Thursday, May 14, 2015

The Market's Next Move: The Bull Case

On Tuesday, we gave reasons for why this sideways market could resolve itself with a bearish outcome.  Today, we're back to give some of the bullish arguments.

Bullish Outlook


While the S&P continues chop around it also only stands roughly 1% from new all time highs.   The 50-day moving average remains above the 200-day and on a monthly chart, price remains above the 12-month moving average.  From a trend standpoint, the markets are still clearly in a long-term uptrend. 

If we look at a ratio chart of high yield corporate bonds (JNK) to investment grade corporate bonds (LQD) we can see that it is turning higher and breaking a downtrend.  This is favorable for stocks as investors reach for riskier, higher yield debt.  We can see from the chart that the LQD has broken to multi-month lows while the JNK has formed a series of higher lows since December.  This can be viewed as bullish and a nice tell on the market's view on the overall economy.  During periods of stress like we had in October 2014, we can see how investors flocked to the safety of the LQD.  We are not seeing that with today's environment.  This ties in well with the positive fundamental/macro comments we'll show later.


The AAII weekly Investor Sentiment Survey measures measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months.  The most recent reading counted bullish investors at 27%.  This is well below the long-term average of 39%. Meanwhile, investors with a neutral/undecided stance are well above the historical average (47% vs 31%).

Macro Environment
  • While often looked at as somewhat of a lame excuse, we really do believe the harsh winter weather caused much of the weak Q1 growth as depicted by the recently published GDP number.  The economy could be primed to rebound over the next couple of quarters with better weather and energy prices still depressed.  If true, the market will surely take that into account.
  • While some have stepped out on a limb and suggested that the Fed will begin hiking rates in June, most data suggests that an initial rate hike is more likely to come in September or October at the earliest.
  • Geopolitics appear to have calmed for the time being.  People even seem to be less and less concerned about the possible Greece exit from the Eurozone.
  • While talk of the Fed raising rates will continue to be a hot topic for seemingly perpetuity, the data shows that the market does a good job of shrugging off the initial shock of a rate hike when viewed through a longer lens. (Charts and commentary from Russell Investments)

Fundamentals / Valuations

With earnings season just about wrapped up, we don't see anything that puts us wildly off course in terms of expectations or estimates.

And with earnings out of the way, the market may now turn its attention to bullish buyback activity among other influences which may act as a tailwind (chart from Deutsche Bank).


We are entering the calendar period where the thrust of gains has been made in pre-election years. As you can see in the chart below from Nautilus research, Q2 in the year prior to an election has been very kind to equity investors.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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