Nomura’s Andy Chaytor, Kevin Gaynor, and Bob Janjuah have a new note just out titled Time To Set Risk-Off Trades.
In English that just means: SELL!
The note is a followup to Janjuah’s bearish note yesterday, which predicted a selloff that goes through November. Note that this is not the ‘House View’ but rather the view specifically of Chaytor, Gaynor, and Janjuah.
After the big rally we’ve seen in equities (Europe and the US), risk currencies, and European government bonds, “risk off indicators proliferate” in their view.
What are some of these indicators?
One is simply: The S&P divided by the VIX, a crude measure of optimism combined with complacency. Suffice to say, it’s very high on a historical basis.
They also make an interesting observation about deteriorating, and the interplay of higher US gas prices with other broader macro measures.
One thing we have noted is that pressure on US households‟ disposable income is returning. Many will have noticed the big rally in wheat and corn over the past few months, with the latter setting new highs above 2008 and 2011 levels. The CRB food index has now risen 12% since early June and is up to levels not seen for nearly a year. What most grabs us, however, is the rise in gasoline. We have in previous pieces noted that when gasoline prices have fallen substantially below $3.75 in recent years there has been a pickup in data against expectations (as described by a data surprise index) and when rallying above this level data has tended to worsen against expectations. With that in mind, we note that average gasoline in the US has risen to $3.90 recently. Figure 4 shows this against the US data surprise index, with the $3.75 level marked.
There’s only a few years worth of data on that chart, but the idea of macro surprises beginning to fade as gas prices hit a certain threshold is an interesting idea that’s worth watching. And since data surprises are key to driving the, this is important.
One other key bit from their report: Speculators are now net-long the S&P, which has been a very rare occurance over the last several years… another signal of widespread optimism that could mark a top.
The note has a few other things, including some calendar-related indicators (this is often a turning point for the market this time of year), and some improvement in Europe.
Bottom line though: Sentiment, positioning, complacency, and data are saying to Chaytor, Gaynor, and Janjuah that the rally’s over.
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