Variant Perception

Market positives are hard to come by these days.  Well, at least that's the perception.  Howard Marks spoke to this in his latest memo: On the Couch

One of the most significant factors keeping investors from reaching appropriate conclusions is their tendency to assess the world with emotionalism rather than objectivity.  Their failings take two primary forms: selective perception and skewed interpretation

The bottom line is that investor psychology rarely gives equal weight to both favorable and unfavorable developments.  Likewise, investors' interpretation of events is usually biased by their emotional reaction to whatever is going on at the moment.  

My friend Frank Zorrilla (@ZorTrades) made a great point on Twitter Friday:

Here in the short term, strictly going to focus on what can go right..only works if you believe in up and down, not up or down

— Frank Zorrilla (@ZorTrades) January 15, 2016

Market breadth and sentiment is extreme enough that we need to think hard about the positives and potential positive developments moving forward.

It's also true that earnings season often sees swings in both directions as the news flow hits the tape.

One in 'our face positive' that deserves discussing is gasoline prices.  From Labor Day through Q4, gas prices were stable.  With the market meltdown, prices have dropped over 20% in just over two weeks.

Looking at the last 16 months of price action, there are a few interesting points to be made.  First, Q4 2014 saw Gas prices plummet 37% through year end, essentially crashing during the holiday season and continually providing a boon to holiday shoppers.  That boost was nowhere to be seen over the holidays.

Also note in Q1 2015, prices rallied all quarter.  Again, all of a sudden prices are 20% below where they were one year ago and 40% below where they were at the end of Q1 2015. 

This is all coming while retailers have maintained discounts beyond the holiday season.  It's a nice combination for the middle class consumer.

Keep this in mind as your favorite consumer discretionary companies report earnings.  A relative headwind from Q4 all of a sudden become a large tailwind for Q1.  Of course these numbers get modeled in and factored into corporate forecasts, but with all of the pessimism and negative news flow, they likely aren't priced in.

On a similar note, the ratio of consumer discretionary stocks to consumer staples stocks, coined as the consumer ratio, is testing a four year rising trend after a dramatic drop.  If this ratio is going to turn, it will very soon.  This coming while the market is sitting at major support.  

Thanks to Mark Newton for pointing this out on Friday.

At the start of the year I wrote 'What's up with retail'.  The breakdown setups were large and have significant technical implications.  I noted that one major concern was how retail struggled to make progress in 2015 even though energy prices were continually crushed.  That STILL is a concern as it may signal broader underlying issues with the consumer.

It'll be interesting to watch this measure of risk appetite as the market reacts to Q4 earnings.  The setup for some risk taking and an improving consumer discretionary group is present.  

Thanks for reading.  Trade 'em well!