December is indeed a good month to be long the stock market especially in Decembers that follow strong annual returns. We have seen a couple of such analyses in the past few weeks and thought that we would chime in here.
Amid the choppy grind higher in US equities one key aspect for investors to look for is the prospect of the long-run relative bull market in small caps to end. If we look at the straight price ratio between the S&P 500 and the Russell 2000 it is now close to an all-time low (only piped by the trough in 1984).
Most of the talk on US equities is still centered around whether and when the Fed will start scaling back its asset purchases (let alone start raising rates). The point here is of course that if the Fed decides to remove the punchbowl, equities will take a dim view.
One of the points that we have emphasized to clients in our most recent reports has been the risk of a reversal in the USD. Fundamentally, the USD looks better than most, but nothing goes up in a straight line and speculators have been complacently long.
We have been warning clients in the past few months that volatility was set to rise towards the middle of the year. We have been flagging the almost parabolic increase in margin debt as well as our leading indicator for equity volatility.
In the short run, it is difficult to see what can stop equities at this point. Low inflation, central bank support and relatively robust economic data have created a Goldilocks scenario for equities. However, perhaps as a result it is worthwhile looking at what could go wrong. One of the more important intermediate indicators on the equity market is derived from the stock of US margin debt at the NYSE.
Judging by the comments from most analysts and commentators, global equities are the place to be and equity markets are still doing well. This is certainly true if you look at Japan, but in general it is not exactly correct. On a 1 month basis, even the otherwise resilient S&P 500 is now flat and many stock markets are down significantly. Indeed, despite widespread investor optimism we are now seeing broad based weakness on a monthly basis.
Margin debt on the NYSE continues to rise, both when looking at the rate of change as well as the level of negative cash balances (lower chart). Overall margin debt rose strongly going into 2013 and is now sitting only…
Brazil and Spain have both come off their upper trading range bands. Other indices still look overbought