Below excerpt courtesy this a.m.’s edition of macro-strategy newsletter “Sight Beyond Sight”
Today is the first time in recent memory that investors are waking up to a meaningful gap down in US equity index futures.
By virtue of the fact that S&P 500 futures were down ~1.0% at one point this morning, the 57-day streak with no 1% up/down move in the index level has finally been broken today and that is clearly a talking point.
The other interesting observation for US equity participants is that Russell 2000 futures (symbol: RTAU4) are currently down -2.2%. That is much more than the German DAX -1.6%) and commensurate with the weakness in the Spanish IBEX (-2.5%) and Italian MIB (-2.15%) indices.
Given that investor sentiment is also very fragile at the moment, and despite this being a very immature approach to investing and nearly always misguided, the fact is a 2-3% move lower in the index always triggers calls for a larger 7-10% correction.
Our view is different.
The leadership in this move is European risk assets. If you look at the banks in Europe it is clear they were sniffing a corrective move lower for the broader markets for a while. The key here is that the EURO STOXX Banks Index (symbol: SX7E) knew this 7% ago: it is now down 13%, so investors should already have realized something was up. Without wishing to pick on one company, the issue for Europe is Societe Generale SA (symbol: GLE FP). What in the world would persuade an investor to buy this stock before the Asset Quality Review (AQR) is completed in the fourth quarter? The same can be said with every other big bank in the region.
The better way to describe the market backdrop is that Europe is going through a clearing process and that region is the leadership. The US could follow Europe but it will be hard to get a big roll down at the index level before either Janet Yellen speaks next week or else earnings lead a fundamental deterioration. Remember, with the gap down today the S&P 500 is still largely unchanged on the month +/- 5 points.
Our view is that the US will keep weakening as long as Europe does, or until earnings justify an acceleration that surpasses Europe. In the meantime, the S&P 500 will just out-perform its European brethren on the downside in the interim.
If you are looking for something with higher beta or volatility it is our view that both can be found in Small Caps (IWM) or strategies that have real concentration, i.e. event driven or merger arbitrage. We are less focused on internet (QNET), biotech (IBB), growth (IWO) vs. value (IWN), or small (IWM) vs. large (SPY) caps as we do not think this is a repeat of the March/April price action. Sentiment will be led by other strategies this time is the point.
If you need a proxy that would signal greater acceleration in the US beyond Europe that proxy would be a visible crack or widening in High Yield credit, not Investment Grade. Right now you cannot say that, especially considering the Main index in Europe is not widening to any real degree. Meaning, people are selling corporate credit at this point in Europe.
The full edition of Rareview Macro’s Sight Beyond Sight macro-strategy newsletter can be accessed via the publisher’s website. Rareview offers 15-day free trial (no credit card required) or compellingly cost-effective monthly and/or yearly subscription plans starting at $300/mo.. For more information, please visit www.sightbeyondsight.com