Weekly Sound Bite

There are more warning signs for a US market that spent has spent the summer hitting new all-time highs. Over the past few weeks we have been watching broad insider sentiment sink as stocks have moved higher. Banking insiders were the one group that offered some comfort to the bulls with our Banking Indicator remaining above the 100% mark, meaning there were more stocks in the group with key insider buying than there were with selling. However, in advance of Janet Yellen's Friday speech at the Kansas City Federal Reserve's end-of-summer symposium at Jackson Hole, the banking insider comfort zone is crumbling.

According to FactSet, for the second quarter the blended earnings decline for the S&P 500 is -3.5% with 91% of the index companies reporting as of August 12th. That marks the first time the index has recorded five consecutive quarters of year-over-year earnings declines since the third quarter of 2009. Nevertheless, as earnings season winds down, investors are pushing broad US benchmarks to new all-time highs. Investors it seems are buying into the narrative that earnings will only get better from here.

Updates number of mining stocks to 30 from 31 in third paragraph, adds that they are in the Basic Materials sector.

Japanese bonds and oil are shaky, should we worry? On Friday, Business Insider noted that oil had slipped into a bear market after falling 20% from its recent peak of just over US$51 per barrel. The move happened on the same day the Bank of Japan decided not to increase its bond purchases which dampened hopes for helicopter easing. While the two developments may not be directly related, falling oil and Japanese policy maneuvers both have implications for investors.

July 27, 2016 - Yesterday the Federal Reserve released a non-controversial policy statement essentially saying that risks were not as high as last meeting (which took place right before Brexit) and that the labour market was showing some signs of strength. Essentially, it left itself enough wiggle room for the rest of the year to either raise rates, do nothing, or backtrack should the data turn south.

July 21, 2016 - Since the beginning of the month, gold stocks have been more or less flat on the back of better expected US growth. Another factor driving investors into riskier assets is the hope that Japan will deliver a double dose of monetary and fiscal policy stimulus following the triumph of the Liberal Democratic Party in recent elections. While we remain skeptical about the narrative surrounding a US recovery that will allow the Fed to hike rates sooner than expected, the moves in Japan could be meaningful.

With key US benchmarks making new all-time highs and the INK Canadian Insider Index making another 52-week high on Wednesday, the key question is whether or not the momentum can be sustained. A key positive development for market bulls over the past week has been the participation and leadership of the Financials, with the Thomson Reuters Financials Index jumping 4.16% compared to a 3.04% gain for the S&P 500 as of Tuesday. A good amount of the gains took place early in the week as long bond yields rose on the back of renewed hopes for aggressive global monetary easing. There was plenty of chatter that the Bank of Japan (BoJ) would be considering either a form of targeted lending to effectively assist the central government in financing a large infrastructure plan or "helicopter easing" which we would dub as HE. Under HE, the central bank would send cash payments or loans directly to households, bypassing the credit markets.

In light of post Brexit global growth concerns, as we wrote in our June 27th Canadian market commentary, we are just not sure what exactly central bankers could do that is not "more of the same." So what is more of the same?

• zero or near zero rates
• negative rates
• asset purchases (QE)

Investors now seem to be dismissing the ability of "more of the same" to work. Consequently, it raises the ante for further central bank action. If they do decide to act, they will try something even more dramatic than more of the same. Two of the most talked about weapons in the arsenal that could be used as a "final assault" on low inflation would be

Back in the 1970s, a think tank called the Club of Rome commissioned a publication Limits to Growth which argued the world would soon press up against a wall of finite natural resources. As a consequence, the world needed to prepare for a lower growth environment. Some forty years later the world may have indeed run up against limits to growth, but not due to natural resource depletion. Instead, accumulated global debt may be the culprit.

A poor jobs report last Friday has had the perverse effect of helping to send US stocks, as tracked by the S&P 500 Index, to new year-to-date highs. The disappointing news shut down Fed talk of a June rate hike, a proposition that in our view had little to do with a hot jobs market or consumer price inflation. Instead, the concept of a tightening likely gained momentum within the Fed over concerns that commercial real estate risks are beginning to boil. Nervousness was on display last month when the Boston Globe reported that Federal Reserve Bank of Boston president Eric Rosengren warned that commercial real estate prices had jumped above the peaks reached before the financial crisis.

Highlights from the June 1st US Market INK Report

Our US Banks Indicator remains positive, sitting above the 100% level (at which point there are the same number of stocks with key insider buying as there are with selling). Nevertheless, after a nice rally over the past few weeks, the bottoming of our US Banks Indicator suggests that much of the rally in the group may be over for now. A bottom in an indicator often coincides with a top in associated share prices. The counter argument could be made on traditional technical measures. From a technical chart perspective, new highs in the banks do look possible, particularly with the SPDR KBW Bank ETF (KBE*US) trading above its 20, 50 and 200 day moving averages. It also put in a new 3-month high earlier this week.