The Department of Redundancy Dept. (JPM)

The Department of Redundancy Dept. (JPM)

The Department of Redundancy Dept. (JPM)


It’s getting to be something of a mantra in the financial world that stocks are currently overpriced and at risk of a sharp pullback.  Not just today, but ever since the Trump took office we’ve been hearing that same old refrain: that there’s little to support current valuations and that stocks will shortly have to respond to the market’s being extended and staying extended for such a… well… extended period.


Heh, heh…


Anyway, it’s taken on a life of its own, with nearly everyone on the same side of the boat, screaming ‘Sell!’, or ‘Buy PUTS!’, or ‘Hedge yourself!’, or ‘Fire Bannon!’ or what have you.


And it appears there are very few left on the bullish side of the ledger as the summer comes to a close, and we enter what has traditionally been the most volatile month for the stock market, September.

That said, we at Normandy have also alluded to the dearth of positive signs on both the earnings and economic fronts.  Even so, we’ve stopped short of taking an outright bearish stance on the market.  There’s too much heat and heaving in the bearish pronouncements we read, and not enough genuine lightheartedness on Main Street for us to turn negative.


Should we read Bloomberg stories on kids jumping into AMZN stock with their allowance money and kicking out a fortune, we’ll know the end is nigh.  But today there’s still too much suspicion, too much reluctance to pony up and take a position.




You’re welcome to take on the September story, and if you’re truly piqued by it, the truth is, it does possess some meat.


For Instance…


This September, at least, we have 1) a looming government shut-down if Congress doesn’t vote to expand the nation’s debt limit, 2) a Federal Reserve meeting mid-month in which the central bank reveals how it proposes to put itself back in the black, and 3) a professional investment class that believes the current equity market is more overvalued than it was prior to the bubble of 1999/2000!


Take a look –

The above is taken from data supplied by Merrill Lynch via their monthly Fund Managers’ Survey, a report that canvasses more than 210 mutual, hedge and institutional fund managers from around the world.


And as you can see, these experts have never felt the market more overvalued since the survey began some twenty years ago.


Moreover, they’ve also drastically reduced their expectations for corporate profit growth this year.  At the beginning of 2017, 58% of the group felt profits would improve.  Today, only 33% share that expectation.


Yet at the same time, in a puzzling move, these same souls are neither expecting a market crash, nor have they taken preventive measures should a crash ensue.


According to the following data, the number of managers who have taken out ‘crash insurance’, i.e., the purchase of protective PUTs, is trending lower over the last year, not higher.


Look here –

Why, with all the worry over an imminent fall in markets and a darkening profit picture, is nobody taking proper counter-measures?  Where are the hedges?  Why are only 36% of managers surveyed taking out plunge protection?


Could it be a form of madness?


It’s not entirely impossible, though we would note that these same managers’ cash positions – on average now at 5% – fall at the high end of the range, indicating a defensive posture toward equities, relatively speaking.


And maybe they figure that’s enough, and are planning to use their cash hoards to buy into any meaningful dip that occurs as September progresses.


We’ll see!


The question we’re pondering today is derived from the above data, and it is, very simply –


Which sector would benefit most from an inflow of cash should the market pull back temporarily, or, should it fail to decline and just keep climbing, which group would see sustained buying?


And the answer, after a thorough canvassing of recent sector performance, is that the financials are most likely to take their turn at the head of the pack in either instance.


Have a look at a year’s worth of chart for banker/broker behemoth Goldman Sachs (NYSE:GS) –

Goldman is an important stock because of its size and influence, and its performance in many cases is a harbinger for the overall market.


Above, we see a tremendous rise coming out of the elections that stalled in March.  GS has been in a tight range ever since (in red).  But we think that’s about to end.


So, too, for banks like Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC), both of which have been locked in a price prison from the start of the year.


Have a look at BAC –

BAC stock has moved in a less than five percent band since New Year’s, a frustrating experience for stock holders, but not without its advantages.


One plus is that it gives the stock’s moving averages a chance to catch up to price and support the next burst higher.


Both GS and BAC are illustrative of stocks that got too far ahead of themselves and had to cool off.  The latest action testifies to the chill that currently obtains in the sector.


Let the Fires be Lit!


It’s now our very strong opinion that the financials will see a surge of inflows that will lead the indexes to new all-time highs.  And we feel the winner in the group will be J.P. Morgan Chase (NYSE:JPM), a stock that has also been range bound, but today appears healthier and more robust than the other mega-cap names we follow.


Have a look –

JPM is trending very close to 52 week highs and should therefore benefit more from a general push into the financials than the rest of the sector.


We would only add that a deeper than expected decline in the market averages would lead us to question our pro-bank outlook.

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With kind regards,


Hugh L. O’Haynew

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