Stocktake: Will stocks ever dip again?

Every trader knows you should buy the dips in a bull market, but what if stocks never dip?  StockTake has previously noted the S&P 500's biggest peak-to-trough decline in the first half of the year was just 2.8 per cent – the second-smallest first-half pullback on record.

Things are usually hairier outside the US, but not this year. In Europe, for example, the biggest pullback has totalled just 4 per cent – way below Europe's average intra-year decline of 16 per cent, according to JPMorgan data. The situation is even more abnormal in Asia. The MSCI Asia-Pacific ex-Japan index has soared more than 20 per cent this year but never dipped more than 2 per cent. On average, says JPMorgan, Asia experiences a peak-to-trough decline of 20 per cent, highlighting the freakishness of today's environment.  The Wall Street Journal notes the last time all three regions went so long without a 5 per cent pullback was in 1993. The current streak cannot continue indefinitely, and stocks will have to retreat at some stage.  However, traders have become conditioned to see every minor pullback as a buying opportunity, so even a minor decline is likely to be pounced upon. The dip, when it does come, will likely be a fleeting affair.

A multi-year rally for emerging markets?

Emerging markets are up over 20 per cent this year and have soared by some 50 per cent since bottoming in January 2016, but many more years of gains are on the cards.  So says

Oppenheimer

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Global bull market is alive and well

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technical analyst Ari Ward, who last week argued the region has finally broken out of a 10-year downtrend that has seen many false dawns. For the first time since 2010, noted Ward, emerging market indices have made a higher high relative to the MSCI world index.

Other technicians note the region is on the verge of completing a so-called golden cross, with the 50-week moving average about to breach its 200-week average, again signalling the end of a multi-year downtrend.  Sceptics may see such talk as technical gobbledygook. However, long-term technical investors argue such metrics keep you out of down-trending markets and that it’s better to wait for confirmation rather than trying to pick a market bottom. Additionally, emerging and European markets have essentially gone nowhere over the last decade, during which time US stocks have doubled, indicating it may now be the turn of non-US markets to take the baton.  Broadening participation in the global bull market is important, says Ward, corroborating the view the market rally is “early-to-middle innings rather than late”.

Don’t worry about the lack of worry

It seems every second commentator is worried by markets’ lack of worry. The Vix – Wall Street’s so-called fear index – continues to hover at levels unseen since the early 1990s. More than half of the Vix’s 25 lowest-ever readings have occurred since May. Recently, the Vix’s 30-day moving average hit all-time lows. Still, while investors may not be fearful, they’re hardly joyous either. The S&P 500 has made 26 all-time highs in 2017. On those days, the average daily return was 0.43 per cent. “This does not indicate euphoria,” notes Ritholtz Wealth Management’s

Michael Batnick

.   Nor is there much evidence of complacency. According to Merrill Lynch’s latest monthly fund manager survey, the percentage of professional investors seeing equities as overvalued is at its highest level in 18 years. To allay concerns, they’ve increased cash holdings to 5 per cent, well above historical norms.

Ordinary investors, too, are cautious: while bearish sentiment, as measured by the weekly American Association of Individual Investors poll, has fallen to its second-lowest level of 2017, bullish sentiment remains at below-average levels.  In short, don’t make too much of a low Vix. Market calm should not be mistaken for euphoria or complacency.

Hedge fund gains mask underperformance

Hedge fund managers have posted eight consecutive months of gains and enjoyed their best start to a year since 2009. After years of underperformance, have the masters of the universe finally got their mojo back?  Well, no. First-half gains averaged 4.87 per cent, according to data provider

Preqin

, prompting Reformed Broker blogger

Josh Brown

to quip they are “only trailing the S&P 500 by 50 per cent”.

Doubtless, hedge funds would protest the comparison is disingenuous and that they cannot be expected to keep up with stocks during a bull market. Brown’s sarcasm is merited, however. After all, investors seeking to reduce risk can do so via a bog standard 60:40 stocks/bonds portfolio, which continues to outperform average hedge fund returns.  A great hedge fund comeback is not on the cards. The days of picking the low-hanging fruit are long gone, with too much money now chasing too few opportunities in the $3 trillion industry. Saying 2017 is shaping up to be the best year since 2009 only highlights what a lousy decade this has been for hedge fund investors.