B.I.G. Tips – Everything’s Overbought…Except For Utilities and Real Estate
The chart below comes from the second page of our Morning Lineup report, and it shows the percentage of S&P 500 stocks that are trading at overbought (red line) and oversold (green line) levels. For the purposes of this chart, overbought (oversold) is defined as a stock trading more than one standard deviation above (below) its 50-day moving average (DMA). Since the start of the year, the number of overbought stocks has surged from a reading below 50% at the end of 2017 to above 70% yesterday (the highest percentage since March 2016).
What’s really interesting about the current set-up is that even though more than 70% of stocks in the S&P 500 are overbought, 11% are trading at oversold levels. Going back to 1990, there has never been a time where the percentage of overbought stocks exceeded 70% and the percentage of oversold stocks was above 10% simultaneously! The major culprits behind the high percentage of oversold stocks have been the Real Estate and Utilities sectors. As shown in the screenshots below from our Trend Analyzer tool, these two sectors account for 46 of the 56 stocks in the S&P 500 that are oversold. The disparity between these two sectors and everything else is extreme, to say the least.
So what can we expect from the market following extreme readings in the percentage of stocks that are overbought? Our just published B.I.G. Tips report looks at prior periods where this reading reached extreme levels and shows how equities performed going forward. Get your hands on it now with a two-week free trial to Bespoke Premium!
For anyone interested in this report, check it out by signing up for a Bespoke Premium membership now!
B.I.G. Tips – When Are High Yields a Problem?
For anyone who was concerned about the flattening of the yield curve in recent months, you can breathe a little easier now that long-term Treasury yields are moving steadily higher. As of Thursday afternoon, the yield on the 10-year US treasury ‘spiked’ to 2.62%, putting it right near its 52-week high of 2.63% from last March. If that level is taken out in the next few days, that would take the yield to the highest levels since 2014.
When looking at the current levels of longer-term Treasury yields, a bit of perspective is in order. The chart below shows the change in the yield on the 10-year US Treasury since the start of the bull market in March 2009. During this span, the 10-year has traded in a range from 1.36% on the downside to 3.99% to the upside. Taking the mid-point of those two extremes gives us a mid-point of 2.68%. With the yield on the 10-year currently right at 2.62%, yields are still in the lower half of their bull market range!
So what can we expect from the market with longer-term Treasury yields on the move higher? To answer this question, we just published a B.I.G. Tips report which looks at how equities have reacted to prior increases in rates throughout the current bull market. Included in this report is an analysis of which sectors have typically reacted the best and worst to moves in yield.
For anyone interested in the trends we uncovered, check out the report by signing up for a Bespoke Premium membership now!
B.I.G. Tips – One Way Markets
Looking back on the last six months of the S&P 500’s performance, it’s hard to overstate just how remarkable of a run it has been. There have definitely been periods where the S&P 500 rallied more (and many cases a lot more), but the nearly complete lack of downside pressure has been extraordinary. Just look at the chart below. There have only been two periods where the S&P 500 saw more than a 1% drawdown on a closing basis from a closing high, and the largest drawdown was just 2.2%!
There’s hardly been any downside pressure at all. In the chart below we calculated the cumulative amount of downside pressure in the S&P 500 on a rolling six-month basis going back to 1928. To do this, we simply added up the magnitude of the daily declines (measured in basis points where every 100 bps equals 1 percentage point) in the S&P 500 over a six-month rolling window. Heading into today, the cumulative impact of all the S&P 500’s down days over the last six months was a total of 1,230 bps.
How does that stack up relative to other periods? Let’s put it this way; since 1928, there have only been three other periods, which all spanned from 1964 through 1966, where the cumulative impact of down days over a six month period was less than the last six months. The most extreme of these periods was in May 1964, when the cumulative six-month downside impact was less than 1,000 bps. We often hear from people who are amazed at how sanguine the market can be in the midst of all the headlines surrounding Washington and the state of geopolitical affairs, but in the 1960s, the US saw more than a little bit of geopolitical and political turmoil as well! And just like today, in the 60s we saw long periods where the market did nothing but go up. This is a reason we always note that politics and investing don’t mix!
So what can we expect from the market after such an extended rally without much in the way of pullbacks? To help answer this question, we just published a report looking at 18 prior periods where the S&P 500 was closely correlated to the current period and analyzed the returns going forward.
For anyone interested in the trends we uncovered, this report is a must-read. To see it, sign up for a Bespoke Premium membership now!