Wall of Worry
Although money supply growth remains historically strong and investors are desperately chasing returns in today’s ZIRP world and are therefore evidently prepared to take much greater risks than they otherwise would, an extremely overvalued market is always highly vulnerable to a change in perceptions. In a sense the rebound may actually turn out to be self-defeating, as it will increase the Fed’s willingness resume tightening policy.
The latest to join in the skepticism rally is none other than Goldman Sachs strategist Christian Mueller-Glissmann who in the latest "Global Opportunity Asset Locator" report, writes that the "relief rally across risky assets might fade over the near term", warns that "sharp declines in oil prices are likely to weigh on risky assets again", suggests to go to "reduce risk allocation", warns against holding US HY bonds as "the risk/reward is least favourable if oil prices reverse course" and "go to cash" ahead of "expected elevated volatility."
The Biggest Threat To The S&P In The Next Month: "Only Buyer Keeping This Market Alive" Stops BuyingSubmitted by Tyler Durden on 03/15/2016 15:45 -0400
The biggest danger to the S&P500 over the short-term has little to do with what Janet Yellen may say tomorrow, and everything to do with the marginal buyer of stocks being put into a state of forced hibernation
"... after four long years without any profits growth, the risk is that MSCI World mean-reverts to its original 2011 PE multiple, which would imply a further 50% decline from here. Even decline back to average would imply a 15% drop."
The most important story of 2015 had to have been the junk bond reversal. It is not your typical market behavior; not at all the “wall of worry” that represents healthy skepticism and functional fundamental discounting but rather a “get the hell out of Dodge” and stay out. Not transitory at all, then, rather a paradigm shift that isn’t yet even close to a new steady state. Welcome to 2016.
There’s only one investment we can think of that many people either love or hate reflexively, almost without regard to market performance: gold. And, to a lesser degree, silver. It’s strange that these two metals provoke such powerful psychological reactions - especially among people who dislike them. Nobody has an instinctive hatred of iron, copper, aluminum, or cobalt. The reason, of course, is that the main use of gold has always been as money. And people have strong feelings about money. From an economic viewpoint, however, money is just a medium of exchange and a store of value. Efforts to turn it into a political football invariably are signs of a hidden agenda, or perhaps a psychological aberration. So, let’s take some recent statements, assertions, and opinions that have been promulgated in the media and analyze them.
One month ago, Credit Suisse confirmed what we had reported in the previous several weeks, namely that according to channel checks, iPhone supply chain orders had weakened recently adding that "in our view, the continued weak supply chain news could weigh on Apple shares for the next few weeks/quarters." The market did not like the news and sold AAPL stock only to promptly BTFD as it always has in the past 7 years: after all any transitory weakness is merely an opportunity to buy, right? Only this time the weakness may not be transitory, because as of this morning we now have not one but three updated channel checks all pointing to a substantial slowdown in AAPL's flagship product and core revenue generator, the iPhone.
Overnight, Credit Suisse became the latest bank to join Goldman, JPM and increasingly more banks in predicting that 2016 will be a year in which investors will want to rotate out of equities. Specifically, the second largest Swiss bank said that it is "we reduce our equity weightings to our most cautious strategic stance since 2008 and take our mid-2016 S&P 500 target down to 2,150, the same as our end-2016 target." Here are the five reasons why CS just looked at the mounting wall of worry... and began to worry.
Credit Suisse has released a reported titled "Client perspectives: lost and bearish" in which it lists the 12 bricks of the global wall of worry and adds that "this is the first time that we have come across so many people who say they are completely 'lost' in the current environment." So, to help out those who just have to be in this market yet share the same total confusion, here is BofA listing what the two key trading camps in the market: "the consensus" and "the contrarians" are doing.
With the Federal Reserve still hinting at raising interest rates, but trapped by weak economic growth, will the next big move by the Fed be another form of monetary accommodation instead? Or, are the underlying dynamics of the economy and market really strong enough to shake off the recent weakness and continue its bullish ascent?
Call it the rigor mortis of the robo-machines. About 430 days ago the S&P 500 crossed the 1973 mark for the first time - the same point where it settled today. In between there has been endless reflexive thrashing in the trading range highlighted below. As is evident, the stock averages have not “climbed” the proverbial wall of worry; they have jerked and twitched to a series of short-lived new highs, which have now been abandoned. Surely most thinking investors have left the casino by now. So what remains is chart driven trading programs, racing madly up, then down, then back up again - rinsing and repeating with ever more furious intensity.
China has been the epicenter of recent market concerns as global markets focus on China's growth trajectory. Equity markets have been hit hard but the question is - how much further is there to go before it's over? Goldman Sachs looks at what the options market telling us? With HSCEI implied volatility over 40, a significant term structure inversion, and high skew, Goldman warns options all signal caution ahead.
Based on data for the week ended August 7th, the Major Trend Index dropped to a NEGATIVE reading of 0.90, led by declines in both the Attitudinal and Momentum/Breadth/Divergence work. The topping action evident in the MTI and other disciplines is consistent with either a severe correction, or a cyclical bear in the near future. We’ve therefore cut net equity exposure in both the Leuthold Core and Leuthold Global Funds to 38%, down from 48% in late July, and 61-62% in late June. A further reduction is possible in the days ahead.
The U.S. economy is growing at a painfully slow pace. Greece still threatens the euro. Chinese stocks have just pulled out of a frightening free-fall. Big companies in the U.S. are struggling to boost profits. You might think it's been a rough year for investors, but it's mostly been a smooth ride - and a profitable one. "Things have worked out," scoffs one analyst "and that has emboldened investors." Maybe too much...