Month: October 2018

Authored by Tsvetana Paraskova via Oilprice.com,

Venezuela has officially launched what its President Nicolas Maduro claims is a first state-backed oil-backed cryptocurrency, El Petro, which analysts and experts see as nothing but a scam and another effort to skirt sanctions and mask the inability to overhaul the ailing domestic economy.

Over the past months, Maduro has been touting a new plan for economic recovery, which includes a new policy on gasoline pricing that would raise Venezuela’s ultra-cheap gas pricesfor the first time in two decades. The plan to ease the severe economic crisis also featured a devaluation of the currency and pegging the new bolivars to the Petro.

Maduro claims that the Petro is strengthening his recently announced economic overhaul plan and will “revolutionize” the global crypto economy with a new form of trade, finance, and monetary exchange.

The official public sale of the Petro – which Venezuela say is backed by oil, natural gas, diamonds, and gold—will begin on November 5, Maduro has said.

According to authorities in Venezuela, the “Petro is an instrument to consolidate Venezuela’s economic stability and financial independence, coupled with an ambitious and global vision for the creation of a freer, more balanced and fairer international financial system.”

Just a few months after Maduro first announced the idea of the oil-backed Petro, the U.S. prohibited in March U.S. dealings with any digital currency, coin, or token issued by Venezuela.

Experts and analysts are skeptical that the Venezuelan cryptocurrency is really backed by oil assets and minerals.

“Reaction from the cryptocurrency community has been a mixture of dumbfoundedness and anger,” Alex Tapscott from the Blockchain Research Institute told the BBC.

According to Tapscott, there isn’t any proof at all to back up Venezuela’s claim that each unit of the Petro is backed by oil.

“There is very little technical information about it,” he told the BBC, adding that the launch of the Petro is eclipsing a more significant development in Venezuelan economy – the trade of Bitcoins in bolivars has soared since the start of the year as people are trying to keep the value of their money amid inflation currently running at 13,860 percent, as per IMF estimates.

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As the US Senate prepares for an initial Friday cloture vote and subsequent confirmation vote on Supreme Court nominee Brett Kavanaugh as early as Saturday, many view the outcome as a “make or break” moment in President Trump’s legacy. 

If confirmed, Kavanaugh will shape US law for decades to come. As The Telegraph‘s Rozina Sabur notes, “The nine-member US Supreme Court will likely preside over cases that touch on issues ranging from abortion, gun rights, immigration, labour rights to campaign financing – and Mr Kavanaugh may be a key swing vote.” 

Kavanaugh’s ascension would likely give the US Supreme Court its most conservative bench in several decades – although as Sabur points out, his characterization of Democrats as organizing an “orchestrated political hit” may raise questions over whether he might have to recuse himself from a vast number of cases which might appear before the court. Rozina also suggests that a Kavanaugh confirmation could spark backlash among female voters, “who may punish Republican candidates standing in November’s midterm elections.” 

Ongoing investigations?

The Telegraph notes that if Democrats take control of the House of Representatives in the midterm elections, which pollsters deem likely, they might demand further investigations into Kavanaugh’s past conduct – and may even float the notion of impeaching him if he is confirmed. 

Impeaching a judge follows the same process as impeaching a president, requiring the House of Representative to vote on the motion then move to the Senate for a trial.

However two-thirds of the Senate must vote in favour of removing an official from office. –The Telegraph

What happens if they vote no? 

If the Senate fails to confirm Kavanaugh, “the first question for Mr Trump is whether to pick another nominee or give Mr Kavanaugh a second shot,” writes The Telegraph. This suggestion was supported by Senator Lindsey Graham – a former “Never Trump” Republican who, at least in this case, is a Trump ally. Graham argues that it would make the Supreme Court nomination a key ballot issue in November, and might create a surge of conservative voters heading to the polls, out of concern over Democrats wrestling power back. 

…the political makeup of the next Congress will have a huge impact on who Mr Trump puts forward for America’s highest court.

The president will have to pick another nominee which has the support of his base but one that can get the bipartisan support needed to be confirmed by the Senate.

Republicans have been determined to rush through Mr Kavanaugh’s nomination before the November elections because passing their preferred candidate will be a far greater task if they lose their majority. –The Telegraph

A “no” vote will also have great implications for the Supreme Court, which has been sitting with just eight judges since October 1; four Democrats and for Republicans. 

Referendum on Trump

As The Telegraph also points out, the biggest fallout from a failure to confirm Kavanaugh will be political – and a “massive failure for the president” to be unable to secure a conservative USSC nominee while enjoying a Republican-controlled Congress. “Who would be held responsible for the blunder?” Sabur asks. 

“whether Mr Trump’s supporters will blame the president’s party or the Democrats remains to be seen – either way it will add pressure on him to produce results ahead of his re-election battle in 2020” –The Telegraph

Meanwhile, liberal USSC Justice Ruth Bader Ginsburg is 85-years-old and takes frequent naps.

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Do you feel like the rabbit today?

 

China remains closed for Golden Week, but Offshore Yuan broke significant support and is pushing back down to its cycle lows…

 

And Gold in Yuan bounced back to its relatively stable levels…

 

We warned yesterday (courtesy of Bloomberg’s Cameron Crise) that the velocity of the bond yield spike was not the friend of stocks… this yield move is entering the “danger zone” for stocks. The 30bps spike in the last 5 weeks falls into the cohort where average and median equity performance has been negative over the following five weeks. Do with that information what you will, but realize that with this kind of price action the bond market is not the equity market’s friend.

 

 

And sure enough – it wasn’t…Nasdaq was the day’s worst performer…Selling really escalated when Europe closed…

 

But Small Caps remain worst on the week…

 

Nasdaq broke down below its 50DMA…

 

VIX broke above 15.50 intraday…

 

FANGs were proper f**ked…

 

All the FANGs are down hard this week…

 

TSLA Tumbled too…

 

Semis were slammed on the China spying allegations…

 

Financials started the day off well but rapidly gave it all back before a late bounce…

 

But financials erased all of Tech’s relative outperformance from September…

 

Homebuilder stocks are down 12 days in a row…

 

Hedge funds are back to their weakest level in 10 months…

 

High yield bond ETF prices plunged…

 

After yesterday’s ugliness in the bond market, today was sideways trading (higher in yield) as the pain was transmitted to stocks via RP strategies…

10Y ended the day higher in yield but well off the highs…

 

The Dollar rallied after the close last night on hawkish Powell headlines then dumped back into the red during the European day… rallying back into the green once Europe closed…

 

Cryptos bounced today with Ripple and Ether just in the green for the week…

 

Dollar’s rebound stalled commodities and WTI finally sold off…

 

Gold held above $1200 and Silver failed to hold above its 50DMA again…

 

In dollar terms, the past six months have seen the largest ever reduction in the combined balance sheets of the ECB, PBOC, BOJ and the Fed

Finally we note that the divergence between the US and the rest of the world is now at a 30 year high…

As Bloomberg notes, the MSCI U.S.A. Index is up about 10 percent in 2018 through Wednesday, compared with a drop of 6 percent for the MSCI AC World ex-U.S. gauge, as investors flock to American equities amid rising profits fueled by the U.S. tax-code overhaul. Credit Suisse Group AG analysts see the “extreme” performance gap as a sign of stretched valuations and expect the U.S. dominance to end soon.

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Elaina Plott of The Atlantic reports that GOP Senator Jeff Flake (AZ) – the key holdout in the Kavanaugh confirmation, and retiring lame duck – is “still having issues” despite calling the FBI report that he insisted upon “thorough” and agreeing that it did not corroborate claims made by Kavanaugh accuser, Christine Blasey Ford. 

I’m told by source with direct knowledge that Flake is “still having issues” and that some colleagues are trying to “walk him through them.” Sen Coons tells me just now that Flake reached out to him and asked if they could speak at length later.

— Elaina Plott (@elainaplott) October 4, 2018

How has Flake flip-flopped throughout the Kavanaugh confirmation process? Plott counts the ways…

Thread. Over the course of several days, these are the public-facing ways in which Jeff Flake has wavered on his decision to confirm Kavanaugh:

— Elaina Plott (@elainaplott) October 4, 2018

—Friday: Puts out statement saying he will vote to confirm Kavanaugh.
—Also Friday: Says he will not vote to confirm Kavanaugh unless there is a week-long FBI investigation.

— Elaina Plott (@elainaplott) October 4, 2018

—Tuesday: Criticizes Kavanaugh’s temperament at The Atlantic Festival, saying “We can’t have that on the court.”

— Elaina Plott (@elainaplott) October 4, 2018

—Also Tuesday: As his handlers shove him into the stairwell, and I ask if this means he won’t vote to confirm even after clean FBI investigation, he stammers: “I didn’t say that…I wasn’t talking about him.”

— Elaina Plott (@elainaplott) October 4, 2018

—Thursday: Senators read FBI report. My source tells me Flake is “still having issues.” What issues? I ask. “I honestly don’t know anymore. Have you ever seen Hamlet?”

— Elaina Plott (@elainaplott) October 4, 2018

Flake’s waffling is undoubtedly troublesome for Republicans, however if GOP Senator Susan Collins of Maine still votes “yes” as was implied by comments she made earlier Thursday, and/or the vote is otherwise tied, Kavanaugh could still be confirmed by Vice President Mike Pence. 

Meanwhile, Flake’s – after a 15-year career on Congress – will be remembered as a Democratic shill. 

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Back in late 2014, when oil prices tumbled after the OPEC “thanksgiving massacre“, the conventional narrative was that dropping oil prices were a boon for the economy as they resulted in lower gas prices and thus greater discretionary income. The stark reality emerged quickly, however, once US corporations halted capex spending, resulting in a mini-recession for business investment coupled with dozens of shale bankruptcies.

Fast forward 4 years when Brent oil prices are trading back near $85/barrel, their highest level since October 2014, right before they tumbled. And with the “lower oil is beneficial for GDP” narrative discredited, following the recent rally, questions about the economic impact of oil prices have resurfaced, among them: have higher oil prices contributed to the upside surprises to 2018 growth via higher energy capex, as Chairman Powell suggested last week? Can US shale further ramp up production when capacity constraints are looming? Do higher energy prices still exert a meaningful drag on consumer spending and boost core inflation in an era of increased energy efficiency?

This is an analysis that Goldman conducted this week, and found that higher oil prices have had a neutral impact on GDP growth so far this year with a -0.25pp contribution from lower real consumption roughly offset by a +0.25pp contribution from higher energy capital spending. However, if oil prices remain at their current level the net growth contribution will decline to -0.1pp to -0.2pp in 2018Q4 and 2019H1.

The key reason is that while higher oil prices will remain a steady drag on consumption growth, the boost to energy capex is likely to shrink as the shale industry runs into transportation capacity constraints. It is only in 2019 H2 that the eventual arrival of new pipelines will likely trigger a re-acceleration of energy capital spending.

Stepping back for a look at the big picture, Goldman adds up the consumer spending and energy capex channels, with the estimated net effects of energy price moves on GDP growth shown in the chart below.

Overall, Goldman expects that oil prices will turn from a roughly neutral factor for GDP growth year-to-date into a 0.1-0.2pp headwind in Q4 and 2019H2, as the 0.25pp drag from lower consumer spending will soon outweigh a shrinking 0.1pp contribution from energy capex.

And, as noted above, it is only in 2019H2 that oil is likely to turn roughly neutral as capacity constraints ease and the drag on consumer spending dwindles. Importantly, the binding constraint of a lack of transportation solutions leaves the risks to this growth impulse as skewed to the downside if prices rally further, given the lopsided negative impact on consumption in coming quarters.

What about the impact of oil prices on US inflation?

Goldman finds that in addition to substantially lifting headline inflation, the recent rise is likely also contributing to the rise in core inflation. It then estimates the energy contribution to year-over-year core PCE inflation will peak at 0.15% around the turn of the year before edging lower to 0.1pp by end-2019. The peak core inflation boost from energy prices is therefore likely to occur around the time Goldman expects to see a meaningful boost from additional tariffs on imports from China.

In summary, Goldman expects higher oil prices to contribute to its forecasts of moderating GDP growth and gradually rising core inflation over the next several quarters.

The negative growth effects and positive inflation effects from higher oil prices bring us back, at least directionally, to the pre-shale era where oil shocks were often followed by sharp growth slowdowns or even recessions.

However, the bank does not see the recent rally as a major threat to its outlook for still “solid growth” in 2019 because consumers are now less vulnerable to rising energy bills than in prior cycles (the energy share in personal consumption has fallen from 10% in the early 80s to 4% today) and because the lifting of capacity constraints should bring the capex boost from shale back to life in H2.

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With a record pile up of shorts stalking the benchmark 10Y US Treasury…

… institutional funds who have been patiently betting against low yields in the United States and Europe are about to enjoy a big payday, as rates continue to rise across the globe and inflation finally picks up as the Phillips curve stirs from its decade-long coma.

Money managers like Goldman Sachs, Franklin Templeton and Aviva Investors are all part of a group of brand name investors who recently doubled down on short positions on long dated government debt. According to JPMorgan data , the largest 20 Euro mutual funds will also profit from the move as most of them shifted aggressively to short duration stances last month, suggesting they are in a good position for the “perfect storm” that has hit rates markets in recent days. 

Bonds are falling as a result of “strong” macroeconomic data in the US, continued “hawkish” sentiment from the Federal Reserve and strong commodity prices. At the same time German bund prices have dropped precipitously in sympathy, and also as a result of receding fears over Italy’s fiscal policy and the country’s corresponding economic trajectory (at least for now, that is as the Italian turmoil is far from over).

As such, all those who have been betting for some type of “normalization” in the bond market may receive their validation soon. James McAlevey, portfolio manager of the Aviva Investors Multi-Strategy Fixed Income Fund, told Bloomberg:

“We have a structural short duration position in the U.S. because we expect the Federal Reserve will continue normalizing policy and that inflation will increase as jobs growth and wage pressure builds. Market participants are at a point where they can start to have a conversation about shorting the European bond market.”

In anticipation of the move, Goldman went underweight European rates in its $3.4 billion strategic income fund over the summer. That added to the fund’s already negative duration stance and was catalyzed by the expectation that the ECB would start rising interest rates, following in the footsteps of the United States.

Franklin Templeton similarly reduced duration in its flagship global bond fund to minus 1.14 years at the end of the second-quarter. The manager of that fund stated on Bloomberg that he believed treasury yields could rise as high as 4%. Both of these funds have outperformed most of their peers over the last month.

And while the strong, if not overheating, US economy is the primary catalyst for the selloff, the double whammy has been the absence of new buyers. Yesterday, we highlighted Bill Gross’ thoughts on why foreign buyers – traditionally among the most passionate purchasers of US duration – have been absent. As Gross explained, the reason is the same as what we had noted in previous reports: a jump in hedging (or funding) costs.

“Euroland, Japanese previous buyers of 10yr Treasuries have been priced out of market due to changes in hedge costs,” Bill Gross tweeted Wednesday. “For insurance companies in Germany/Japan for instance, U.S. Treasuries yield only -.10%/-.01%.”

Gross was referring to the falling cross-currency basis, which has driven U.S. 10-year equivalent, or hedged yields to -0.06% for European investors and 0.09% for Japanese buyers who hedge against currency fluctuations through swaps, as the following Bloomberg chart shows:

Whatever the reason behind the sharp drop in US paper, others have been focused on Europe where yields are far lower. DWS Group reduced the European interest-rate risk in its $130 billion multi-asset portfolios. Money manager Christian Hille told Bloomberg, “The risk of being wrong on the long-duration side in Europe is much higher than in the U.S.”

Many funds have struggled with this trade over the course of the last year. Funds like Franklin Templeton have underperformed as they waited for yields to climb. They believe now, more than ever, that the time is right for such positioning. 

Hille and other strategists expect the growth and inflation trajectory for the Euro area to stay on course, ultimately resulting in the ECB to normalize policy next year.

Now, if only they knew what “normalize” meant, and perhaps more to the point, how long before “normalized” rates result in the next recession, sending yields plummeting as the ECB is forced to renew its QE, and restarting the yield cycle from scratch.

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Currency traders – monitored by “24-hour Big Brother-style surveillance” in the wake of a global scandal which resulted in $14 billion in fines – are so petrified of AI-powered compliance systems that they’ve stopped swearing over the phone, reports Bloomberg. 

Traders today are subject to 24-hour Big Brother-style surveillance that goes beyond the scrutiny of equity and bond desks. It uses machine learning and artificial intelligence to lurk in chatrooms, listen in on phone conversations and flag anything that might carry the whiff of criminal or abusive practices. The clampdown was described by more than a dozen industry participants, including those flagged for rough language, who requested anonymity because they weren’t authorized to speak publicly. –Bloomberg

“It’s been a nightmare” said Swiss asset manager Thomas Wind. “No one can do anything.” 

Wind was flagged by the compliance department from his friend’s bank after he sent a publicly available news story. After he argued that he should be able to send a public document, he was told that the bank would continue to monitor the conversation. 

Former HSBC Holdings Plc currency boss Mark Johnson was the first to be convicted, and three ex-traders from other banks are scheduled to go on trial Oct. 9 in New York. –Bloomberg

Trading records analyzed

The silicon sleuths are also poring over trading records, scanning for unusual transaction sizes, abnormal prices or suspicious timing, according to Steve LoGalbo, a director at compliance software vendor NICE Actimize. 

The advanced snooping was implemented following a price-rigging scandal that led to massive fines and sweeping reforms by regulators and foreign-exchange executives. “The three ex-traders — Richard Usher, formerly of JPMorgan Chase & Co.; Chris Ashton, previously at Barclays Plc; and Rohan Ramchandani who was at Citigroup Inc. — are charged with conspiring to fix the market while participating in an electronic chat room known as “the Cartel,“” writes Bloomberg. 

Between 2014 and 2017, broker-dealer divisions at several banks spent around $2.3 billion on compliance, with surveillance accounting for roughly half of that according to Danielle Tierney, a senior analyst at Aite Group. 

Extreme caution

Dishonest traders have “opened the eyes of buy-side participants to be very cautious and wary,” when interfacing with banks, according to Vanguard’s head of FX trading, Andy Maack. Two years ago Maack was critical of a controversial practice known as “last look,” which allowed traders to back out of losing trades at the last second. 

“The pendulum always swings, and swings hard, the other way after periods of scandals and fines,” said Maack. 

Some financial firms are taking fingerprints to prevent financial crimes, and several banks have moved front-office staff into risk departments to police their ex-colleagues, according to the currency traders who asked not to be identified. Some bankers say they avoid meeting socially to prevent the appearance of collusion. Even jokes are discouraged. –Bloomberg

BNP Paribas SA co-head of FX local markets and commodity derivatives, Adrian Boehler, says that bolstering standards is a “commercial opportunity.” BNP agreed to pay $686 million in fines over the last 24 months for misconduct, and now segregates order information while automating various trades to avoid conflicts of interest. 

According to a February statement by Boehler, he is “personally liable for anything untowards that happens on my watch,” and “Consequently, I sleep much better at night knowing that I have embedded in the first line of defense, i.e., embedded in the business, a surveillance mechanism which gives me feedback from the front line.”

At the Federal Reserve Bank of New York, audit and compliance teams are “pretty tough,” said Simon Potter, head of its markets group. The bank’s operations are reviewed by independent risk teams, separate from the trading desk, forming a second line of defense against misconduct, Potter said. Companies that sit on the foreign exchange committee overseen by the New York Fed also have a similar setup, Potter said at a July conference. –Bloomberg

The Fed’s Potter is currently spearheading an effort to overhaul standards and rebuild trust in the FX trading market, which is mostly over-the-counter, global, and doesn’t fit very well under the authority of any one single regulator. 

Concerns remain

Despite the billions spent on AI-powered surveillance and other compliance measures, concerns still remain over the controversial practices of last look and front-running. 

The zero-tolerance approach among many industry executives means that FX staff have to accept heightened scrutiny if they want to stay in the business. Some market participants complain that the tactics used are inefficient and ineffective. –Bloomberg

Former FX analyst for the New York Fed, Maya Rodriguez, believes that “Only when traders see that they can go to jail will they improve their behavior.“

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While the S&P may be trading just shy of its all time highs, hedge funds are having another miserable year, and according to HFRX, as of today, the average equity hedge fund was not only down on the year, but the performance was at 2018 lows.

Of course, this is hardly news in a time when the “2 and 20” crowd has had an acute difficult generating alpha, resulting in almost daily reports of prominent hedge funds shuttering. Case in point, yesterday Reuters reported that the once-iconic hedge fund Highfields Capital Management was shutting down and converting it into a family office “amid a period of lackluster returns and as its founder said he needs a change after two decades of managing money for prominent clients including Harvard University.”

Now another prominent asset manager has thrown in the towel with Dmitry Balyasny deciding that it is time to shutter his “best ideas” hedge fund.

According to Bloomberg, Balyasny Asset Management has shut down the Atlas Fundamental Trading Fund – which was created during the financial crisis to trade on Balyasni’s “best ideas” – after deciding it’s more cost effective to manage the capital within Atlas Enhanced, the levered version of the firm’s flagship vehicle. The Atlas Fundamental fund had lost all of its outside capital and shrunk to no more than $150 million in assets when it closed, according to Bloomberg sources.

Similar to SAC Point72, Millennium and Citadel, Balyasni has traditionally allocated capital to roughly 80 internal teams, or pods, that specialize in strategies ranging from credit and global macro investing to quantitative systematic and equity trading. The fund’s total assets totaled about $10.8 billion as of March 1, down from $12.7 billion a year earlier. And like Steve Cohen, Balyasny had run a portfolio within the main fund while allocating capital among the various teams.

Atlas Fundamental, however, operated differently: Balyasny had ultimate discretion over the fund and decided how much leverage it employed, according to company documents.

It primarily traded stocks tied to the best ideas from Balyasny and the firm’s portfolio teams. The fund also made macro bets in highly liquid financial instruments, such as futures, based on his market views.

Perhaps Balyasni had simply run out of good ideas? Recent returns would appear to confirm this: Balyasni had posted lackluster performance this year, trailing multistrategy rivals like Citadel and Millennium Management.

Atlas Fundamental, billed in marketing materials as providing “direct access to Dmitry Balyasny,” declined about 5.9 percent this year through Aug. 24, and Atlas Enhanced is up less than 1 percent through Sept. 21, according to investor documents. Balyasny declined to comment.

And the punchline: Atlas Fundamental, which started during the 2008 financial crisis, had a goal of providing uncorrelated returns and preserving capital, particularly during down markets. The problem is that 10 years later, central banks and passive investing have made down markets a thing of the past.

Balyasny and other insiders owned about 35 percent of the fund, according to a December 2017 filing. Net assets stood at $308 million in December before investors fled this year and the fund closed.

Considering the pace of hedge fund shutterings in recent years, many more will follow with the financial community’s attention these days squarely focused on how long David Einhorn hopes to fight the Fed. With his fund down a record 26% YTD, one can’t help but marvel at both Einhorn’s resilience, and the patience of his LPs.

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Via Dana Lyons’ Tumblr,

The following is a free look at the type of research and analysis that members of The Lyons Share receive on a daily basis. We are providing this free look due partially to the importance of the data discussed herein as well as the potential significance of the current market juncture.

Despite the fact that the major averages are hitting 52-week highs, we are observing a proliferation of New Lows among individual stocks – a condition that has proven disadvantageous at times in the past.

In recent weeks, we have discussed the phenomenon that we call the “junkie market”. That refers to a market in which the major averages are at or near 52-week highs while, at the same time, there is an abundance of both stocks hitting new highs as well as new lows (i.e., too many highs and lows). This is a condition that we have found to occur, often times, near market tops of some significance. There is, however, a worse potential set of conditions — that being a high in the market that occurs with an abundance of just new lows. We are witnessing such a condition now.

Over the past few days, while the large-cap averages have hit new highs, there have been more new lows than new highs on the NYSE. Yesterday saw an egregiously high number of net new lows (i.e., new lows minus new highs). Specifically, according to our data source, there were 339 issues hitting new lows on the exchange, or a whopping 9% of all issues traded. At the same time, there were 119 new highs. The difference between the two, i.e., 220 net new lows, represents over 5% of all issues on the NYSE.

How unusual is that? Well, for a day in which the S&P 500 traded at a new 52-week high (on an intraday basis), it was just the 4th unique occurrence since 1970. The other dates were 4/13/1972, 7/20/2015 and a handful of dates at the end of 1999. From a glance at the chart, those were obviously not advantageous times to be piling into stocks.

Since it’s difficult to learn much from just a few data points, if we expand our parameters a bit, we obviously come up with more occurrences — a fact that might make our study a bit more robust or useful. In the following case, we expand our search to all days in which the S&P 500 traded at a new high while net new lows exceeded 1% of all NYSE issues. This loosening of the parameters actually results in just 29 dates since 1970 — but definitely a few more interesting ones.

As the chart shows, we now have occurrences at the precise cyclical tops in 1973 and 2007 as well as near a few more shorter-term tops. Then there is the curious occurrence in 1995 which preceded a multi-year blowoff. Here are all of the dates and the aggregate forward returns in the S&P 500 (dates in bold are those with >5% net new lows).

As you can see, the list is dominated by those occurrences in 1999. Even accounting for that large cluster, however, the returns going forward are exceedingly negative. It is especially so in the shorter intermediate-term of 1-2 months — and perhaps most alarming, in the long-term, i.e., 1-2 years. The only occurrence that really escaped any damage was the one in 1995. However, the evidence would suggest that one not focus on that “outlier, but the preponderance of occurrences.

We have written on a number of red flags in the equity market over the past few months. However, some warnings are more serious than others. In our book, this one qualifies as that.

*  *  *

What, if anything, are we doing about this serious red flag? Become a member of The Lyons Share and get an “all-access” pass to our charts and research — as well as a daily inside look at our investment process, including insights into what we’re looking to buy and sell and when. Thanks for reading!

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