Fear of Missing Out

“The biggest chunk of change was allocated to equities in March since June 2007, up 0.3 percentage point in March to 67.2%. That’s the third biggest allocation to equities since July 2007, trailing only two other instances — 68.1% in September 2007 and 68.3% in December 2013. Bond and bond fund allocation fell 0.5 percentage point to 15.7%.” (American Association of Individual Investors)

The fear of missing out on the sixth year of a bull market has created something close to a buying panic.

Equity Allocation

The ten biggest months of capital inflow to the equity market (all equity mutual funds and ETF:s). Seven of the ten largest inflows occurred either in 2000 or 2013.

S&P 500

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EPS Guidance

“Earnings for the S&P 500 are forecast to decline 1.2% in the first quarter, which would mark the first year-over-year decline since the third quarter of 2012. As of Dec. 31, analysts were estimating first-quarter earnings would grow 4.3%.” (FactSet)

But sluggish earnings growth over the past three years hasn’t held back stocks.

EPS Guidance

Seasonal Performance

Most of market corrections and bear market down-legs take place in an unfavorable season from May to October, referred to as “Sell in May and Go Away”. Even against the massive Fed influence during the recent years the effect of seasonality has been clear. During 2012 and 2013 there was no larger correction but the market still made most of its gains for the year in the traditional favorable seasons, and moved basically sideways in the unfavorable summer season.

“A 2012 study of the 40-year period from 1970-2011, published by the Social Science Research Network, concluded that the old adage “Sell in May and Go Away” remains good advice. On average, returns are 10 percentage points higher in November to April semesters than in May to October semesters.” (Barrons)

When the market plunged in 2011 Bernanke and the Fed rushed in to double the QE from $40 billion a month to $85 billion a month. Now Fed is tapering back stimulus, and will have it back down to $35 billion in May. The current bull market is now 61 months old. Not many have lasted as long. By most valuation metrics the market is overvalued by historic standards.

Seasonal Weak Part of the Calander

No Earnings

“In the Russell 1,000, there are 85 stocks in the index with negative trailing 12-month P/E ratios (negative earnings). Those 85 stocks were down an average of 1.78% today (friday), and they’re down an average of 3.9% over the last month. The other 932 stocks in the Russell 1,000 were down just 20 bps today on average, and they’re up an average of 2% over the last month.” (Bespoke Investment Group)

Distinctly Dovish Tone

“Draghi struck distinctly dovish tone yesterday as he mentioned the high spare capacity in the common currency area, the risk of high cyclical unemployment turning structural if not appropriately tackled, and of a long period of low inflation feeding disinflationary expectations, like in Japan. ECB left the policy rates unchanged but opens door to QE.”