The S&P 500 (SPX) is up 8% from last Friday’s low. That low followed Sept’s disappointing and downward revised August employment data that basically put the final nail in the coffin for any chances of the FOMC raising the Fed funds rate in 2015. I am not going to rant (much) about why I think this price action is so dangerous, I have done so plenty of late, most recently here, (MorningWord 10/5/15: Don’t forget what you are celebrating). In what feels like a global equity topping process, last week’s V reversal is probably the most ill advised bounce in years.
Following the late August stock market swoon, it was my view that 2000 in the SPX would serve as near term technical resistance, while 2050 would be the short entry of the decade. Prior to the Sept FOMC meeting the SPX did get to 2020 on Sept 17th, and failed, and retreated 7% into last Friday’s jobs data. So now we are back (at the mid Sept highs) and quickly approaching 2050:
We have tried to be patient in our trading. It’s our view that we see 1800 in the SPX in the coming months. We remain cautious about committing new capital to equities here. Those who would like to be risk adverse should use these rallies to reduce their equity exposure. And all investors should sincerely consider the reasons for the recent rally.
I really can’t say anything more about this, investors buying stocks, playing catch up for the fear of missing out are no longer rational. For the first time in years a pause in global growth and the bursting of asset bubbles after years of unprecedented monetary policy now pose the potential for systemic financial risk, across geographies (thankfully not likely to start in the U.S. this time). That is a fact. Central banks the world over had lots of ammunition and tools at the disposal to combat systemic risks the last few years. I think it is safe to say they lack them now (WSJ: U.S. Lacks Ammo for Next Economic Crisis).
An announcement (and implementation) of QE4 would represent a disaster for risk asset values. Global investors would have to adjust risk appetite and return expectations vs the reasons behind more easing. Namely a global profit recession and the potential for a protracted bear market in almost every risk asset class on the planet. This is not a prediction, there’s no telling how investors would react initially, but it is a rational expectation.
To those that seem like they want to squeeze the last 10% in their favorite growth stock, I say have a ball. But know the number of chairs is getting thin and the music is about to stop.
The only down year in the SPX since 2002 came in the crash of 2008. The great recession barely put a dent in risk asset prices aside from that year itself. We’ve completely forgotten what a protracted bear market (like 2000-2003) feels like.
The point of this post is not lobby readers to panic and sell all their stocks. I just want to state that while I’ve not been correct on the near term price action I am still convinced about what comes after. There are still plenty of opportunities on long side, and we have tried our best to pick ones that work within our world view (XLU, XLP and TLT). But we want to avoid high valuation, high growth stocks (e.g. FANG & Biotech) and fade these sharp broader market rallies.