May 12, 2017

This week’s market flash will be kept relatively short and to the point.

One of our key research providers and a group highly respected by the market, BCA Research, recently went short on the US equity market in their Global Investment Strategy publication. It’s a technical trade valid for the next 6 weeks.

As usual, their call is based on solid reasoning and fits well with our own view. We are not short the market in our tactical portfolio, but are very underweight. Our focus has been on minimising beta allocation, on the expectation that US market weakness was just a matter of time.

On most technical indicators, the US looks very toppy. Similarly, it also looks expensive relative to history. The rally since 2009 is also now long in the tooth.

Source: BCA Research and DShort

Growth expectations are coming under pressure. As we highlighted in last week’s CIO Flash, the credit cycle in China is turning, which will dampen asset prices and growth on the near term. Rates are also rising in the US, which is not market supportive.

Source: BCA Research and Trading Economics

Similarly, the US is going through a soft patch. Data has been improving for a number of years and there is little further potential improvement in many indicators. If anything, we have highlighted that some indicators show a very clear topping process.

Source: Dshort.com and Trading Economics

In a nutshell, the US equity market  is expensive, technically topping and the rally long in the tooth; whilst the credit cycle is weakening, sentiment is overly bullish and the economic data soft.

Not a market we would suggest chasing at the moment.