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Goldman's Clients Are Suddenly Very Worried About Collapsing Market Breadth
Three days ago, just before the biggest market drop in weeks, we wrote an article attempting to answer "when does the market breakdown again" where we said the answer is in the advance-decline line....
... for one reason: the absolute collapse in market breadth had become the biggest threat to the rally since late September.
BofA noted that "the rise in the US Dollar has had a bearish impact on global equity market breadth (many equity markets have done much better in local currencies) and this A-D line has not confirmed the global equity market rally. This is a major bearish breadth divergence and a classic sign of diminishing breadth for global equity market indices."
We added that what this "means that the central banks, whose only mandate is to keep the global market from crashing, is they will have to buy - either directly like the SNB and BOJ or indirectly/spoof like the NY Fed via Citadel - much more than just the E-mini and a handful of stocks to give the impression that the market is healthy when in fact, it is not."
For now they are failing.
Which explains why suddenly the topic of collapsing market breadth is the biggest concern among Goldman's clients.
As Goldman's David Kostin explains, narrow market breadth has been a recent topic of investor discussions.
Clients are quick to point out similarities between the current low breadth environment and the narrow breadth regime that emerged during the tech bubble in the late 1990s. A narrow market exists when a few stocks drive the majority of the index-level return. Five firms – AMZN, GOOGL, MSFT, FB, and GE – totaling 9% of the equity cap of the index have accounted for more than 100% of the S&P 500 YTD return. Stated alternatively, without these stocks the index would have posted a 220 bp lower total return or -2.2% YTD.
We introduce the Goldman Sachs Breadth Index (GSBI) to track market breadth (see Exhibit 1). The index utilizes S&P 500 constituent weights and 6-month returns to assign a market breadth value between 0 and 100. Readings below 5 indicate that market breadth is especially narrow.
Our Breadth index currently equals 1, one of the lowest levels in the 30- year series. The Breadth index has stayed below 5 for at least two consecutive months just 11 times since 1985 (Exhibit 1). The typical episode lasted four months, with past episodes ranging from two months in 2007 to a high of 14 months during the tech bubble. The current exceptionally narrow breadth period is just one month old but is on track for a second month, so this environment could reasonably be expected to persist into early 2016.
Factor analysis shows that high quality stocks tend to outperform in narrow breadth environments, although results were inconsistent. Using our long/short Micro Equity Factors (MEFs), we can evaluate the types of stocks that typically outperform in narrow breadth environments. Firms with strong balance sheets outperformed firms with weak balance sheets in 7 of 11 narrow breadth periods. Low volatility stocks also outperformed their higher volatility counterparts in 7 of 11 episodes. In contrast, the “lower quality” Russell 2000 index outperformed the S&P 500 during 8 of the 11 periods, the best factor hit rate (see Exhibit 3).
The subsequent performance of stocks in a narrow breadth market has been mixed. Factor analysis shows that high momentum stocks outperformed low momentum stocks in 64% of narrow breadth episodes. During the six months leading into the 1994 low breadth episode, the top ten contributing stocks accounted for nearly 90% of the S&P 500 return. However, during the six months following the initial low breadth index reading, the median stock in the list fell by 4% while the S&P 500 returned 3% during the same period. The 1999 episode was a different story: The top 10 contributing stocks accounted for nearly 900% of the S&P 500 return ahead of the first low reading of our breadth index. The median stock surged by 62% during the subsequent six months and accounted for 51% of the index return and pushed the overall S&P 500 index up by 18% during that period.
In other words, BTFD is nothing new.
But is breadth a relevant indicator? That depends: just like there has not been a major market crash without a Hindenburg Omen, so market breadth has collapsed before every single prior recession. However, just like the H-Omen, breadth has had numerous false negatives, and 8 very narrow breadth periods ended without an economic contraction. To wit:
On its own, narrow breadth is an unreliable indicator of a recession or market peak. Breadth was extremely narrow preceding each of the three recessions during the last 30 years, but the remaining eight narrow breadth periods ended in relatively healthy growth environments. While breadth was especially narrow before the market collapses of 2000 and 2007, the S&P 500 exited 7 of the 11 narrow breadth episodes in a positive fashion, with the median episode producing 6- and 12-month returns of 3% and 9%. In short, narrow breadth by itself does not appear to be a cause for investor concern.
And while Goldman is eager to spin the bullish case, its clients are no longer as believing:
On the other hand, clients continue to point to similarities between the current narrow breadth environment and that of the later years of the tech bubble. S&P 500 forward P/E currently equals 16.3x, near the highest level since the tech bubble. Mega-cap growth stocks explain a vast majority of the trailing 6- and 12-month S&P 500 return. Other similarities to the late 1990s provide a persuasive case for why mega cap outperformance will likely persist, at least in the near term. Modest US economic growth and peak margins should put a premium on stocks with perceived high secular growth prospects.
Or, said otherwise, Goldman's clients are nervous because with just 5 stocks (!) propping up the entire market, the party is to end with a bang (especially for the small and mid-cap momos). And, as the action on Friday confirmed, the "market" is finally getting the memo.
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Keep listening to Goldman's advice. You're sure to come out of this OK. Well, then again...
"Goldman's clients" are properly known around here as muppets you dumbass...
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013...
As in,
"my jew bankster advised I put all my money in this attractive investment..."
Been a while since I've seen do many stocks blow up in 6 months.......
Normal
I knew Apple wouldn't hit 125 again. That was my stop loss when it was on the way down from 130ish. I'm pretty sure I can stand by that number as we go forward. It's not looking pretty... (and not just for them, as you mention: it's a real party for everybody).
Which GS clients? The ones in London, NY, Tel Aviv or in Shanghai?
I know they haven't asked my affluent, hypocritical and Catholic father-in-law, here in the Pac NW. He seems unperturbed.
And here I thought here were only atheists in the Pac NW.
only way to kick this in to high gear(high=crash) is if France does some knuckle headed move....like call out Putin's gang in S town
otherwise....PPT has all weekend to print for those 5 stock proppers.
Okay, so now we've confirmed JMP's quant-steinian has reasoned that Vol, along with delta has shifted back to a selling scenario, and now the Squid is saying market breadth is low, ie; their buyback desk is dusty.
That means the 38.2%-50% Fibi's are going to get Whack-A-Moled then a sudden low Vol signal[ VIX selloff] will ignite the ALGO's when some stupid headline from CNBS hit's the ticker. This shit is so predictable. [ Three Card Monte, at it's best]
So now we have just enough time to crush all the shorts again, just before Christmas?
Ohh yahh. The Squidballs are here.
It'll be interesting to watch this play out.....
Agreed. BTW, keep up the good work with your fantastic contributions to Z/H. I enjoy your insight.
Bull trap has already shut, now it's killin' time.
Yeah today's market breath is pretty foul!
oh,
yeah, breadth...
lol..goldman's clients
Half their worries would disappear if they wern't goldman clients
Market breadth is a fucking joke when you have NO market volume, and fucktards buying the markets are using the most heavily weighted parts(8-10 stocks) to manipulate the volume>less markets, with free fake money lent to them at ZIRP!
i don't understand the downvotes. zh has been posting articles showing this for quite some time
It's just basement baby wanabes looking for attention. I find it highly unlikely that they know how to differentiate flows based on Volume vs Breadth.
Look at the BTFD'ers pretending they understand markets. Their only strategy is to assume the FED will print forever. That will prove to be as useful as assuming .com's would rule the world.
The Squid has to get it's high net worth out first.
The smaller investors are required to serve as bag holders.
we have ~$100k in a "negative duration" gs bond fund(?) negative duration bond fund - who else but the squid could have come up w/that? they haven't stolen it yet (but then again we haven't tried withdrawing it yet either)...
Don't worry Goldman clients Goldman has your back.
The peewee goldmans ballsacks are sad that there's not going to be any excess Graft this year. > Pouty face :-(
Here is one I would like someone to explain to me in all seriousness. Goog and FB claim to get over 60 Billion a year in advertising revenues. I honestly dont think that the total advertising revenue of all US companies is anywhere near that.
I guess this mean no rate increase
You'd think Goldman's clients would be more worried about what happens when the proletariat wake up.
Screw the market! I'm baking a pumkin pie. I didn't have any eggs left. I am suddenly very worried. Really worried the pie will collapse.
Markets do not exist in their own right; they are supposed to represent the value of the underlying companies and the state of the economy.
Companies provide real products and services into that economy.
Companies take raw materials and make them into products.
Cheap oil = collapsing global economy
Low commidity prices = lack of demand for raw materials from which real things are made
QE and low interest rates may have kept markets up, but the real economy is collapsing.
Maintaining the penthouse suite while the foundations are crumbling.
Central Banks policies just aren’t working.
How is the global consumer these days?
1) The once wealthy Western consumer has had all their high paying jobs off-shored. As a stop gap solution they were allowed to carry on consuming through debt. They are now maxed out on debt.
2) Japanese consumers have been living in a stagnant economy for decades.
3) Chinese and Eastern consumers were always poorly paid and with nonexistent welfare states are always saving for a rainy day. Western demand slumped in 2008 and the debt fuelled stop gap has now come to an end.
4) The Middle Eastern consumers are now too busy fighting each other to think about consuming anything and are just concerned with saying alive.
5) South American and African consumers are busy struggling with economies that are disintegrating fast.
Oh dear.
“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” Warren Buffett
This has rolled out globally with the Neo-liberal ideology.
The 1% have gone to war against the 99% (aka the global consumer base)
This is what the 1% winning looks like – global recession.
The world might soon witness a major shift in the value of one investment over another as investor seek firmer ground. Derivatives, currencies, plunging stock prices, air rushing out of a bond market bubble, how debts are structured, and the timing or direction from which problems arise are all elements that must be considered. Several factors determine just how much influence can be applied to how current economic policies unfold.
Using the metaphor of "let the chips fall where they may," things like the size of the chips, the rate or speed at which they fall, and the number of chips in the air may make them uncontrollable. We could find ourselves up to our neck in chips in a blink of an eye, at that time all bets are off as to how successful efforts to stem a catastrophe might be. The financial overlords may be losing control and this means during the final stage of the global shakedown events will be chaotic and become very wild. More below on how violent the crash might be.
http://brucewilds.blogspot.com/2015/08/the-final-shakedown-will-be-uncontrolled.html
BUTT-FUCK THIS MARKET ALREADY!