If you traded/invested in the U.S. equity markets for the last two decades then you have witnessed a few gravity defying bull markets (mid 1990s to early 2000, March 2003 to the end of 2007, and March 2009 till ???). You’re probably familiar with the 20yr chart of the S&P500 (SPX) I suppose:
Trying to call tops in this market has been a fool’s errand as the corrections following the breakout above 1600 in mid 2013 to the present have been shallow, quick, with none greater than 10%.
I would suggest that calling a top vs taking a more cautious investment outlook are too very different things and I am hard pressed to think that taking cash out of the U.S. equities and Treasuries on a monthly basis vs committing fresh capital at this stage of the game is the prudent thing to do, primarily for one reason: the U.S. Fed is faced with the increasing likelihood of popping the bull market, in both bonds and stocks. And it won’t be their intent, it’s more that they will faced with impossible choices. If they’re preemptive and raise rates to avoid a parabolic rise in risk assets the popping of those assets has the potential to initiate a wicked a bear market and possibly cause a recession. But how does the Fed raise rates as the rest of the world is fighting off a massive deflationary spiral that seems to be engulfing (e.g. China eased overnight) most parts of the globe. I have no clue what they do, but I suspect the Fed keeps ZIRP in place as they know better than anyone on the planet that our recovery is fragile at best.
As for yesterday’s price action it had a little something for everyone, and could be a sort of Goldilocks scenario for the Fed dealing with the adverse affects of a strong dollar after years of intentionally debasing it. The sharp rise in oil caused stocks to party, bonds to get slayed and thus rates rising), and the dollar took a breather. I think it is safe to say that oil stabilization is the key in the near term for things to settle down, but I would echo a comment my partner CC made to me yesterday, that it was shocking that oil’s 50% decline since last summer merely caused a 5% decline from the highs in the SPX, yet a 20% bounce off of an oversold condition caused a 3.5% rise in the SPX in 2 days.
Oh, and I’ll make one more point, as long as I have been in the business, I have never seen the consensus call a top or the bottom the way it seems financial pundits and traders on Twitter did in oil over the last week. It’s entirely possible we just witnessed one of the biggest sucker rallies since the depths of the financial crisis when bank stocks would have counter trend rallies similar to what we just saw in oil. Could that have been it?? Sure. But I wouldn’t guarantee it. And if trading through the financial crisis taught me anything it’s that if and when oil makes a new low, it will feel much worse than it did when crude was $45 last Thursday. So buckle up! Remember just as top callers have been made to look like fools for years, no one rings the bell at commodity bottoms either!