debt load: Investors had $559.6bn worth of margin debt in Sep - NYSE. That's the 7th monthly record high this year, and up 14% from Dec-16 (NYSE, 8 Nov-17)

      • Retail investor sentiment

        • Example (Bloomberg, 31 Jan-18): Google Trends search for “S&P 500 Index” shows that people are Googling the phrase the second most since the 2008 crisis. On a scale from 1 to 100, with a value of 100 meaning peak popularity for the search, the trend gauge now sits at 86.

        • Example (Bloomberg, 31 Jan-18): Consumer confidence expectations for higher stock prices is at all-time record - Conference Board consumer confidence/expectations for stock prices (Bloomberg: CONCSTKI Index)​

    • Institutional investor demand

      • Current allocation and prospective changes

        • Example (BAML FMS, Jan-18): Equity allocation is at 2yr-high of net 55% overweight, while to bonds at 4yr-low of net 67% underweight. Investors are overweight equities vs govt bonds by most since Aug-2014

      • Profit-taking: Common for towards year-end by market-performing funds (Business Insider, 4 Jan-18)

      • Benchmark index-related:

        • Benchmark index-rebalancing: Typically month-end

        • Inclusion or exclusion from benchmark

          • Example (14 Jan-18): Saudi shares rallied on expectations country was closer to being classified as an emerging market by major equity index providers​

      • Economic newsletter writers​: 

        • Example (Investors Intelligence survey, 8 Nov-17): Among newsletter writers, 64% bullish vs 14% bearish. 40pt-spread for 6 consecutive weeks

    • Systematic or algorithmic investors: Typically amplify sell-offs movement if/as historical cross-asset relationships breakdown

      • Example (FT, 6 Feb-18): Analysts say the biggest US equity reversal since 2011 was deepened by a bevy of exchange-traded products that allowed investors to wager on the Vix index, a measure of stock market volatility sometimes dubbed Wall Street’s “Fear Index”. ... Investors often also use volatility as a proxy for risk, embedding it into many algorithmic trading strategies. For example, if a fund has a volatility target of 10 per cent and the stock market is twice as turbulent then they automatically hold more cash to hit their target. If markets are tranquil, they use leverage to increase their exposure. In practice, they are short volatility. This approach is based on evidence that targeting volatility is a good risk management tool. But some worry that when turmoil erupts — as it did in dramatic fashion late on Monday — then volatility can beget more volatility, triggering a lethal feedback loop of selling.

      • Example (FT, 6 Feb-18): The pace of the afternoon equity sell-off in New York raised suspicions that investors had been forced to unwind positions in haste. At one point, the Dow Jones Industrial Average shed more than 800 points in 10 minutes, taking the measure down as much as 1,600 points. Trading volume was the second highest this decade. “The speed of this is like a flash crash at the end of the trading day,” said Jim Paulsen, strategist at Leuthold Investment Management. “Either there are quantitative trades that are automatic or someone got caught awfully wrong.”

      • Example (Marko Kolanovic via FT Authers, 6 Feb-18): On Friday [2 Feb-18], the market dropped ~2% on a day when bonds were down ~40bps. The move on Friday was helped by market makers’ hedging of option positions (as gamma positions turned from long to short midday). Friday’s move, on its own, was significant as it pushed realized volatility higher, which is a signal for many volatility targeting strategies to de-risk. Anecdotally, broad knowledge about the risk of systematic selling kept many investors fearful and waiting on the sidelines (both in equity and volatility markets). Midday today [5 Feb-18], short-term momentum turned negative (1M S&P 500 price return), resulting in selling from trend-following strategies. Further outflows resulted from index option gamma hedging, covering of short volatility trades, and volatility targeting strategies. These technical flows, in the absence of fundamental buyers, resulted in a flash crash at ~3:10pm today. At one point, the Dow was down more than 6%, and later partially recovered. After-hours, the VIX reached 38 and futures more than doubled — it is not clear at this point how this will reflect on various short volatility products (e.g., some volatility ETPs traded down over 50% after hours).

    • Volatility: Declining volatility of the underlying asset may attract demand

    • Seasonal demand

      • Dividend reinvestment: Company dividend payouts may lead to reinvestment flows into the underlying shares.

      • Seasonal flows

    • 'Intra-market' flows

      • Example: Hong Kong-Shanghai Stock Connect North/Southbound flows​

  • Government rules and regulations that affect buying/selling behavior

    • Circuit-breaker levels limit daily volatility, typically on the downside​

    • Moral suasion:

      • Example (Bloomberg, 5 Feb-18): CSRC is urging brokerages to ask investors with stock pledges to add to collateral instead of closing out positions - people familiar​

  • Company or ticker name

    • Example (PNAS, Jun-06): Investors may be overly attracted to companies with familiar-sounding names or tickers

    • Example: Long Island​ Iced Tea Corp renaming to Long Blockchain (Wiki)

EM - EEM outflows - Bberg 18-06-20
EM - EEM outflows - Bberg 18-06-20
EM - ETF eqty outflows - JPM via FT Authers 18-05-05
EM - ETF eqty outflows - JPM via FT Authers 18-05-05
US eqty - Tech IPOs $ - WSJ 18-04-12
US eqty - Tech IPOs $ - WSJ 18-04-12
US eqty - Tech IPOs numbers - WSJ 18-04-12
US eqty - Tech IPOs numbers - WSJ 18-04-12
US eqty - Use of cash - JPM via FT 18-04-16
US eqty - Use of cash - JPM via FT 18-04-16
US eqty - Estimated buybacks - JPM via FT 18-04-16
US eqty - Estimated buybacks - JPM via FT 18-04-16
US eqty - Short interest - S3 Analytics via FT Authers 18-03-20
US eqty - Short interest - S3 Analytics via FT Authers 18-03-20
US - SPX sector correlation - Bberg 18-02-27
US - SPX sector correlation - Bberg 18-02-27
US - Corp insider buying and selling - Washington Svce via WSJ 18-02-05
US - Corp insider buying and selling - Washington Svce via WSJ 18-02-05
US eqty - CB consumer exp stock px - Bberg 18-02-01
US eqty - CB consumer exp stock px - Bberg 18-02-01
US eqty - Retail Google search - Bberg 18-01-31
US eqty - Retail Google search - Bberg 18-01-31
US eqty - Retail inflows - Bberg 18-01-31
US eqty - Retail inflows - Bberg 18-01-31