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Monday Musings
A few weeks ago, we noted the potential
for an oversold bounce despite what appeared to be a clear shift in the
investment landscape. Now that most major equity indices have rallied
for two consecutive weeks (with the S&P 500 stalling at a 50 DMA
which looks to be rolling over), it is critical to assess the underlying
strength of this move. Suffice it to say, that the evidence is mixed
at best. Many of our immediate term commodity and commodity currency
models have moved back into “buy” territory, but we view Dollar Strength
as a BIG RED DEFLATIONARY FLAG. The Greenback’s long term trend moved
back to positive recently and the USD remains strong across all three
durations – short term, intermediate term, and long term. Importantly,
Financials stand out as the most overbought S&P sector on a one-year
basis, in the face of strong secular headwinds and declining relative
strength. Ditto for the Consumer Discretionary sector, although the
stocks have yet to figure it out.
When the market’s prior leaders fail to
rebound convincingly, the market often struggles. And at this point,
the reflation trade has failed to return to prominence with the biggest
disappointment, visibly the dull bounce in emerging markets. This may
be the beginning of a transition in the investment landscape – and odds
favor the outperformance of Quality at this point in the cycle.
Interestingly, Energy, Consumer Staples, Healthcare & Telecom remain
at the bottom of our one-year mean-reversion scoreboard.
And speaking of the cycle, the charts
below from Albert Edwards at Soc Gen, continue to be the primary reason
for our defensive posture, despite tentative signs of a market rebound
from extremely short term oversold levels. As Big Al describes:
“Early last year
the safe re-entry back into risk assets was signaled by a clear upturn
in leading indicators. So too now should investors be concerned that the
leading indicators are topping out. The recovery in the leading
indicator for China seemed to precede that of the composite for the OECD
and similarly China has now topped out ahead of the OECD composite (see
chart below). Indeed, other emerging economies such as India (below)
and Brazil are also seeing clear warning flags of cyclical caution.”
Once again, we think Dr. John Hussman
accurately portrays the Market Climate
today:
“As of last
week, the Market Climate for stocks remained characterized by
unfavorable valuations and unfavorable market action. Internals have
improved moderately during the rebound of the past two weeks, though
price-volume behavior remains poor. Interest rates have become notably
hostile, and presently would weigh on the prospective return/risk ratio
of stocks even if internals were to improve here. That suggests that the
rebound we’re seeing from the correction low of a couple of weeks ago
may turn out to be a whipsaw. For now, the Strategic Growth Fund remains
fully hedged, and the combination of rich valuations, yield pressures
and potential credit strains are the primary concerns.”
We’ll wrap up our thoughts this morning
with a couple brief articles worth reading. The first from George Soros
followed by a few former Treasury Secretaries who “get it.”
The
euro will face bigger tests than Greece
The euro was a
unique and unusual construction whose viability is now being tested. The
construction is patently flawed. A fully fledged currency requires both
a central bank and a Treasury. The Treasury need not be used to tax
citizens on an everyday basis but it needs to be available in times of
crisis. When the financial system is in danger of collapsing, the
central bank can provide liquidity, but only a Treasury can deal with
problems of solvency. This is a well-known fact that should have been
clear to everyone involved in the creation of the euro.
Ex-Treasury
Secretaries Back Volcker Rule
“The principle
can be simply stated,” the five said in a letter to The Wall Street
Journal. “Banks benefiting from public support by means of access to the
Federal Reserve and FDIC insurance should not engage in essentially
speculative activity unrelated to essential bank services.”
»
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The Banks are going to crash...
Greece is going to crash....
Commercial Real Estate is going to crash....
Pension funds are declaring bankruptcy
the Dollar is going to crash....
the Euro is going to crash.....
right after everyone shorting the market fills their 50th margin call and folds and loses everything.....
6 months waiting on "the" correction....down 80%...better than vegas...
Some people warned of the previous SP500 buying support and the counter trend rally.
UPDATES:
http://www.zerohedge.com/forum/market-outlook-0
Um, can we get something with a little more substance next time please? Thanks
It's only Monday Musings ... what do you expect from Monday morning ... I wasn't even awake