Back in May 2015 the S&P 500 hit its all-time high and it is surprising that it has not been able to take the high out in the last few days. The strong USD was held to be a problem, the USD is at its weakest for the year. It has fallen sharply in the past few trading sessions. The Low oil price was held to be a problem, because of the effect it has on energy stocks; oil has rallied impressively – almost 70% - and it is back to where it was at the beginning of last year. You saw a big write down on expectations on earnings. We are almost through the earnings seasons and generally most companies have beaten these expectations. You see continued bullishness among equity investors that the Fed is not going to raise rates until December if you believe the forward market. These are all good reasons to believe that equities should do well.
Why have we not taken out last May’s high? The market had required the information technology sector giants such as Apple and Microsoft to lead equity gains. This leadership is now dramatically absent.
This shows the information technology sector relative to the rest of the S&P and how it has come down to earth dramatically. Companies like Apple and Microsoft disappointed with their revenue projections and their earnings and were punished very severely.
There is a more positive gloss you can put on this: The market has broadened. Last year, the market cap weighted index did significantly better than the rest of the market and that was a sign of market narrowness, i.e. the strength of the market move is concentrated on a few large caps names. Generally, this is a very worrying sign that we are at the end of a bull market. The market has broadened very significantly and very positively in the past few months. The market has regained some balance after a period in which some companies have become excessively priced and done so without a major fall in prices.
While we are losing old leaders, but we are gaining new ones. Apple has dropped back to its lowest level of the summer of July 2014. This is plainly a negative development as Apple has been the leader of this market rally for a long time. If you compare this to how Amazon has been doing in the same period, it appears that we are seeing new leaders in the market.
There are some arguments that something is going on: the market is broadening and a change of leadership is taken place. This may bode well for the market. If you would like to discuss specific stock views, please drop us a note.
Zurich, May 4th, 2016
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