Investors Floating Up and Down (DJTA, BAC, And More)
Good day, race fans.
We’ve got two themes to discuss today.
One is the overwhelmingly bullish/overbought condition of the current market, and the second is the imminent creep higher we expect to see in interest rates.
We’re going to venture some thoughts today on how to play both of these trends.
We’ll start with the equity markets.
You’re Too Excited – Calm Down
The following chart gives a good indication of where we’re situated in the realm of overall market enthusiasm:
Save last October’s spike above 80%, we have never in the last six years seen so many stocks trading at overbought levels as we do today.
Now, remember – an overbought stock is one trading two standard deviations above its 50 day moving average. It’s not necessarily indicative of a coming crash. Last October, for example, the market pulled back somewhere on the order of 8.5% before resuming its upward trajectory that led to the highs we’re seeing today. All’s not lost, friends. But a drop could be coming.
Look also at a recent Bloomberg poll, that shows investors favoring stocks over other asset classes in 2013 by an overwhelming majority.
Note that while the 53% figure doesn’t seem that high, it’s actually the survey’s highest stock reading at any time since the bull market began in 2009.
Bank of America (BAC) runs a survey of professional money mangers that also shows extreme levels of bullishness. Have a look here:
These are historic low numbers, and they should force us to look hard at whether we’re a) headed for Armageddon, or b) preparing for a wild, liquidity-driven bull market kickoff, as we at Oakshire believe and have been projecting for some time now.
Here’s another one.
It’s from the same Bank of America (BAC) survey, and it shows the outright bullishness of the pro investor class, who are now more prepared to assume equity risk than at any time since January of 2004. This is the second highest reading for this indicator ever.
And here’s one more to chew on.
We’ve noted in this space several times over the course of the last eighteen months just how consistent and large the flow of funds was from U.S. equity mutual funds. The charts had been bleeding red to an extraordinary degree – over $220 billion worth in the last two calendar years, with just a pitiful week or two turning up net positive over the whole period.
Until approximately ten days ago.
Then something switched. All of a sudden – as if on cue from some higher financial power – retail investors decided en masse to buy stock funds!
What in the world!?
Extraordinary. We just witnessed the biggest net inflow into long only mutual funds since the height of the tech bubble in March 2000, and the fourth largest net inflow in history.
DJTA Leading the Pack
Let’s take one more look at a single stock sector – and one that has some predictive ability, to boot – the transports.
It’s generally understood that the transports lead the industrials, with orders to ship product usually being made months in advance of actual production.
We saw the likelihood of a transport breakout before most, but we never imagined what would ensue.
This is the Dow Transports (DJTA) for the last three months. Of especial importance is the +80 reading on the RSI (at bottom, in red), normally indicative of an imminent pullback.
And after a 1000 point, 20% rise in just two months, the old gal deserves a rest, no?
As far as we can see, the trannies are the most stretched of all the market sectors and anyone looking to take advantage of a general market retreat would be wise to look closely at an outright short of this sector, a purchase of PUTS or a short term sale of CALLS. At the very least a bear CALL spread to take in some premium would be advisable.
Interest Rates A’Rising
The prospect of funds flowing out of fixed income securities and into equities over the next eighteen months looks strong. And with rates backing up, how do investors take advantage of such an eventuality?
We think it’s advisable to diversify somewhat. As much as we tout the explosive potential that’s about to manifest in stocks, we also believe there’s room for fixed income product in everyone’s portfolio.
But it has to be the right kind of fixed income product. There’s absolutely no room for vanilla Treasuries at this point, in our opinion. They’re a losing proposition.
What is advisable is floating rate notes and, possibly preferred floaters., instruments that increase their payments and/or increase in value as interest rates rise.
As for the former, ask your broker what he’s got in inventory. Failing that, here are a few suggestions on the ETF front (in no particular order).
- iShares Floating Rate Note Fund (NYSE:FLOT),
- Market Vectors Investment Grade Floating Rate (NYSE:FLTR)
- SPDR Barclays Capital Investment Grade Floating Rate (NYSE:FLRN)
As for floating rate preferreds, here are just a few, offered without comment or recommendation:
- AEGON N.V. 6.2996% Floating Perpetual Capital Securities (NYSE:AEB)
- MetLife Inc. Floating Rate Non-Cum. Pfd. Series A (NYSE:MET-A)
- Morgan Stanley Non-Cumulative Pfd Stock Series A (NYSE:MS-A)
Many happy returns,