FlowPoint Research – Long-Short U.S. Equity Model Signals

Summary

  • One by one our model signals are starting to register green shoots for stocks. The most recent signal change is the decline in credit spreads (bullish for equities).  On May 20, BBB spreads registered a -0.75% decline in the last 30 days.  Two days prior, credit default swaps, another of our credit-based signals, made a similar move, and are now tighter by 11% month/month, and at a level that has historically been bullish for stocks.
  • Short and medium-term momentum in U.S. equities has been positive since the second half of April, while the long-term trend has yet to be recovered.  Today, 95% of all S&P 500 stocks are above their 50-day moving average – the highest reading this millennium – but just 25% of all NYSE shares are above their 200-day averages, barely above all-time lows.
  • Volatility is on the cusp of another “Buy” signal for stocks, just barely hovering above the 24% annualized figure that keeps this signal bearish.
  • Globally, the picture is less sanguine.  Ninety-five percent of the 43 country markets we track are in confirmed downtrends.  Switzerland (EWL is the ETF) is the sole international market in a confirmed uptrend.

Exhibit 1:

1. S&P 500 Trend1 Score (1-4) – Measures long-term trend. Most recent signal change was March 5, 2020 (Short).

The S&P 500 scores a 3 on our Trend1 model, reflecting a price that is above a downward-sloping 200-day moving average. Prices recently moved above that long-term average, and with continued progress, the average would begin rising. Perhaps by Independence Day.

2. S&P 500 Medium Term Trend (MT) – the medium-term trend of the market has been negative since May 11, 2020, when the 100-day moving average fell below the 200-day.  We’re currently applying little weight to this model because there has been no medium-term trend – it’s either been Doomsday Bear (Q1:20) or Recovery Bull (Q2:20)he intermediate term has been noise.

The last change to the medium-term signal prior to the May 11, 2020 Sell (red arrow) was a Buy signal on May 23, 2019, almost one year earlier (green arrow).

3. Momentum – currently positive. No surprise to anyone, the U.S. market has experienced positive momentum since mid-April, 2020.

Goldman Sachs summed up the market’s reception to this new reality in a strategy note Friday, declaring the return of market momentum has been “‘Unloved, but welcome. Unloved because most portfolio managers were not positioned to take full advantage of it.  However, it is welcome because most investors are structurally long-biased.”  The magnitude and persistence of the index recovery has certainly surprised many.

4. Volatility is on the cusp of another “Buy” signal for stocks, just barely hovering above the 24% annualized figure that keeps this signal bearish.

When less than 10% of liquid U.S. stocks trade above their 10-day moving average, our model signals “Reduce Gross Short” i.e., the market is deeply oversold and, like a beach ball held under water, may be ripe for a bounce. “Liquid” is defined as average trading volume of more than $3 million per day. Currently there are 2,195 such stocks in the U.S., and 75.7% of them are above their 10-day average. This model last signaled Reduce Gross Short March 19, 2020. Timely indicator indeed.

5. Credit Spreads – Credit has improved dramatically since the Covid-lows of late March. In fact, credit spreads peaked March 23, 2020, the day the Fed announced it would begin purchasing high-yield bond ETFs. Since then, investment grade credit default swaps (CDS) are down 48% from 151 to 77, including down 11% the last 30 days.


Energy is clearly the sector with the most stressed balance sheets.

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