Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO senior economist Robert Kavcic put his equity strategist hat on in When it Starts to Fall Apart,
“Despite Monday’s gain, equity markets have come under pressure after a strong and uninterrupted run since last fall. A couple reasons and takeaways: - Sentiment had become very bullish by historical standards, and implied volatility had almost disappeared. Statistically, that is not a good set-up for near-term performance. - Rate cut expectations have been significantly pushed out and scaled back, which seems to now be showing through in the equity market. - High-flying sectors (think technology and communication services) have taken the brunt of the recent selloff. That leaves the S&P 500 now below its 50-day moving average, with still some air below before reaching the 200-day mark. The TSX, with a more favourable sector composition in this environment, has held firmer and still trades above the 50-day average”
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RBC Capital Markets analyst Sam Crittenden identified growing optimism in the copper market,
“Copper was up 4.5% last week before opening this week higher at $4.48/lb. Copper exchange inventories were down -0.9% w/w, while net long/short copper positioning moved increasingly net long to 47.6k from 42.7k last week … Speculative fund interest continues to flow into copper with gross long positions increasing 105% YTD and short positions increasing 57% YTD as funds rotate into commodities with the balance of net long/short positioning growing increasingly net long on the back of positive views on copper. Near[1]term physical copper indicators remain mixed with inventories still relatively elevated and physical premiums declining while global growth continues to be slow to recover. However, speculative interest in expressing long-term conviction in copper with clear supply deficits and growing electrification[1]related demand has continued to drive the copper price higher”
Mr. Crittenden’s bullishness is reflected in the large number of stocks he rates outperform – Arizona Sonoran Copper, Teck Resources, Ivanhoe Mines, First Quantum Minerals, Champion Iron, Capstone Copper, Major Drilling Group International, Filo Corp., Marimaca Copper Corp., Solaris Resources and Capstone Mining Corp.
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The Morgan Stanley Research department summarized the most recent report from U.S. equity strategist Michael Wilson,
“MS Chief US Equity Strategist Mike Wilson is not of the view that the market is in an early cycle environment given: 1) the tightness of the labor market; 2) the underperformance of equal weighted equities; 3) the slow recovery of ISMs (not a v-shaped/early cycle rebound); and 4) the lack of significant accommodation on the monetary policy front. Mike thinks that the underperformance of small caps and low-quality stocks corroborates his view in this respect. For investors looking for economically sensitive exposure, Mike recommends quality cyclicals which are now showing relative strength after a multi-year consolidation. Mike’s OW-stance on the Energy sector is a reflection of an attractive fundamental set-up, including: 1) inflecting relative earnings revisions; 2) attractive valuations; 3) above average free cash flow margins; 4) below average leverage; and 5) a supportive commodity price prior to geopolitical tensions rising. With most of the rally in stocks since October due to higher valuations as a function of lower rates, it seems reasonable to Mike that multiples may now face headwinds if yields stay elevated/rise further. Mike’s work suggests that the VIX and realized volatility tend to pick up 2 to 3 months prior to the election. He points out that Quality, Defensives and Large Caps tend to outperform in the 6 months leading up to the election. Mike notes that Value tends to show particularly strong outperformance in the 12 months following the election”
Mr. Wilson’s view is 180 degrees different from strategists like BofA Securities quantitative strategist Savita Subramanian who believes U.S. markets are starting a new sustainable upcycle in economic and corporate profit growth.
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Diversion: “Not excited about this year’s music festivals? You’re not alone” – A Journal of Musical Things
Scott Barlow