S&P 500 continues to trade above its 200-day average / The breakout was driven by the non FAANG stocks

In our last publication we were reckoning that a possible break out above the 200-day average might occur. This is against the negative macro news flow. The rally is driven by stimulus. The latest rescue package from the Eurozone is unprecedented, like many other previously announced stimulus packages. Professional fund managers have still a very high cash allocation. The BofAML risk indicator is still at the lowest bearish level., which is a good counter indicator.

Fig. 1: S&P 500 trades above its 200-day average

Today we see red all around and an expected test of this new support is going to happen. The market keeps pricing in a much better H2 2020 in contrast to the latest economic forecasts, which are at best indicating a U or even a hockey stick (i.e. very slow and weak) recovery.

Positive is that over the last trading sessions the FAANGs did basically nothing but the market went up. Driven by cyclicals and bank stocks. This sector rotation is rather positive, and the rally might continue with other leaders.

Fig. 2: For 1 month Small and Mid-Caps outperform US large caps

Fig. 3: Record inflows into money market fund and Outflows from equity funds

It is remarkable that the outflow of equity products has accelerated. So, the pain trade gets rather bigger. As we see rising prices driven by lagers like Small and Mid-Caps which are in most investment strategies underweighted.

Fig 4: Outflows out of Equity products keep accelerating

The flip side is that corporate spreads have tightened over the last weeks. We have seen a strong recovery of bonds in the non-investment grade space. In the US this was driven by the Fed. They not only buy fallen angels and high yields via ETFs, but they also indirectly guarantee credits to such companies. Zombie companies are kept alive. The market cleanup process is distorted. We therefore keep repeating that one should not bet against US companies, like Mr. Powell recently said. US corporates and US equities have outperformed the rest of the world and although their valuation is extremely high, we believe if there is support from the Fed both asset categories will continue to perform (relatively) well.

Fig. 5: Spread have substantially tightened over the last weeks

Short-term we expect a consolidation and a retest of the 200-day average in the S&P 500. But we would not underweight or sell substantially US asset right now.

Recent articles stress the phenomenon of financial repression, a theme we keep writing about from time to time. The conclusion driven from these reports is well known – buy real assets and keep your cash allocation at a low level. Cash holdings are already charged in Euros and Swiss francs. In real terms i.e. after inflation in the holding of US dollars is no longer for free.

Published: 29/05/20 by Blackfort CIO Dr. Andreas Bickel

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