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US Portfolio Strategy - Taking a more neutral near-term view

Erica Stephenson - Mar 16, 2016
Canaccord's analyst and U.S. Industry Strategist, Tony Dwyer has recently put out the following industry overview.

Taking a more neutral near-term view


Canaccord's analyst and U.S. Industry Strategist, Tony Dwyer has recently put out the following industry overview.


Given the backdrop of our positive core thesis, when the financial weakness got extreme, the historic oversold readings suggested near-term upside and an intermediate-term bottoming signal. Near the low in January/February, oil was collapsing, corporate credit was a mess, emerging currencies were on the verge of collapse, the majority of stocks were down more than 20%, and many in the US fixated on the increasing likelihood of a recession.


Since the February 11th low, much of the fear in the financial markets has been reversed, but we are left with 4 main themes to review. The reason we remained positive was the extrent of the oversold condition, and now with that no longer the case, we expect a period of near-term consolidation/correction prior to next leg higher. There needs to be a proving ground that recent equity, commodity, fixed income and currency gains are sustainable.


  • Key tactical indicators back to neutral.  Volatility has dropped, the 14-week stochastic indicator is trending toward overbuoght, the percentage of bullish newsletter writers is trending toward neutral (and works with lag), and the percentage of S&P 500 components above their respective 100-day moving average is in extreme overbought territory (Figures 1-4).  The speed of improvement in our key indicators reinforces our intermediate-term positive view, but only after the market takes a breather.


  • Oil off low, but still in a downtrend.  The collapse in the price of oil has been historic and created contagion in other markets.  While the WTI bounce has been dramatic, it has yet to even reach up to the prior 2015 low (Figure 5). Throughout the last two years, significant bounces have been met with periods of consolidation.


  • Credit spreads/CDS improved, but more is needed.  A driver of fear in the equity market has been the selling in corporate bonds and rise in European CDS. It appears after a surge higher toward the levels last seen in 2011, there has been stabalization and a potential inflection lower (Figures 6 & 7). This would go a long way in helping create an improvement in sentiment.


  • Emerging currencies off lows, but remain in downtrend.  Altough the market has had a pretty snappy move off the low, the MSCI Emerging Currency Index remains in a downtrend (Figure 8).


Summary:  For us, a change in trend is not seen when the markets experience their first oversold bounce, but is more identifiable during the consolidation/correction period after the initial ramp off a historic low. In our view, we are entering that period of consolidation before the next leg higher. 


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