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Sentiment 09/2018

In our July article we briefly explained how our market view changed from "Moderately Positive" to "Neutral".

It is appropriate, after two months,  argue about  the reasons of prudential vision, helping us with our indicators and with graphs and macroeconomic analysis.

-              LIQUID ASSETS

Equity markets are known to move ahead of expectations on the economy and on corporate profits, but the main driver remains the liquidity that can be used for investments. In USA it is recurring the use, by the operators, of margin debt  communicated monthly. For that purpose we have elaborated the charts Annex 1 and Annex 2 which measure, respectively, the variation of margin compared to that of the SP500 and for the EURO area the comparison between the ESX600 index and the M1 (primary liquidity).

In both cases the connection between the indices and the liquidity is clear and signals are alert. On the US market there is a triple maximum of the MD that could be a top, while for the EU area it is clear how the change in the M1 transmits its effects to the stock index delayed.

We also remind that the monetary policies by FED, with the rate hikes already begun this year and  extended in 2019, as well as the end of the QE by ECB will absorb liquidity from the market.

-              MARKET VALUE

Another element on which to pay attention to evaluate the convenience of a market is the P / E Ratio.

We elaborated  this ratio both the  SP500’index  and the government bond market (10YR US). To date, the the SP500 P/E Ratio stands at 32.71X while the corresponding value of the Tbond 10yrs is 30.96X.

Considering  realistic the will of the FED to proceed to further increases in rates, we could estimate the final yield of 10YR US around 4-4.3% with a P / E of 23.25 (historical average is 20.69) .

Consequently, to make investment in equity competitive, we should expect very optimistic corporate's estimates  in a context of further economic growth. The Annex 3 we show you the graph of the effects of changes in the 10yrUS P / E on the performance of the share index.

-              EQUITY INDICES SITUATION

We deliberately delayed publishing our "Sentiment" column to evaluate the movements of these first days of October. The correction although expected has not changed, for now, our view on the various stock markets.

World indices: the indicators produced are democratic, assigning the same weight to the 31 indices selected among the world stock exchanges. The Annex 4, which represents the totality of the 31 indexes and Annex 5, which instead represents the main European markets, have the same technical configuration having turned down below their moving average. On the other hand, Annex 6 reunites  the North American indices and the chart shows the still positive trend of the main SP500 index.

SP500 technical situation: we attach the monthly chart updated to 10/15/2018 (Annex 7). You notice how the index has completed the path, which at the time we had proposed as  hypothesis, scoring new highs. For now the correction of these days can be framed in a context of normal profit taking that will remain so until the dynamic support of 2600 points. Beyond this value we have the main support at 2485 decisive for maintaining the uptrend. Below this level the bullish scenario would be questioned.

- MACRO USA INDICATOR (Annex 8)

Often in this column we talked about this indicator, constructed monthly with macro data and quantitative data, as a tool that allows you to identify the turn points of the main stock index.

This indicator  confirms that the positive trend of the SP500 is still alive and there are no signs of alert. It is worth remembering that this proprietary indicator is built once a month, so the events we are witnessing on the markets will show their effects at the end of October.

 

We end with a short summary of our view:

- Equity rating "Neutral":  Underperform  EU area and Emerging Mkt - Market perform  Americas area;

- "Underperform" rating bonds:  Sell High Yield - Underperform  EU area  - Accumulate USA;

- Commodity: Accumulate Gold

 

Giorgio Giovannoni

10/04/2018

 

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