Well that was exciting. A 4700 point move in $SPX in less than 2 months–biggest point mover in 83 years! That’s bullish, right?
The 1st Quarter of 2016 indeed looks to have put us back on the road to our destination. But before we look forward, let’s look back. We ended 2015 with a few stocks (like Facebook, Amazon, Netflix, Google) gaining $500 billion dollars in market cap while the remaining S&P 500 stocks went down by more than $500 billion. That was freakish as well. But is it?
Out-sized volatility and bearish price movements often result when there are signs of economic weakness (check), deterioration of market internals (check, check) and the potential for Fed policy error collide (anticipating…). But none of that mattered in Q1: oil caught a bid!
Now what? Here are some of my curated ideas that served as my personal guideposts moving into Q1. They have been stirred not shaken as we move into Q2.
- Overvaluation risk. Not the same thing as growth (i.e. AMZN stock price vs fundamentals), but if enough perceive the fear of overvaluation then sentiment will drive demand, or lack thereof.
- Lack of investor liquidity. Who will fuel the rocket ship and bid stocks higher? Retail is back, but they are always last to the party. Hedgers have bid up those put call ratios off the charts, higher than even 2008, when we had a real systemic failure to justify. The psyche remembers, and appears to be hedged to the hilt. Crowd is bullish but with every trade they expect to be wrong?
- Earnings and economic forecasts don’t matter. As the mantra goes: “Trade what you see, not what you think” so why can’t I get this chart out of my head:
Clearly economic growth has struggled and been a headwind but that hasn’t stopped the seven-year bull market. Recent earnings were forecast to grow by double digits but actually went negative. Does any of that matter if the Fed has put a floor in this market with internationally coordinated reinforcement? One notable problem: with each roller-coaster ride of mini-corrections, the more likely money will leave/stay out of the market–not fuel it.
- Volatility begets volatility. It’s clear the credit cycle is stressed, the velocity of money flow is stressed and the liquidity in the overall markets let alone credit markets is more than stressed. Most expect the Fed to muck something up. The presidential election ramps up emotions. For thrill-seeking riders, volatility, something I watch more than closely, is approaching an out-sized jumping-off-place sometime in late April.
- Rotation is All or Nothing. Biotech stocks can enjoy their bounce next few weeks, like the DJ-20 and Energy and so many other grossly oversold sectors did in March. Money seems to rotate all at once into the laggards and prop them up. Funny how they catch a bid at major support.
- Small cap rally or else. Similarly, April could help overall small-cap breadth to improve. If the current biotech bounce fizzles and/or small caps fail to make a new high relative to large caps, it could provide strong evidence that we have seen a secular peak in small-cap strength given the forming topping pattern. And that’s bad.
- Credit Spreads are still in the basement. Balanced views can help manage bias which can help manage trades on this bumpy road. For example, while growth rates in China have slowed, they have a larger demographic base from which to contribute growth. While ROW and EEM have weakened significantly, foreign money continues to flow heartily into the US. While we could continue to focus domestically, 2016 could be a time for EEM to play catch-up. While breadth in individual stocks has suffered despite the indices, the divergence can be reversed, as we’ve seen. But this insipid credit spread divergence doesn’t engender trust.
- Commodities (oil, gold…) caught a bid!? I love the idea of timing a bottom in commodities, short term it’s more than fun, but “calling a bottom” on all those “grossly oversold” oil and gas plays, miners, etc…that’s just dangerous. I admit my bias keeps me hoping and chasing and justifying every bounce. But the bigger picture of a long-term commodity supercycle may just supersede my day-to-day search for a significant low. Sadly, the long-term trend is still flat to down and wishing it weren’t so won’t change it.
- The $USD is an enigma wrapped in a mystery. Best guess:
- Next big thing is what to do about bonds. Put $TNX on a quarterly basis because it moves just too damn slow to look otherwise. I am no macro wonk but this 34 year long trend channel down, to me, looks like it’s on a roll. Down to sideways but not up for a few years. At some point interest rates will go up (>4% ~2020), but I don’t see this proverbial battleship galactica turning around on a proverbial dime.
Put it all together and this is what I see:
These overriding themes continue to be my guiding “Tells” for 2016. I share them as a reminder to myself and a lesson to all that without patience, flexibility and much courage, we risk being misled by our fears, distracted by our biases and blindsided by our egos. So with every forecast we read, find the Bull and Bear argument in it, but remember your own risk management approach matters more than anything else.