Bob Janjuah on The S&P Trek From 1,400 To 1,000 To 800
Between 'Twist+', his belief that Germany will 'blink' leaving any eurozone breakup/exit unlikely this year, and confidence that the US (Fed) and China (fiscal and monetary) will attempt once again to pump things up, Bob Janjuah (of Nomura) expect to see a risk-on phase that lifts the S&P - possibly climbing the wall of worry back up to the 1400s by late July or early August. His stop-loss (which would be very bearish in his view) is a weekly close under 1267 for the S&P. And then? He would look to position for an extremely bearish risk-off phase over late August through to November or December. The drivers of this extremely bearish expected phase are not new: overly bullish positioning and sentiment; weak global growth, not just in the eurozone but also in the US and the BRICs; the next leg of crisis in the ongoing eurozone debacle in my view; and of course the looming US fiscal crisis, which in Bob's view is not even ‘slightly’ priced into markets, but where he feels the probability of a crisis is close to 75%.
From Bob's latest missive:
Hopefully by year-end US sell-siders will realise that blaming the eurozone crisis for everything that is going wrong in the US has been a serious error, which has resulted in them being blind-sided to the other real ‘gorilla’s in the room’ – namely the US debt/fiscal weakness, and the hard landings now beginning in the BRICs.
My forecast for this extremely bearish risk-off phase over late Q3 and Q4 is that the S&P500 trades below the low of last year, perhaps as low as 1000 +/- 20. The iTraxx Crossover index should over that period widen from around 550/600bp (my end July/early August risk-on target) out all the way to certainly 800bp, and more likely closer to 1000bp. And we should see core bond yields rally hard – I expect 10yr UST yields to rally from my 2.35%/2.45% end July or early August target, all the way down to 1.5%, maybe even lower.
Into 2013-14, I am still concerned that my long-standing 800 S&P500 target will be hit, but it will not be a straight line. In December or early 2013, I expect Bernanke to give us a substantial dose of QE3, in response to the growth and fiscal crisis that I expect the US to be suffering from at that time. This QE3 will provide a short but sharp risk-on relief to markets. But as I forecast, once its ‘benefits’ subside (in weeks) it will be the failure of this QE3 to ‘fix’ things that, I fear, will open the door to 800 S&P. I will write more on this issue later this year.
For now, I recommend using the next 4-8 weeks of risk-on to trade tactically, to put in place long volatility trades and other portfolio hedges, and to lighten up on risk.