March 27, 2019

The market is positioned for a strong year in 2019, but with the first quarter being as strong as it has been we think the next couple of months will show a sideways-to-choppy market. Even with a short period of consolidation, there are a lot of reasons this market can move higher in the next couple of quarters. We believe recession worries are overblown at this time, but there is a lot of money on the sideline that can come back in.

03-27-2019 SPY


It is worth keeping in mind that there is substantial “dry powder”, or highly liquid marketable securities, on the sidelines by retail investors and hedge funds. Individual investors have been taking money out of the equity market since August 2018, with money market balances soaring to $3.1T. Moreover, this has grown by 10% in the past 4 months alone. In the meantime, JPMorgan Prime Brokerage data shows hedge funds are still net short equities.

One large reason could be substantial inflows, if our analysis is correct. In just the past 4 months, this balance has surged 10%, or $300 billion, and has reached the highest level since March 2010. This is “dry powder” in our view—as it reflects retail investors fleeing equities in response to seeing the US as late-cycle.

  • Existing home sales rebounded 11.8% in February, its first increase in four months, and the most since December 2015, to a 5.51 million unit annual rate, the highest level in a year.
  • The consensus was for a much smaller 3.2% rise to a 5%.10 million unit rate.
  • The surge was fueled by lower mortgage rates and received continued support from rising incomes and high consumer confidence.
  • Three of the four regions posted solid gains, with only the Northeast unchanged from the previous month.
  • All of the increase in sales was in single-family, which jumped 13.3%, also the most since December 2015, and the second most on record.
  • Condo/co-op sales were flat. Existing home inventories increased 2.5% to 1.63 million units.
  • The months’ available supply slid to 3.5 from 3.9 in the previous month, its lowest level in a year, indicating a continued supply shortage.
  • Partly due to the shortage, existing home prices continued to rise, up 3.6% y/y, led by single-family.

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