Equity Put/Call Ratio Jumps To Near 1.0

It seems as though the Greece situation has been one that has been ongoing for years and was the cause for today's market decline and jump in the equity put/call ratio to .94 from .54 on Friday. As we noted in a May post in 2012, a spike in the put/call ratio to .99 was partly caused by "the lack of confidence in Europe handling its sovereign debt issues." Nearly three years later the same issues are again challenging investors. For investors, the equity put/call ratio...:

...measures the sentiment of the individual investor by dividing put volume by call volume. At the extremes, this particular measure is a contrarian one; hence, P/C ratios above 1.0 signal overly bearish sentiment from the individual investor.

From The Blog of HORAN Capital Advisors

When countries live and spend beyond their means, an unlimited supply of funding eventually drys up. The contagion concern is associated with countries like Spain, Portugal and Italy. In the U.S. Puerto Rico has now become an issue and broadly, the U.S. is living far beyond its means which needs to be addressed sooner versus later.

In the near term though, the markets sometimes become disconnected and sentiment does suggest an overly bearish investor when looking at the put/call ratio. Other individual investor sentiment measures also are bearish (AAII bullish sentiment.) Overly pessimistic sentiment indicators are contrarian indicators and are indicative of potential market bounces. 

Equity Market Performance Around Crisis Events

With Greece headlines dominating news stories over this past weekend, investors might be on edge regarding future equity market returns on Monday and the coming weeks. A number of headlines this evening are using the words plunge and slide as U.S. futures are down less than 1.5%. Yes, much can change before the U.S. markets open Monday morning, but it is the sensational headline that generates reader clicks and article views. I have written several times over the past few years about these shocks to the equity market and how the market damage generally has been short lived, (here and here.)

S&P Dow Jones Indices published a report in September 2013, Shocks & Stocks, that analyzed market shocks and the initial market decline and the time necessary to recover the losses. Included in the report is the below table.

From The Blog of HORAN Capital Advisors

As can be seen in the above table, of the fourteen shock events listed, the average market decline was 5.3% and losses were recovered in an average of 14 days. Several of the losses were much greater than the average and the recovery time period much larger than the average. S&P notes though,

• "Granted, even though selected events took much longer to play out than the medians would suggest, these extreme situations usually occurred within the confines of a long-term bear market and did not precipitate the initial decline. Examples of these include: 1) Pearl Harbor, 2) President Nixon’s resignation, 3) the terrorist attacks on 9/11, and 4) the collapse of Lehman Brothers. So should history repeat itself, and there is no guarantee it will, unanticipated events that occur within bull markets that throw markets for a loop are typically assessed for their economic impact in short order, allowing opportunistic traders to step in and quickly push share prices back to break-even and beyond."

A a word of caution for investors wishing to sell stocks early Monday morning, remember, these crisis events generally have a short lived impact on the return in equity indices.

Companies Continue To Enhance Earnings Per Share Via Stock Buybacks

S&P Dow Jones Indices released first quarter 2015 buyback detail for the S&P 500 Index. On a year over year basis, buybacks declined 9.5%. In conjunction with the YOY decline in buybacks, YOY operating earnings declined 6.3% and as reported earnings declined nearly 13%. Important in the buyback report is the fact 20% of S&P 500 companies reduced their share count by at least 4%. This share count reduction enhances reported earnings per share and investors need to be aware of the artificial growth in EPS that results from this activity.

From The Blog of HORAN Capital Advisors

Better Investing Members' Most Active Stocks As Of June 20, 2015

Better Investing Magazine maintains a list of most active stocks as reported by their members. From time to time I highlight recent activity. Below is the list of most active stocks as of June 20, 2015. Most of the active stocks on the list are experiencing more buying than selling. Two issues, Qualcomm (QCOM) and Ford (F), are experiencing the most selling pressure as reported by BI's members.

From The Blog of HORAN Capital Advisors

Full View

Disclosure: firm zand family long AAPL, QCOM

EURO STOXX 50 VIX At Record Wide Spread Versus S&P 500 VIX

The VIX index is a measure of volatility and a higher VIX reading is associated heightened investor fear. Because this index is know as the fear index, a higher VIX reading is viewed as a contrarian indicator. In late 2008 the VIX hit a level of near 90% as compared to today's reading of about 14%. Shortly after this high reading the S&P 500 Index reached a bottom and has been on a march higher since.

VIX measures are available for other markets outside the U.S. and one getting some attention at the moment is the EURO STOXX 50 VIX. As the below chart shows the VIX for the EURO STOXX Index has widened to a historically wide level versus the S&P VIX. This widening is likely the result of concern around the consequences of the resolution of the issues in Greece issues and the potential impact on European markets.

From The Blog of HORAN Capital Advisors

Full Size Image

As can be seen in the above chart, the average spread between the VIX and EURO STOXX VIX is 3.78% and the current spread is 14.95%. The current reading places this spread difference in the 99 percentile over the last ten years.

For investors then, the question becomes how this spread differential gets resolved. Is the ultimate resolution in Greece a "kick the can" one which is likely viewed favorably by the market or is the future path one where Greece is removed from the Euro Zone? Can Hui, CFA wrote an insightful article covering potential outcomes for Greece and how investors can take advantage of the results in an article titled, Two ways to Play Greece. One important distinction for readers in the article is the two ways to play the Greece situation depends on whether one is a trader or an investor. 

Stock Investors Should Hope 2015 Is A Repeat Of 2013

Market similarities comparing this year to 2013 are beginning to rise to the forefront of investors' minds. For equity investors, let's hope 2015 is a repeat of 2013. In 2013 the bond market experienced a "taper tantrum" as the Fed was preparing to end its quantitative easing programs. From early May 2013 to mid September the 10 year US Treasury yield rose from 1.7% to 2.9%. On an absolute basis, this is a significant rise in interest rates and caused bonds to selloff.. The iShares 20+ Year Treasury Bond ETF (TLT) fell over 17% from May 2013 to year end 2013.

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Dow Theory Has Many False Signals

One technical market indicator that has gained quite a bit of focus recently is the weakness in the transport index (IYT) relative to the Dow Jones Industrials Index (DJIA). Dow Theory suggests that underperformance in the transportation sector of the market is a precursor to broader weakness in the Dow index.

From The Blog of HORAN Capital Advisors

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Low Bullish Investor Sentiment Generally Leads To Strong Forward Returns For Stocks

This past week the American Association of Individual Investors reported bullish investor sentiment declined over seven percentage points to 20.04%. This is the lowest sentiment reading level since April 11, 2013 when bullish sentiment was reported at 19.31%.

From The Blog of HORAN Capital Advisors

Data source: AAII

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High Quality Stocks Hold Up Better In Broad Equity Market Corrections

Just two weeks ago I wrote an article focusing on investment risk and market corrections, Incurring Investment Risk Near A Market Correction. The "correction" thinking seems to remain high on many investors' and strategists' minds. From a contrarian perspective, market corrections are difficult to time and corrections rarely occur when everyone expects them to. This article is falling into the same line of correction thinking, maybe a trap of sorts; however, the following thoughts will touch on an equity strategy that historically has held up better in declining equity market environments.

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Share Buyback Investment Strategy Beginning To Underperform Broader Market

One market phenomenon noticed by many investors has been the elevated use of excess cash flow by companies to fund stock buyback programs. The demand for these buyback oriented equities has resulted in their significant outperformance versus the broader S&P 500 Index as can be seen in the below chart.

From The Blog of HORAN Capital Advisors

The U.S. equity market bottomed in March of 2009 following the financial crisis. From Q1 2009 through Q4 2014, S&P 500 companies have spent $3.8 trillion on dividends and buybacks. Reported earnings over this same time period totaled $4.5 trillion. As a result companies used 84% of their earnings to fund these dividend and buyback programs. Understandably, companies repurchased shares in the 2009 - 2012 period when share prices were depressed; however, accelerating buybacks at this point in time may be causing investors to rethink exposure to high buyback oriented firms. Since April the buyback index (PKW) has been underperforming the S&P 500 Index as can be seen in the following chart.

From The Blog of HORAN Capital Advisors

Lastly, as I noted in a post several years ago, firms have a tendency to buyback shares when stock prices are near highs. This fact may be causing investors to turn more cautious on companies buying back shares in an environment where some stocks may be trading at elevated valuation levels.

Lower Oil Prices Ahead?

On Thursday the EIA Petroleum Status Report shows a fourth week of oil inventory draw-down with a decline of 2.8 million barrels. Expectations were inventories would decline 857,000 barrels.

From The Blog of HORAN Capital Advisors

This decline occurred in spite of the continued increase in production as noted by the orange line in the below chart. Notable in the chart is the fact production continues to increase in spite of the sharp drop in rig count (blue line). The recent inventory draw-down may be due to seasonal factors as the busy summer travel season approaches as well as temporary production declines in sand fields in Canada.

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Today's Market Decline Does Not Qualify As A Correction

The S&P 500 Index is down 1% today and much of the television media represent this as a market "plunge". A representative headline on CNBC notes:

• "Stocks close 1% lower as Dow plunges triple digits; dollar, data weigh"

As the below chart shows, the S&P 500 Index is down only 1.29% from its year-to-date high return of 3.49% reached on 5/21/2015. For the the Dow Jones Industrial Average, this index closed down almost 200 points today; however, as the market index value becomes a larger number, 100 or 200 point movements are not significant from a percentage return basis.

From Blog of HORAN Capital Advisors 5 2015

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Incurring Investment Risk Near A Market Correction

One issue on the minds of a number of investors is the near term potential for an equity market correction. One's thinking is framed by the fact the S&P 500 Index has not incurred a 10+% correction in three and a half years or 916 trading days. This is the third longest streak as can be seen in the below chart. Include the fact first quarter 2015 earnings were not that great from a growth perspective, the economy (GDP) is growing at a snails pace and euro zone issues (Greece and now maybe Spain), it is not surprising investors are a little on edge.

From Blog of HORAN Capital Advisors 5 2015

Source: @NickatFP (twitter)

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Divergent Performance Between Transports And Industrials Likely Not Indicating Broader Economic Weakness

The disconnect between the performance of the Dow Jones Industrial Index and the Dow Jones Transportation Index has some market strategists suggesting the broader equity market is setting the stage for a correction. The correction thinking is based on the theory that weakness in transports is indicative of less goods being moved in the economy and thus a signal of a slowing  economic environment. From a more technical perspective, some strategist look at the Dow Theory as being able to signal a market correction.

As the below chart shows the transportation index has underperformed both the Dow Jones Industrial Index and the broader S&P 500 Index. This underperformance began to accelerate in mid-March. For investors though, evaluating the actual causes of weakness in the transports will provide insight into the slowing rail segment of the market and whether these factors are broad based ones or simply industry specific ones.

From Blog of HORAN Capital Advisors 5 2015

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Bonds Performed Poorly Leading Up To Release of Fed Minutes

In our last post about a week ago we noted the slow pace of economic growth that has unfolded since the financial crisis. This slow pace of growth has resulted in the unprecedented easing programs (quantitative easing-QE) instituted by the Federal Reserve over the past few years. A consequence of these QE programs is the apparent inability of the Fed to embark on a monetary tightening path since the markets seem addicted to these programs. In our view, given the low level of rates today, an initial tightening by the Fed will not have a long lasting negative impact on the overall economy or equity market. With this said, market participants were looking for insight into the Fed's future monetary direction with the release of the Fed's most recent meeting minutes. As was true to form, the Fed seems intent on maintaining its near zero interest policy with a June rate hike most likely pushed back to later in 2015 or maybe 2016. This delay in raising rates may give the market a reason to push bond prices higher (interest rates lower) near term.

Leading up to the release of the April minutes, the bond market positioned itself for a potential rate hike in June. As the below chart shows, from the beginning of April through the market close on May 19th, treasury bond ETFs sold off significantly. The aggregate bond index was also a weak performer and traded down nearly 2%. Stocks (S&P 500 Index) on the other hand have generated a positive 3.2% return since April 1st.

From Blog of HORAN Capital Advisors 5 2015

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Anemic Economic Growth Since The Great Recession And Some Causes

The March trade deficit grew to $51.4 billion which has many economist now predicting subsequent revisions to first quarter GDP will show the economy contracted for the first time since contracting -2.1% in the first quarter of 2014.  In the first quarter the advanced reading on GDP or economic growth was reported at .2% which was below an expectation of a Q1 growth rate of 1%. The large increase in the trade deficit is being attributed to resolution of the West Coast labor dispute resulting in a spike in imports and to U.S. export headwinds due to the strong dollar.

From The Blog of HORAN Capital Advisors

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Dividend Paying Stocks Struggling Mightily

In a post last month we highlighted the fact value strategies and dividend paying strategies were lagging both the S&P 500 Index and the S&P 500 Growth Index over the past twelve months. Frequently the value type stocks have a dividend component that provides additional return for investors.

Further confirmation that dividend paying strategies have been underperformers can be seen below. S&P Dow Jones Indices reports the average performance of the dividend payers in the S&P 500 Index have lagged the non payers by a wide margin, both year to date and over the course of the past twelve months as of April 30, 2015. For the one year period the payers return of 12.85% falls far short of the non-payers return of 20.64%.

From The Blog of HORAN Capital Advisors

Source: S&P Dow Jones Indices

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Stock Buybacks Are Not A Primary Factor In Lower Wage Growth Rates

Recently, a number of articles have been circulating about the need for companies to use more of a firm's cash flow to pay employees a higher wage versus using the cash flow growth to fund stock buybacks. For example,

• How the Stock Market Destroyed The Middle Class (MarketWatch)
• Stock Buybacks Are Killing the American Economy (The Atlantic)
• Profits Are Up, But Wages Are Stagnant. This Senator Has A Plan (ThinkProgress)

The implication in a number of the articles is stock buybacks increase a company's stock price and therefore buybacks are being used to increase the value of senior management stock options. In short though, buybacks have no direct impact on the value of a company's stock price. The below table shows how the share price is unchanged. What can occur is the earnings per share figure can increase due to the lower share count. Other  examples are contained in our post, Proof Buybacks Impact Earnings Per Share. We believe the market is intelligent enough to see through this type of earnings manipulation; thus, not attaching additional value for a firm's stock price due solely to stock buyback activity.

From The Blog of HORAN Capital Advisors

Source: McKinsey & Company

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A Further Rise In Crude Oil Prices Facing Headwinds Near Term

Oil rig count has fallen dramatically in the U.S., yet oil supply is continuing to pile up nearly unabated. The market is of the belief that this decline in rig count will ultimately put a halt to the supply growth.

From The Blog of HORAN Capital Advisors

Rex Tillerson, CEO of Exxon Mobil (XOM), recently spoke at the IHS CeraWeek conference in Houston, TX. Tillerson believes oil prices are likely to remain at a lower level for the next several years. Additionally, ConocoPhillips (COP) CEO noted the shale fracking industry has a large number of wells that will be completed once oil prices do rise. This alone is likely to place a cap on the rise in the price of oil.

Lastly, as the below chart clearly shows, in spite of the lower level of oil prices, Saudi Arabia is determined to keep the supply of oil flowing as evidenced by the country's rig count growth (green line.) Their goal is to force fracking companies out of business in an effort to eliminate this swing supply.

From The Blog of HORAN Capital Advisors

With WTI recently rebounding from the mid $40 per bbl price to mid $50's level, further oil price increases could face some headwinds in spite of the decline in global rig count (red line.) In the EIA Petroleum Status Report released on Wednesday, crude oil inventories rose 5.3 million barrels. As noted by Econoday,

"The string of inventory builds continues for oil, up a fat 5.3 million barrels in the April 17 week to 489.0 million which is the 14th straight build and yet another 80-year high [emphasis added]. The build is due to yet another rise in oil imports and also in part to an easing of refinery demand for oil. But refineries are still busy, operating at 91.2 percent of capacity."

Investor Letter Spring 2015: Another Weak First Quarter?

The first quarter of 2015 once again was a period where reported data suggests a mixed economic picture for the global economy. Interest rates declined slightly leading to positive returns for nearly all U.S. bond market segments. This was once again influenced by lower yields outside the U.S. and the strengthening Dollar. Worries about an economic slowdown have resulted in Europe, Japan and China incorporating additional economic stimulus via interest rate decreases and bond purchase programs. For many investors, the prospect of weak economic news is good for equity markets as central banks pursue stimulus programs to reinvigorate economic growth. Stimulus seems to create a floor for equity markets as liquidity finds its way into the market.

As we noted in our blog post yesterday, Higher Yield and Value Oriented Strategies Underperforming Broader Market, the additional investor demand for these yield oriented equities, i.e. dividend growth stocks, has not resulted in higher returns. Also, Goldman Sachs notes in a recent report that the dividend yield, high quality and strong balance sheet companies have been weaker performers versus other more growth oriented strategies. The below charts provide evidence of this phenomenon.

From The Blog of HORAN Capital Advisors

Looking specifically at economic growth or GDP, the Federal Reserve Bank of Atlanta notes the weakness in GDP in each first quarter since 2010. Some attribute this first quarter weakness to poor weather. However, the Atlanta Fed notes seasonal adjustments since the Great Recession could be negatively influencing first quarter GDP reports as well. As the chart at left shows, weaker economic activity in the first quarters since 2010 is very apparent. The average GDP growth in the first quarter since 2010 has been .6% versus 2.9% for the remaining quarters of the year. The advance estimate for the first quarter of 2015 will be reported on April 29th and the Fed’s tracking of data shows Q1 2015 GDP at just above zero.

For additional insight into our views for the market and economy, one can read our Investor Letter accessible at the below link.

• Spring 2015 Investor Letter

From The Blog of HORAN Capital Advisors