According to Bank of America, there have been 503 interest rate cuts by central banks around the world over the past six years. $11.6 trillion has been injected into the world’s economic system during this time. This record setting global easing helped deliver the best first quarter performance in 15 years for the Dow Jones Industrial Average, up 11.9% including dividends.
Appreciating stocks and depreciating bonds is the “risk-on” trade. Within stocks, small and mid cap are considered more risky than large cap. The “risk-on” trade was even more evident in the small- and mid-cap equity sectors with the Russell 2000 up 12.4% and the S&P MidCap 400 up 13.5% for the first quarter.
As one might expect in the face of big money easing, global bonds had their worst quarter since early 2009. The Barclays U.S. Aggregate Bond Index was down 0.12% in the first quarter. As the supply of money kept rising, higher interest rates were required to attract new bond buyers. Modestly rising rates caused bond values to depreciate.
For those waiting for the bull-run to offer a better buying opportunity, there have been zero 5% corrections since November. During a normal year, the market usually delivers five corrections of at least 5%.
With the market at all-time highs and just a month away from the seasonal sell-in-May trade, the question is should new money be put to work in equities now. Relative to 2007, stocks are inexpensive. Companies today have half the debt, pay bigger dividends and are producing 13% higher profits than five years ago. Individual investors continue to be skeptical of the market advance and remain under-invested. Analysts estimate that first quarter real consumer spending is on track for 3.5% growth quarter over quarter. While the Eurozone remains mired in recession, Asia (especially Japan) appears to be on a renewed growth path.
Technically, the S&P 500 broke out to a new high last Thursday. While this is likely the result of end-of-the-quarter institutional mark up, it creates a positive technical picture. In the short-term, we expect some of the end-of-quarter mark up to be pulled out of the market. The next important market driver will be the first couple of weeks of earnings season which formally begins a week from today. On weakness and with our indicator in the 70% range, we are buyers.
Review of Positions
Lilly (Eli) & Co. (LLY) – On Jan. 9, we recommended to buy to open the LLY July 55 calls (LLY 130720C000055000) for $1.45 or less. Today, we recommend you close the LLY calls for $2.60 or more.
Charles Schwab (SCHW) – On Mar 7, we recommended to buy to open the SCHW Sep 18 Calls (SCHW130921C000018000) for $1.05 or less. As of Friday’s close, these options closed at $1.05.
EMC (EMC) – On Jan. 10, we recommended to buy to open the EMC April 25 calls (EMC 130420C000025000) for $0.95 or less. As of Friday’s close, these options closed at $0.08.
Healthcare Trust of America (HTA) – On Feb 13, we recommended you buy to open the HTA Jul 12.5 calls (HTA 130720C0000125000) for $0.45 or better. On Friday, this position closed at $0.33.
Parting Shot: Market Sentiment Indicator
Shown below is our MSI (blue line) superimposed on the equal weighted S&P 500 measured by the ETF (RSP). We are bullish on the stock market when the MSI is above the 50% mark and bearish when it is below.
The scale for the MSI is on the left hand y-axis. The MSI has declined from 76.5% to 72.6% through Wednesday of last week but has since turned higher. The market remains bullish in the intermediate term and is not showing signs of being significantly overbought.
Have a great week trading,
Nick Atkeson and Andrew Houghton
Big Money Options