bonds

A (too-often-repeated) exercise in top-picking: US stocks edition ...

In going through financial headlines and blogs lately, many -- MANY -- analysts are surprised by the melt up we're seeing in US stocks. The dynamic behind this move is likely due primarily to capital flight (and some market psychology, of course).

US stocks are clearly outperforming global risk assets -- commodities, international stocks, currencies -- and lots of speculators (me included) have been trying there hand at picking a top. 

This time around, I'll point to the potential double-top forming on a daily chart of the S&P 500:

Assuming the S&P 500 rolls over here, it would mean the set-up (similar to two others we've recently seen lead to a breakout) has failed. And it may signal this market can't go higher before a correction freshens things up. The lack of volume amidst this melt-up has been well-documented. What's more: defensive sectors like utilities and staples have been driving gains the last few weeks.

In other words: lack of conviction and sluggish price action may suggest the upside has run its course and beget a sharp sell-off.

But that's enough of technical talk for now. Let me poke at the Great Rotation a bit ...

US Treasury prices are on the rise (yields falling) after putting in a double bottom. I'll spare you the chart. German bunds are also seeing yields decline sharply. This isn't supposed to be happening, based on the rotation concept. And while the Great Rotation could eventually materialize in a way that resembles the great forecasts, recent action suggests the rotation will pause for the near term.

I came across a blog earlier this week discussing what to expect from the end of the first quarter (today). It suggested pension funds (among other funds) would look to lock in the outsized gains from being in US stocks the last few months and rebalance back towards fixed income a bit. To me, that would seem like the prudent thing to do at this juncture. 

Will it happen? And if it does, will it mark a temporary top and lead to sharp downside in the months ahead?

It may still make more sense to play for downside in other assets, like copper, that have underperformed US stock markets. But I think we're close to an opportunity to capture some gains on downside in US stocks.

-JR Crooks

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It's a lay-up: buy stocks!

cowboy bull“He may look like an idiot and talk like an idiot, but don't let that fool you -- he really is an idiot.”

- Groucho Marx


John Ross asked me this morning if I could create a scenario whereby stocks fall.  I laughed and said, "Well ... no!" And maybe that is the point. No doubt 'if you are not long, you are wrong' is playing out in spades. But we’ve seen that sentiment many times before near tops.  

The primary thematic shaping up seems the idea that bonds have topped and as this money leaves bonds it will power stocks higher—globally. The idea seems to make sense; but often it is never that easy.  Taking a look at the chart below, there doesn’t seem a heck of a lot of correlation to hang your hat upon, only to say the long-term trend higher in bonds (lower in yields) has been met by a corresponding big run in stocks.    

Let’s consider some reasons why US stocks might NOT go a lot higher and, for grins, maybe even, dare I say it, “correct.”  

  1. A recovery in the US economy could mean finally financial assets will start competing for funds and the Bernanke Put, i.e. QE moral hazard liquidity juice, fades. Bonds would get hit here, but stocks might at least correct.

  2. Bernanke’s concern the job market is still not healed may play out because fiscal stimulus fades as the year progresses. Thus, we have well below trend growth and rising prices for energy and food leading to at least a mild case of stagflation; that isn’t good for either stocks or bonds.

  3. Germany decides to go “all in” and throws its full faith and credit behind a Eurobond for the Eurozone. Immediately, the risk profile improves in Europe. S&P and Moody’s decide it’s time to upgrade European paper and at the same time downgrade US paper given that Washington can make no real cuts amidst ideological squabbling. Lots of capital flows back to European bonds and stocks and out of the US; a possible triple-whammy out of US assets (stocks, bonds, and the dollar).

  4. China financial and social unrest ramp up and the Communist Party is at odds on stimulus given their concern about inflation; therefore it’s better to have security locally than worry about Western markets; the additional stimulus never arrives as growth and demand forecasts for China ratchet lower. Likely bad for stocks, but maybe good for bonds.

  5. Eurozone. 'Nuff said!

  6. Rising emerging market capital controls a la Brazil (tacitly condoned by the IMF) are met with rising trade tariffs from developed countries.  Money flows out of risk assets (stocks), quickly from the periphery, and back into bonds as global trade falls.

  7. Republicans win the White House and Congress, fire Ben Bernanke, and make Ron Paul Fed Chairman. They cut the budget deficit twice as much as what Paul Ryan is lobbying for. Ultimately it would be the best thing that happened to the US financial position in a hundred years, but there would be hell to pay as US credit drains from the global economy (and we have to listen to the moochers whining and crying about “fairness” day in, and day out). US bonds rally big time, so does the US dollar; stocks would likely be hit very hard initially, then stage a gargantuan rally.  [I know; but a guy can dream.] 

For now, “don’t fight the Fed” and “the trend is your friend” are winning the day. And if the bulls are right about US recovery, European healing, and new Chinese stimulus soon on the way, it could keep running. No doubt.  

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