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In the short-run, sentiment and momentum drive everything in markets. We have a conflicting backdrop with respect to these factors heading into year-end.
On the cautious side, sentiment once again reached optimistic extremes last week.
The spread between Bulls and Bears in the Investors Intelligence poll came in at 39.5%, the 94th percentile of such readings.
The spread between Bulls and Bears in the AAII Sentiment poll is also elevated at 37.6%, or the 96th percentile historically.
Such extremes are typically associated with below average forward returns for equities as illustrated in the tables below. While returns are still positive on average, you tend to see a more range-bound market when everyone is already in the bullish camp.
On the positive side, however, is momentum and seasonality. ‘Tis the season where investors tend to chase the first 10 months returns into year end. In years where the S&P 500 was up over 9% on the year heading into November (as is the case this year), the average November-December return is +4.5%, with 83% of years positive returns into year-end. We have never seen a down year for the S&P 500 when it has been up more than 9% heading into November.
We can contrast this tendency with years in which the S&P 500 enters November with a negative return. In such years, the average November-December return is -1.5% with only 48% of years posting a positive return. When the S&P has entered November with a negative YTD return, it has finished the year in positive territory only 10% of the time.
As was the case in 2013, the momentum heading into year-end is favorable for the Bulls and at the very least will be a difficult backdrop for Bears to push back against. There is little historical precedent for a large down November-December when the market has had strong YTD gains leading up to these last two months (the worst example by far in this sample was 2007 when the S&P 500 declined -5.2% in November and December).
If we look past the duration of the year, though, sentiment is likely to become a more important factor. The strong momentum of today is not in any way lost on investors as reflected by their extreme love for stocks with a dearth of Bears. In 2015, this could lead to a more difficult, range-bound market environment until the overbullish sentiment condition is alleviated.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
You can follow Charlie on twitter here.
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