Developed Countries

The housing market remains a bright spot within the U.S. economy, which is not yet fully reflected in relative share performance. For instance, the NAHB survey has massively outperformed the ISM composite, signaling that relative profit conditions are more favorable for housing (top panel). The latest data showed that new home sales have surged, and that homes purchased but not yet under construction are at their highest level since 2007. Importantly, while banks are tightening standards on C&I loans, they remain willing to make mortgage loans, and consumers are increasingly willing to take on residential-related debt. This is bullish from a cyclical perspective, particularly since housing starts and household formation have considerable room to run before hitting a saturation point. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM.

Stocks have breathed a sigh of relief following earnings season. Nevertheless, cracks are spreading beneath the surface. The chart shows a compilation of non-conventional indicators that are waving a yellow flag. Breadth is thinning, as evidenced by the downtrend in the NYSE A/D line (top panel). Sentiment is also poor, with bullish investors throwing in the towel at an accelerating pace (third panel). Rather than view this contrarily, it can often be a sign that selling may accelerate. Moreover, once vibrant M&A activity is cooling rapidly, and the news has been recently dominated not by deal making, but by deal break ups. This may reflect increased trepidation about further adding debt to already bloated corporate sector balance sheets (bottom panel). Bottom Line: Resist the temptation to deplete cash balances, and continue to favor defensives over deep cyclicals. A capital preservation mindset is still warranted.

Against a backdrop of continuing supply destruction, particularly in the U.S., and a pick-up in crude demand, markets will remain in balance this quarter and go into a deficit in 2016H2.

Special Report

A combination of physical rebalancing in the oil markets and geopolitical risk have pushed oil prices above $50/bbl. We therefore close our recommendation - made jointly with BCA's Commodity & Energy Strategy team - to long a December 2016 WTI $50/$55 call spread for a 106.3% gain.

The latest conclusions from the sector-based (right) way to pick stock markets. Plus some important conclusions for credit markets.

Special Report

This month's <i>Special Report</i> reviews the literature on equity market timing, and identifies the key indicators that historically have had the best track record. We then aggregate the indicators into an overall scorecard that should prove to be valuable for investors in these volatile times.

This month's <i>Special Report</i> reviews the literature on equity market timing, and identifies the key indicators that historically have had the best track record. We then aggregate the indicators into an overall scorecard that should prove to be valuable for investors in these volatile times.

Our upgrade of the S&P electrical components & equipment (ECE) index to overweight earlier this year was based on both market and industry factors. The group had undershot on technical, valuation and sentiment basis. Moreover, it was being unfairly lumped in with more resource-dependent industrial sector groups, particularly given that the index is comprised of large, diversified manufacturing businesses with exposure to a variety of end markets. However, market extremes have been unwound and headwinds to a fundamental earnings recovery have surfaced. Shipment contraction is rife, and unlikely to improve given that new orders have tumbled. Factories are likely to become underutilized. Utilization rates had stayed remarkably high during the overall economic downturn, owing to capacity shrinkage. This resilience is at risk now that leading revenue indicators are sinking. Productivity growth has dipped, and has more downside risk, given that wage inflation is outpacing deflationary pricing power growth. Adding it up, the power to sustain the advance in ECE stocks is diminishing, and we recommend moving to the sidelines. Please see yesterday's Weekly Report for more details. The ticker symbols for the stocks in this index are: BLBG: S5ELCO - EMR, ETN, ROK, AME, AYI.

The S&P industrials sector has led the deep cyclical sector recovery this year, validating our upgrade to neutral to protect against a countertrend move spurred by U.S. dollar softness. However, the industrial sector share price ratio is now near the top end of a 15-year range, suggesting major resistance. An exhaustive examination of our Indicators highlights that this year's rally has been based on portfolio repositioning and reversion from oversold conditions rather than expectations of a sustainable earnings recovery. Valuations have gone from cheap to neutral, implying that further gains require earnings outperformance. The objective message from our industrials Cyclical Macro Indicator is that relative forward earnings estimates will continue to fall. The underlying bearish force is top-line malaise. Hopes for an industrial sector revival appear to be misplaced. Once credit conditions tighten and banks become less willing to extend C&I loans, the ISM manufacturing index generally weakens. Core durable goods orders are already contracting, despite the boom in auto production over the past few years. Importantly, the corporate sector is not in a position to ramp up investment, as highlighted in last Monday's Weekly Report. That is particularly true of resource companies, where the most intense leverage pressures reside. Consequently, it is premature to bet on an industrial profit recovery and we recommend returning to an underweight stance. Please see yesterday's Weekly Report for more details.