October 16, 2020
We’ve stayed bullish on US equities during the retracement and beyond based on a number of factors still in place today. The most compelling factor is ultra-easy financial conditions. Interest rates are at 0%, 10-year bond yields are below 1%, money supply is growing at 24.2% year-over-year. Our Notes from mid-March explained any reversal in equities needs to start with narrowing credit spreads. That occurred the morning of March 24. Despite a good deal of public/press skepticism during the retracement, we had little difficulty remaining bullish, partly due to contrarian support factors including below average equity positioning, elevated bearish sentiment and record cash balances. The SPX has rallied ~9.5% over the last three weeks on large scale fiscal stimulus hopes given the Democrat sweep scenario. As you know, we’ve been expecting a test of the 9/2 high at ~3581 and it looks like we’re getting that test now. It might take a week or two to sort out, but we’re optimistic about the potential to trade through ~3581. While it’s not yet an issue, we saw some deterioration in the contrarian support factors over the last two weeks. Equity positioning indicators (Hedge Fund and CTA beta) have ticked higher and bearish equity sentiment is no longer at levels we consider elevated. We also see signs of early cash deployment from individual investors in the fund flow data. Last week, equity fund inflows totaled $2.4B vs outflows of $6B in the prior week. And money market funds saw outflows of $18.9B, which marks the 12th straight week of withdrawals. We generally use contrarian signals when they reach extreme levels, so this is not a bearish call, but it does open the door for a less-optimistic view once market internals flip.