Investors are continuing to digest Federal Reserve chief Janet Yellen's remark Friday that an interest-rate rise in the coming months is probably appropriate. They're also bracing for a European Central Bank news conference on Thursday, an Organization of the Petroleum Exporting Countries meeting on Thursday and the monthly U.S. jobs report on Friday. And as usual investors pay no attention to the falling GAAP earnings.
"This week is packed with events to distract investors which will keep volatility high," said Igy, in a note.
Down goes the Dow
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econ!
real disposable income +3.8 y/y - that's been steady for years. very solid growth.
consumer spending; +3.0%. Solid.
The big news was the m/m spending - that jumped at the fastest m/m rate in at least 4 years.
Case shiller home prices +5.4% y/y - steady as she goes
chicago pmi: 49.3: no growth and falling a bit
consumer confidence: in same range, fairly high levels
investor confidence: in range, high
So it's looking like the tables are turning a bit - after several years of corporate profits keeping the lion's share of the money...now labor is starting to take it back. Most consumer numbers are very strong, as is housing. but corporations are not doing great. Maybe they have to pay more for labor now?
that's not exactly the sanders narrative. -
IgySet Scorecard: With 98% of companies in the S&P 500 reporting earnings to date for Q1 2016, 38% have reported GAAP earnings above the mean estimate and 53% have reported sales above the mean estimate.
IgySet Earnings Growth: For Q1 2016, the blended earnings decline is -7.1%. The first quarter marked the first time the index has recorded four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009.
IgySet Earnings Revision: Earnings as usual were revised downward to create a lower hurdle.
IgySet Valuation: The forward 12-month GAAP P/E ratio is 19.7. The current GAAP P/E ratio is 24.17. This is the highest GAAP PE ratio since September 2009. -
Ghost of Igloi wrote:
The current GAAP P/E ratio is 24.17. This is the highest GAAP PE ratio since September 2009.
let me just point out that September 2009 was an extraordinarily good time to buy stocks.
the SP500 doubled in the following 6 years. -
agip,
True, but distorted by GAAP LTM earnings of only $6.86. When earnings recovered to where they are today ($86.98), two years later (09/30/2011), the index was at 1,131. PEs began to expand in the following years at a greater rate than earnings, driven by Fed policies. We are now seeing a reversion of the process.
Igy -
All three major indices finish in the green for May. Life is good!
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Big Dog Investments wrote:
All three major indices finish in the green for May. Life is good!
not too bad this year
My general go-to benchmark is the vanguard balanced index - 60% stocks 40% bonds, all indexed...it's up 3.5% this year. Not shabby at all. -
"Before Pandora's Box bursts open a third time, test your tools against available data, then choose your weapon."
--John Hussman, 5/31/2016 -
OK, Igy, here's my weapon, and it's a doozy. This is an explosive paper published in January of this year by NYU Stern:
http://poseidon01.ssrn.com/delivery.php?ID=352021002125000084004024125119013107036024008001019007007071124100020024097081101069121058118006041127001088099092094088073068030007004001088007095113089099114103084000084096027004125105100009126025123010115102070089024114120096072125031005127070020&EXT=pdf
See Panels A and B on page 29. The advantages over time in favor of what they call time series momentum (what the rest of us call trend following) are so large, that there's no reason to even argue the point. And in the conclusion...
All of these results, over such a large study period, pose a significant challenge to the random walk hypothesis, assumptions about the normal distribution of stock returns and elements of the efficient market hypothesis. The relevance and persistence of momentum despite the significant academic research documenting its existence for over 25 years (and practical journals or newspaper articles for over 100 years) is an ongoing puzzle. Practically, this suggests money managers will continue to develop and exploit simple and complex momentum rules until exhaustion is reached within the 12-month momentum bound (which practitioners often view as the mark-to-market window for performance and compensation measurement). Until that point is reached, we expect hedge funds, mutual funds or exchanged traded funds utilizing “smart†beta 25 products and algorithmic trading rules to grow until a tipping point is reached to reduce
momentum’s enduring effect.
Basically what they're saying is that people promoting buy-and-hold and passive investment strategies, including people like Fama, Malkiel, and Siegel don't know what the hell they're doing, given that there has been evidence that what these people have been selling in the political sense has been wrong for 25 years. I take it that professors of finance, economists, and business schools are still promote this garbage because they don't know how to invest. -
Ghost of Igloi wrote:
"Before Pandora's Box bursts open a third time, test your tools against available data, then choose your weapon."
--John Hussman, 5/31/2016
Igy, you're like the guy who the Roman Emperor hired to whisper in his ear that all will end, all will come to naught.
I mean that in a good way - a needed message. -
So we're just supposed to ignore "the significant academic research documenting its existence for over 25 years (and practical journals or newspaper articles for over 100 years)"?
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coach d wrote:
OK, Igy, here's my weapon, and it's a doozy. This is an explosive paper published in January of this year by NYU Stern:
http://poseidon01.ssrn.com/delivery.php?ID=352021002125000084004024125119013107036024008001019007007071124100020024097081101069121058118006041127001088099092094088073068030007004001088007095113089099114103084000084096027004125105100009126025123010115102070089024114120096072125031005127070020&EXT=pdf
See Panels A and B on page 29. The advantages over time in favor of what they call time series momentum (what the rest of us call trend following) are so large, that there's no reason to even argue the point. And in the conclusion...
All of these results, over such a large study period, pose a significant challenge to the random walk hypothesis, assumptions about the normal distribution of stock returns and elements of the efficient market hypothesis. The relevance and persistence of momentum despite the significant academic research documenting its existence for over 25 years (and practical journals or newspaper articles for over 100 years) is an ongoing puzzle. Practically, this suggests money managers will continue to develop and exploit simple and complex momentum rules until exhaustion is reached within the 12-month momentum bound (which practitioners often view as the mark-to-market window for performance and compensation measurement). Until that point is reached, we expect hedge funds, mutual funds or exchanged traded funds utilizing “smart†beta 25 products and algorithmic trading rules to grow until a tipping point is reached to reduce
momentum’s enduring effect.
Basically what they're saying is that people promoting buy-and-hold and passive investment strategies, including people like Fama, Malkiel, and Siegel don't know what the hell they're doing, given that there has been evidence that what these people have been selling in the political sense has been wrong for 25 years. I take it that professors of finance, economists, and business schools are still promote this garbage because they don't know how to invest.
this is nothing new - it has been known for a long time that there are strategies that beat the market on paper.
-momentum
-value
-small stocks
-cheap stocks
-consumer staples stocks
-dividend increasers
over a long period of time, studies have shown that these work. BUt they don't work all the time. For 1,3,5 even 10 year periods they won't work. Then people try to improve on them, which blows the strategy.
Jim O'shaughnessy backtested hundreds of strategies and found many that beat the market. THe problem is making them work in real life. He hasn't been able to, really. Maybe the past 20 years have been anomalous. Maybe there is some other reason.
but the fact is, indexed investing has worked better than probably 90% of strategies. And it is dirt simple.
If momentum worked in the real world, trillions of dollars would chase it, and it would stop working, as the quote you pulled out says. The disasters that are hedge funds today are examples of how it doesn't always work. -
agip wrote:
this is nothing new - it has been known for a long time that there are strategies that beat the market on paper.
-momentum
-value
-small stocks
-cheap stocks
-consumer staples stocks
-dividend increasers
over a long period of time, studies have shown that these work. BUt they don't work all the time. For 1,3,5 even 10 year periods they won't work. Then people try to improve on them, which blows the strategy.
Jim O'shaughnessy backtested hundreds of strategies and found many that beat the market. THe problem is making them work in real life. He hasn't been able to, really. Maybe the past 20 years have been anomalous. Maybe there is some other reason.
but the fact is, indexed investing has worked better than probably 90% of strategies. And it is dirt simple.
If momentum worked in the real world, trillions of dollars would chase it, and it would stop working, as the quote you pulled out says. The disasters that are hedge funds today are examples of how it doesn't always work.
From Michael Harris at Price Action Lab http://www.priceactionlab.com/Blog/2016/02/explanation-momentum-anomaly/
There is massive literature than documents the persistence of the time-series momentum anomaly in most major asset classes. I abduct in this article a simple explanation of this anomaly and I present some evidence that corroborates it.
Summary
The simplest explanation for the persistence of the momentum anomaly is that it has not been arbitraged out yet but it will be in the future
The main reason that the price-series momentum anomaly in equity markets has not been arbitraged out is due to lack of trading discipline
In commodity markets the time-series momentum anomaly has been arbitraged out in the last 10 years due to systematic trend-following programs
Algo trading and robo-advisor domination will cause the momentum anomaly to slowly disappear
Momentum refers to the empirically documented tendency of rising asset prices to rise further and vice versa for falling prices. Numerous academic and practitioner studies have documented this anomalous market tendency. Finance theory argues that once discovered, anomalies should disappear. This assumes that markets are efficient and obey certain equilibrium models, e.g., the CAPM. However, the time-series anomaly has persisted for decades, as the backtests below show. Therefore, either finance models are wrong or the anomaly persists due to some special conditions.
The backtests below are based on monthly S&P 500 data (dividends not included) in the period 01/1900 – 02/2016. No commission is included. The strategy involves buying the index when current close is higher than the close of 12 months ago. This is the simplest form of time-series momentum. Equity is fully invested.
The first backtest is for the period 01/1900 – 12/1937:
There is significant outperformance of buy and hold, as it may be seen from the notes in the above chart. Holding the index in the test period would have resulted in an annualized return of 2.9% and maximum drawdown of nearly 85%. On the other hand, the simple time-series momentum strategy with a 12-month lookback period shows 7.34% annualized return at 50% maximum drawdown. This significant result was noticed in the late 1930s. Of course, this analysis is hypothetical because no one could buy the index but instead a portfolio of securities that tracked the index closely and that involved transaction cost. However, due to the low turnover, the transaction cost would not impact the performance significantly.
Although the annualized return of the momentum strategy in the above period is 30 basis points less than that of buy and hold, maximum drawdown is much lower, resulting in significant outperformance on a risk-adjusted return basis. These results show that the time-series momentum effect has persisted. It can also be shown that the effect is persistent for all lookback periods between 2 and 12.
The goal of the above limited analysis was to review the existence of the time-series momentum anomaly in the US stock market. Much more advanced studies have shown the persistence of this anomaly across many different markets. The puzzling issue is why this anomaly exists in the first place. The abducted hypothesis in this article is that the anomaly exists in markets where there has been no systematic arbitrage in action. In other markets where such action has taken place, the anomaly has almost disappeared. An example is commodities markets due to the systematic programs used by CTAs. It was shown in another article that in the last 10 years, the performance of the CTA groups has deteriorated significantly, as shown in the chart below:
For more details see this article. In the last 7 years, the annualized return of the CTA group is flat versus about 14% annualized for the S&P 500 total return.
CTAs have used systematic strategies for many years in an effort to eliminate emotions from trading and enforce discipline. Because there cannot be a free lunch, the actions to secure proper execution of the strategies actually made them ineffective due to the consistent arbitrage. This is important to understand. Actually, some non-systematic traders may have been able to generate significant outperformance but only due to luck. However, no one should expect to profit from a crowded trade and CTAs have been victims of their own efforts to enforce discipline. Essentially, anyone with market experience and a computer could become a CTA, at least in principle, because the models followed were and are still nowadays in many cases trivial. This is also what is slowly occurring in the equities markets after the popularization of momentum by some authors who fail to recognize the reflexive nature of markets.
By trying to convince people that the momentum anomaly is robust and they should systematically exploit it, authors, practitioners and researchers actually contribute to a slow but effective arbitrage process. As robo-advisors and algo traders offer related strategies, the anomaly will disappear because this is natural consequence and unavoidable: There is no room for everyone to profit from the same strategies and some or even most will have to lose eventually. -
coach d and agip,
A snap shot in time will deliver a certain statistical conclusion. The picture on 5/21/2015 may be the mirror opposite of 3/9/2009. In this era momentum investing has ruled the day, but I doubt whether it gives any window into the future. In fact it may be the opposite, people will be fooled by what they thought would be. Once stock valuations are stretched, safety nets are gone and random events exert more influence.
Igy -
USO far it looks like you're the one who has been fooled. Just sayin'.
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Lemons,
Well seeing the market reached a peak of 2,134 on May 21, 2015 and closed at 2.094 today not so much. Just saying'.
Igy -
Hasn't gone down much, has it?
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Lemons,
True, yet in 18 months S&P 500 earnings have fallen by 18.5%. If you believe there is value there vote with your dollar. I will wait for more favorable valuations.
Igy -
Exactly. You've been fooled.
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U.S. stock futures on Wednesday signaled a lower open, putting the market on track to extend the prior day\'s decline as investors stayed cautious ahead of big economic releases later this week.
S&P 500 futures fell by 5.90 points, or 0.3%, to 2,089, while Dow Jones Industrial Average futures dropped by 51 points, or 0.3%, to 17,723. Nasdaq-100 futures shed 9.75 points, or 0.2%, to 4,514.50.
On Tuesday, the S&P 500 closed down 0.1%, while the Dow lost 0.5%, as investors turned skittish ahead of key events this week. The S&P finished May up 1.5%, its third straight monthly gain, and the Dow edged up 0.1% for its fourth monthly advance in a row.
\"Investors decided to take some risk off the table ahead of a number of key economic issues that present their credentials this month -- the OPEC and ECB meetings on Thursday and non-farm payrolls on Friday,\" said David Buik, market commentator at Panmure Gordon & Co., in a note.
Members of the Organization of the Petroleum Exporting Countries are due to meet Thursday, and the European Central Bank also has a meeting that day. The U.S. jobs report for May is due Friday, with economists polled by MarketWatch expecting the economy added 155,000 non-farm jobs.
