WHAT YOU DON’T SEE AT MARKET BOTTOMS: CFD TRADING …€¦ · 29/09/2017  · WHAT YOU DON’T SEE AT MARKET BOTTOMS: CFD TRADING EDITION Highlights It is said that while bottoms

Quantitative & Strategy

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WHAT YOU DON’T SEE AT MARKET BOTTOMS: CFD TRADING EDITION

Highlights

It is said that while bottoms are events, tops are processes. Translated, markets bottom out when panic sets in; therefore,

they can be more easily identifiable. By contrast, market tops form when a series of conditions converge, but not

necessarily all at the same time.

We have stated that while we don’t believe the stock market has made its final cyclical top, we are in the late stages of a

bull market (see Four Steps, Where’s the Stumble?). Nevertheless, psychology is becoming a little frothy, which represents

the pre-condition for a major top.

As a result, we are publishing another report in a series of the “things you don’t see at market bottoms”, where we are

seeing widespread signs of investor euphoria.

Interested readers can review the reports in the other editions in this series, What You Don’t See At Market Bottoms, What

You Don’t See At Market Bottoms: Euphoria and Wild Claims, What You Don`t See At Market Bottoms: No Fear Edition and What

You Don’t See At Market Bottoms: Paris Hilton Edition.

We reiterate our belief that this is not the top of the equity market. Nevertheless, investors should be aware of the risks

of an environment in which sentiment has become increasingly frothy. However, we also remind investors that BAML

strategist Savita Subramanian observed that the last year of an equity bull can be rewarding and painful to miss.

Cam Hui, CFA September 29, 2017

cam@[email protected]

Cam Hui, CFA | (604) 724-8404 Page 2

September 29, 2017

Quantitative & Strategy

What You Don’t See at Market Bottoms

It is said that while bottoms are events, tops are processes. Translated, markets bottom out

when panic sets in; therefore, they can be more easily identifiable. By contrast, market tops

form when a series of conditions converge, but not necessarily all at the same time.

We have stated that while we don’t believe the stock market has made its final cyclical top, we

are in the late stages of a bull market (see Four Steps, Where’s the Stumble? and The Music Is Still

Playing, Should You Keep Dancing). Nevertheless, psychology is becoming a little frothy, which

represents the pre-condition for a major top.

As a result, we are publishing another report in a series of “things you don’t see at market

bottoms”.

CFO Survey: 83% Think Market Overvalued

A recent Deloitte survey of CFOs found that 83.1% believe the equity market to be overvalued,

which is the highest level in the history of the survey. To be sure, CFO sentiment is an inexact

market timing indicator, as this reading has been elevated for some time.

Exhibit 1: The Paris Hilton Lydian Coin Tweet

Source: Deloitte CFO Survey

Move along, nothing to see here.

Cam Hui, CFA | (604) 724-8404 Page 3

September 29, 2017

Quantitative & Strategy

Leveraged Loans Are Back!

The WSJ reported that leveraged loans are back. Issuance in both the U.S. and Europe are set

to top pre-crisis levels.

Exhibit 2: Leverage Loan Issuance

Source: Wall Street Journal

As an example of how credit standards have fallen, unemployed teenage students and dogs

receive credit card offers.

Exhibit 3: Credit Card Standards Are Falling

Source: Twitter

Cam Hui, CFA | (604) 724-8404 Page 4

September 29, 2017

Quantitative & Strategy

To be sure, the Toys “R” Us bankruptcy filing was a warning for investors who have stretched

for yield. This apparent appetite for risk has depressed credit spreads to historically low levels,

but trouble is brewing beneath the surface. Bloomberg highlighted analysis from Morgan

Stanley indicating that the dispersion of credit spreads is rising, even as headline spreads have

fallen.

Exhibit 4: Trouble Stirring Beneath the Credit Market Surface

Source: Morgan Stanley Research

Cam Hui, CFA | (604) 724-8404 Page 5

September 29, 2017

Quantitative & Strategy

Fear or Greed?

As experienced investors know, market psychology is constantly oscillating between fear and

greed. Today, the percentage of IPOs with negative earnings has only been eclipsed by the

period preceding the NASDAQ Bubble top. Is this a manifestation of fear, or greed?

Exhibit 5: Unprofitable IPOs at Levels Last Seen at NASDAQ Bubble Top

Source: Jay R Ritter

BAML also recent reported that private client bond and cash allocations have fallen to

historically low levels. Is this fear, or greed?

Cam Hui, CFA | (604) 724-8404 Page 6

September 29, 2017

Quantitative & Strategy

Exhibit 6: BAML Private Client Debt and Cash Allocation at All-Time Lows

Source: BAML Research

Cam Hui, CFA | (604) 724-8404 Page 7

September 29, 2017

Quantitative & Strategy

European Football Stars Promoting CFD Trading

Finally, we see that Real Madrid star Cristiano Ronaldo is promoting Contract For Difference,

or CFD, trading.

Exhibit 7: Cristiano Ronaldo as CFD Spokesman

Source: Twitter

For newbies, CFDs are derivative contracts that allow for leverage of anywhere from 300:1 to

1,000:1. Bloomberg reported that a number of European soccer clubs have partnered with CFD

firms.

Exhibit 8: CFD Partners of European Football Clubs

Source: Bloomberg

Cam Hui, CFA | (604) 724-8404 Page 8

September 29, 2017

Quantitative & Strategy

For now, we believe the frothy excess that we have cited in this and past reports represents a

“this will not end well” narrative without an obvious bearish trigger. However, sentiment

doesn’t function well as precise market timing tools.

BAML strategist Savita Subramanian also pointed out that the last year of an equity bull can be

rewarding and painful to miss.

Exhibit 9: The Last Year of a Bull Can Be Painful to Miss

Source: BAML Global Research

We reiterate our belief that this is not the top of the equity market (see our recent report, Four

Steps, Where’s the Stumble?). Nevertheless, investors should be aware of the risks of an

environment in which sentiment has become increasingly frothy.

Now if we could only trade with 1,000 to 1 leverage for that final bull leg…

Cam Hui, CFA | (604) 724-8404 Page 9

September 29, 2017

Quantitative & Strategy

Disclaimer

I, Cam Hui, certify that the views expressed in this commentary accurately reflect my personal views about the subject company (ies). I

am confident in my investment analysis skills, and I may buy or already own shares in those companies under discussion. I prepare and

edit every report published under my name. I depend on my colleagues for constructive criticism on my research methods and conclusions

but final responsibility is my own.

I also certify that I have not and will not be receiving direct or indirect compensation from the subject company(ies) in exchange for

publishing this commentary.

This investment analysis excludes any target price, and is not a recommendation to buy or sell a stock. It is intended to provide a means

for the author to share his experience and perspective exclusively for the benefit of the clients of Pennock Idea Hub (PIH). My articles

may contain statements and projections that are forward-looking in nature, and therefore subject to numerous risks, uncertainties, and

assumptions. The author does not assume any liability whatsoever for any direct or consequential loss arising from or relating to any use

of the information contained in this note.

This information contained in this commentary has been compiled from sources believed to be reliable but no representation or warranty,

express or implied, is made by the author or any other person as to its fairness, accuracy, completeness or correctness.

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