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Near-term pullback, long-term uptrend

Near-term pullback, long-term uptrend

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On March 13, 2020, we began talking1 and writing2 about a series of tactical market bottom indicators3 that showed signs of extreme risk-off positioning, which were positive from a contrarian perspective. One of those indicators was the Chicago Board Options Exchange (CBOE) equity put/call ratio. Little did we know it at the time, but ten days later, the S&P 500 Index would put in what now appears to be a major low for the cycle.

What is the CBOE equity put/call ratio and why does it matter?

The put/call ratio is a measure of seller (put) relative to buyer (call) positioning derived from the options market, where a ratio greater than 1 signals more sellers than buyers (or extremely negative investor sentiment) and usually aligns with big market bottoms. On March 12, 2020, the put/call ratio hit 1.28, its highest level since 20084—in the depths of the Great Recession and Global Financial Crisis—meaning risk-off positioning was lopsided and investor pessimism was overwhelming.

The put/call ratio served us well three months ago, but what is it telling us now?

Unfortunately, there may be at least a temporary wrinkle in the bull case for stocks. The recent trough-to-peak surge of 44% on the S&P 500 Index compressed the put/call ratio to 0.37 on June 8, 2020, its lowest level since 2010—just before the peak of the European sovereign debt crisis. In other words, risk-on positioning has gotten stretched, and the bulls are running rampant, raising the likelihood of a near-term pullback in stocks akin to what we saw in 2018, 2015 and 2011.

Figure 1. Too many buyers, not enough sellers

Source: Bloomberg L.P., Invesco, 06/11/20. Notes: CBOE = Chicago Board Options Exchange. The CBOE Equity Put/Call Ratio is a measure of seller (put) relative to buyer (call) positioning derived from the options market, where a ratio less than 1 signals extremely positive investor sentiment. An investment cannot be made in an index. Past performance does not guarantee future results.

Beyond investor positioning, is there a broader bearish case to be made for stocks?

In our view, the bearish case includes 5 points of pessimism, namely:

1) Fears of a potentially deadly second wave of the coronavirus as the economy reopens and we approach cooler fall weather; 2) the risk of a negative feedback loop between stocks and 2Q20 gross domestic production (GDP) and earnings per share (EPS); 3) heightened US-China tensions; 4) overvaluation; and 5) tactical overbought conditions, as discussed. All valid points, any one of which could prove to be the catalyst for a near-term pullback in stocks.

Figure 2. The optimists always win in the end

Source: Invesco, 06/11/20. Notes: GDP = Gross domestic production. EPS = Earnings per share.

How does the bullish case stack up?

That said, we remain compelled by the breadth and scope of the bullish case, which includes the following 10 points of optimism:

1) Massive, unprecedented and coordinated monetary policy support; 2) similarly impressive fiscal policy support; 3) cautious investor positioning in the form of high cash balances and net short positions in stocks; 4) negative investor sentiment as expressed by persistent outflows from stocks and more bears than bulls in the individual investor survey; 5) a structural oversold condition as seen in the rolling 20-year total returns on stocks; 6) plateauing or flattening coronavirus daily cases overall; 7) a potential treatment for the disease that is being researched and developed by a host of companies around the world, and that has already moved to human trials; 8) a potential vaccine for the virus that is evolving similarly; 9) the high-frequency economic data like weekly initial claims for unemployment insurance are improving; and 10) the economy is reopening and activity is moving in the right direction, as evidenced by the daily mobility data.

Is this a cyclical bear market in a secular bull market, or is this a cyclical bull market in a secular bear market?

While it may seem like a daunting task, we believe it is possible to differentiate between secular bull and bear markets. It is said that the trend is your friend except at the end where it bends. Historically, secular bull markets have not ended until stocks have produced 20-year annualized total returns of 11% to 15%. In the current environment, however, 20-year returns remain muted, so much so in fact that they seem more consistent with a secular bull market in its earlier stages than one in its later stages.

Figure 3. The trend is your friend except at the end where it bends

Source: Bloomberg L.P., Invesco, 03/31/20. Notes: Rolling 20-year annualized returns on the S&P 500 Total Return Index, calculated using quarterly data. SE = Standard error. Dark gray areas denote secular bear markets in US stocks. Light gray areas denote secular bull markets in US stocks. An investment cannot be made directly in an index. Past performance does not guarantee future results.

Amidst the biggest economic event in modern history, we must admit to being surprised by the v-shaped stock market recovery and the fact that equities haven’t yet re-tested the March low. Based on some of the tactical breadth and positioning indicators that we monitor, however, there is a case to be made for a near-term pullback in stocks. Short-term volatility aside, we believe the long-term bull case (10 points of optimism) outweighs the bear case (5 points of pessimism). As such, we think investors may benefit from maintaining structural exposure to stocks in the years ahead.

Footnote

1 Source: BNN Bloomberg, Why this strategist sees long-term investment opportunities post-Covid 19 chaos, 03/13/20.

2 Source: Invesco, Chaos can create opportunities, 03/19/20.

3 Source: Invesco, Looking for signs of a bottom in stocks, 04/01/20.

4 Source: Bloomberg L.P. as of 5/31/2020

Important Information

Blog Header Image: Schira Kosmin Rudi / EyeEm/ Getty

Contrarian investing is an investment style in which investors purposefully go against prevailing market trends by selling when others are buying, and buying when most investors are selling.

A put option is an instrument that gives the holder the right to sell an asset, at a specified price, by a specified date to the writer of the put.

A call option is an instrument that gives the holder the right to buy an asset, at a specified price, by a specified date from the writer of the call.

GDP is the total value of all finished goods and services produced within the United States’ borders in a specific time period.

EPS are the total value of US corporate profits divided by the same companies’ common stock outstanding.

The SE is a statistical term that measures the accuracy with which a sample distribution represents a population by using standard deviation.

All investing involves risk, including risk of loss.

A decision as to whether, when and how to use options involves the exercise of skill and judgment and even a well conceived option transaction may be unsuccessful because of market behavior or unexpected events. The prices of options can be highly volatile and the use of options can lower total returns.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The opinions referenced above are those of the authors as of June 12, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations. This does not constitute a recommendation of any investment strategy or product for a particular investor. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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There will soon be one million seats on this popular Amtrak route

“More people are taking the train than ever before,” says Amtrak’s Executive Vice President.

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While the size of the United States makes it hard for it to compete with the inter-city train access available in places like Japan and many European countries, Amtrak trains are a very popular transportation option in certain pockets of the country — so much so that the country’s national railway company is expanding its Northeast Corridor by more than one million seats.

Related: This is what it's like to take a 19-hour train from New York to Chicago

Running from Boston all the way south to Washington, D.C., the route is one of the most popular as it passes through the most densely populated part of the country and serves as a commuter train for those who need to go between East Coast cities such as New York and Philadelphia for business.

Veronika Bondarenko captured this photo of New York’s Moynihan Train Hall. 

Veronika Bondarenko

Amtrak launches new routes, promises travelers ‘additional travel options’

Earlier this month, Amtrak announced that it was adding four additional Northeastern routes to its schedule — two more routes between New York’s Penn Station and Union Station in Washington, D.C. on the weekend, a new early-morning weekday route between New York and Philadelphia’s William H. Gray III 30th Street Station and a weekend route between Philadelphia and Boston’s South Station.

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According to Amtrak, these additions will increase Northeast Corridor’s service by 20% on the weekdays and 10% on the weekends for a total of one million additional seats when counted by how many will ride the corridor over the year.

“More people are taking the train than ever before and we’re proud to offer our customers additional travel options when they ride with us on the Northeast Regional,” Amtrak Executive Vice President and Chief Commercial Officer Eliot Hamlisch said in a statement on the new routes. “The Northeast Regional gets you where you want to go comfortably, conveniently and sustainably as you breeze past traffic on I-95 for a more enjoyable travel experience.”

Here are some of the other Amtrak changes you can expect to see

Amtrak also said that, in the 2023 financial year, the Northeast Corridor had nearly 9.2 million riders — 8% more than it had pre-pandemic and a 29% increase from 2022. The higher demand, particularly during both off-peak hours and the time when many business travelers use to get to work, is pushing Amtrak to invest into this corridor in particular.

To reach more customers, Amtrak has also made several changes to both its routes and pricing system. In the fall of 2023, it introduced a type of new “Night Owl Fare” — if traveling during very late or very early hours, one can go between cities like New York and Philadelphia or Philadelphia and Washington. D.C. for $5 to $15.

As travel on the same routes during peak hours can reach as much as $300, this was a deliberate move to reach those who have the flexibility of time and might have otherwise preferred more affordable methods of transportation such as the bus. After seeing strong uptake, Amtrak added this type of fare to more Boston routes.

The largest distances, such as the ones between Boston and New York or New York and Washington, are available at the lowest rate for $20.

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The next pandemic? It’s already here for Earth’s wildlife

Bird flu is decimating species already threatened by climate change and habitat loss.

I am a conservation biologist who studies emerging infectious diseases. When people ask me what I think the next pandemic will be I often say that we are in the midst of one – it’s just afflicting a great many species more than ours.

I am referring to the highly pathogenic strain of avian influenza H5N1 (HPAI H5N1), otherwise known as bird flu, which has killed millions of birds and unknown numbers of mammals, particularly during the past three years.

This is the strain that emerged in domestic geese in China in 1997 and quickly jumped to humans in south-east Asia with a mortality rate of around 40-50%. My research group encountered the virus when it killed a mammal, an endangered Owston’s palm civet, in a captive breeding programme in Cuc Phuong National Park Vietnam in 2005.

How these animals caught bird flu was never confirmed. Their diet is mainly earthworms, so they had not been infected by eating diseased poultry like many captive tigers in the region.

This discovery prompted us to collate all confirmed reports of fatal infection with bird flu to assess just how broad a threat to wildlife this virus might pose.

This is how a newly discovered virus in Chinese poultry came to threaten so much of the world’s biodiversity.

H5N1 originated on a Chinese poultry farm in 1997. ChameleonsEye/Shutterstock

The first signs

Until December 2005, most confirmed infections had been found in a few zoos and rescue centres in Thailand and Cambodia. Our analysis in 2006 showed that nearly half (48%) of all the different groups of birds (known to taxonomists as “orders”) contained a species in which a fatal infection of bird flu had been reported. These 13 orders comprised 84% of all bird species.

We reasoned 20 years ago that the strains of H5N1 circulating were probably highly pathogenic to all bird orders. We also showed that the list of confirmed infected species included those that were globally threatened and that important habitats, such as Vietnam’s Mekong delta, lay close to reported poultry outbreaks.

Mammals known to be susceptible to bird flu during the early 2000s included primates, rodents, pigs and rabbits. Large carnivores such as Bengal tigers and clouded leopards were reported to have been killed, as well as domestic cats.

Our 2006 paper showed the ease with which this virus crossed species barriers and suggested it might one day produce a pandemic-scale threat to global biodiversity.

Unfortunately, our warnings were correct.

A roving sickness

Two decades on, bird flu is killing species from the high Arctic to mainland Antarctica.

In the past couple of years, bird flu has spread rapidly across Europe and infiltrated North and South America, killing millions of poultry and a variety of bird and mammal species. A recent paper found that 26 countries have reported at least 48 mammal species that have died from the virus since 2020, when the latest increase in reported infections started.

Not even the ocean is safe. Since 2020, 13 species of aquatic mammal have succumbed, including American sea lions, porpoises and dolphins, often dying in their thousands in South America. A wide range of scavenging and predatory mammals that live on land are now also confirmed to be susceptible, including mountain lions, lynx, brown, black and polar bears.

The UK alone has lost over 75% of its great skuas and seen a 25% decline in northern gannets. Recent declines in sandwich terns (35%) and common terns (42%) were also largely driven by the virus.

Scientists haven’t managed to completely sequence the virus in all affected species. Research and continuous surveillance could tell us how adaptable it ultimately becomes, and whether it can jump to even more species. We know it can already infect humans – one or more genetic mutations may make it more infectious.

At the crossroads

Between January 1 2003 and December 21 2023, 882 cases of human infection with the H5N1 virus were reported from 23 countries, of which 461 (52%) were fatal.

Of these fatal cases, more than half were in Vietnam, China, Cambodia and Laos. Poultry-to-human infections were first recorded in Cambodia in December 2003. Intermittent cases were reported until 2014, followed by a gap until 2023, yielding 41 deaths from 64 cases. The subtype of H5N1 virus responsible has been detected in poultry in Cambodia since 2014. In the early 2000s, the H5N1 virus circulating had a high human mortality rate, so it is worrying that we are now starting to see people dying after contact with poultry again.

It’s not just H5 subtypes of bird flu that concern humans. The H10N1 virus was originally isolated from wild birds in South Korea, but has also been reported in samples from China and Mongolia.

Recent research found that these particular virus subtypes may be able to jump to humans after they were found to be pathogenic in laboratory mice and ferrets. The first person who was confirmed to be infected with H10N5 died in China on January 27 2024, but this patient was also suffering from seasonal flu (H3N2). They had been exposed to live poultry which also tested positive for H10N5.

Species already threatened with extinction are among those which have died due to bird flu in the past three years. The first deaths from the virus in mainland Antarctica have just been confirmed in skuas, highlighting a looming threat to penguin colonies whose eggs and chicks skuas prey on. Humboldt penguins have already been killed by the virus in Chile.

A colony of king penguins.
Remote penguin colonies are already threatened by climate change. AndreAnita/Shutterstock

How can we stem this tsunami of H5N1 and other avian influenzas? Completely overhaul poultry production on a global scale. Make farms self-sufficient in rearing eggs and chicks instead of exporting them internationally. The trend towards megafarms containing over a million birds must be stopped in its tracks.

To prevent the worst outcomes for this virus, we must revisit its primary source: the incubator of intensive poultry farms.

Diana Bell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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This is the biggest money mistake you’re making during travel

A retail expert talks of some common money mistakes travelers make on their trips.

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Travel is expensive. Despite the explosion of travel demand in the two years since the world opened up from the pandemic, survey after survey shows that financial reasons are the biggest factor keeping some from taking their desired trips.

Airfare, accommodation as well as food and entertainment during the trip have all outpaced inflation over the last four years.

Related: This is why we're still spending an insane amount of money on travel

But while there are multiple tricks and “travel hacks” for finding cheaper plane tickets and accommodation, the biggest financial mistake that leads to blown travel budgets is much smaller and more insidious.

A traveler watches a plane takeoff at an airport gate.

Jeshoots on Unsplash

This is what you should (and shouldn’t) spend your money on while abroad

“When it comes to traveling, it's hard to resist buying items so you can have a piece of that memory at home,” Kristen Gall, a retail expert who heads the financial planning section at points-back platform Rakuten, told Travel + Leisure in an interview. “However, it's important to remember that you don't need every souvenir that catches your eye.”

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According to Gall, souvenirs not only have a tendency to add up in price but also weight which can in turn require one to pay for extra weight or even another suitcase at the airport — over the last two months, airlines like Delta  (DAL) , American Airlines  (AAL)  and JetBlue Airways  (JBLU)  have all followed each other in increasing baggage prices to in some cases as much as $60 for a first bag and $100 for a second one.

While such extras may not seem like a lot compared to the thousands one might have spent on the hotel and ticket, they all have what is sometimes known as a “coffee” or “takeout effect” in which small expenses can lead one to overspend by a large amount.

‘Save up for one special thing rather than a bunch of trinkets…’

“When traveling abroad, I recommend only purchasing items that you can't get back at home, or that are small enough to not impact your luggage weight,” Gall said. “If you’re set on bringing home a souvenir, save up for one special thing, rather than wasting your money on a bunch of trinkets you may not think twice about once you return home.”

Along with the immediate costs, there is also the risk of purchasing things that go to waste when returning home from an international vacation. Alcohol is subject to airlines’ liquid rules while certain types of foods, particularly meat and other animal products, can be confiscated by customs. 

While one incident of losing an expensive bottle of liquor or cheese brought back from a country like France will often make travelers forever careful, those who travel internationally less frequently will often be unaware of specific rules and be forced to part with something they spent money on at the airport.

“It's important to keep in mind that you're going to have to travel back with everything you purchased,” Gall continued. “[…] Be careful when buying food or wine, as it may not make it through customs. Foods like chocolate are typically fine, but items like meat and produce are likely prohibited to come back into the country.

Related: Veteran fund manager picks favorite stocks for 2024

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