MorningWord 1/4/16: Hello From The Other Side

by Dan January 4, 2016 7:21 am • Commentary

When I wrote this post last night, the S&P 500 futures were up about 30 basis points, Asian stocks were down slightly.  As I continue writing at 7am this morning, the S&P 500 futures are down 1.9% in sympathy with Asia and now European equities.  Global equities, in hindsight were holding on to whatever gains they had in 2015 for dear life as we limped into year end. Overnight the Nikkei in Japan closed down 3%, the Hang Seng in Hong Kong closed down 2.7%, and the Shanghai Composite closed down nearly 7%.  The Euro Stoxx 50 is down 3.4% and still going, with the German DAX down a whopping 4.4%!

Hello from the other side!


The last few weeks in U.S. markets has been a bit of a blur.  The month of December for U.S. stocks was unusually volatile, trading in a nearly 5% range, closing nearly at the mid-point, for a month that is known for such occurrences as Santa Claus rallies, window dressing and marking books.  Yeah, on December 16th we had the Fed’s first rate increase since June 2006. But since the (expected) event the S&P 500 (SPX) has merely banged around between 2000 and 2075. Before adding back dividends, the SPX finished 2015 with its first annual decline since 2008, down 73 basis points.  The most important observation for me in 2015 for the largest equity market on the planet is that at no point was it ever up more than 4% on the year.  That’s in contrast to the average return over the last 6 years which has been about 15%.

The one year chart (below) shows the series of lower highs since early November, and the important technical support at 2050, which the index closed below on Thursday:

SPX 1yr chart from Bloomberg
SPX 1yr chart from Bloomberg

What’s fascinating about the 2015 SPX chart is its resemblance to 2011, the last year the index (excluding dividends) was unable to eek out a gain.  From January to August 2011 the index held important support, trading in a fairly tight range, giving way to precipitous drop in August, then a retest of the Summer low in September only to find its footing towards the end of the year:

SPX 2011 from Bloomberg
SPX 2011 from Bloomberg

In 2012 the SPX gained nearly 13%, followed by a nearly 30% gain in 2013.  I don’t highlight the similarities to suggest that history is going to repeat itself (or that this time is different). But it is important to put the waning upward momentum, where small cap stocks dramatically under-performed large caps and high growth/valuation Nasdaq stocks, in context.

The Russell 2000 (RTY) closed down 5% in 2015. More importantly it closed down 12% from its all time high made mid year. It’s once again approaching its long term uptrend from its 2009 lows:

RTY since 2008 from Bloomberg
RTY since 2008 from Bloomberg

The Russell could set up for a decent bounce if it were to hold the uptrend, but 1200 looks like fairly formidable technical resistance.  But if it were finally to break the uptrend, there is little support for another 10%.

Oh, and don’t get me started on the Nasdaq, particularly the Nasdaq 100 (NDX), from Dec 30th:

On more than a few occasions in 2015 I have highlighted what I deem to be a very unhealthy concentration in ownership and performance is U.S. stocks among a handful of high growth / valuation leaders. I am not gonna go into great detail here, but I do find this one stat regarding the Nasdaq 100 (NDX) fairly troubling.  The stocks that make up the NDX have a $5.3 trillion market capitalization. The NDX is up 10.3% in 2015, or gains of roughly $550 billion.  Not bad, but when you consider the fact that Alphabet (GOOGL), Amazon (AMZN) and Facebook (FB) make up about 20% of the weight of the NDX, and that those three stock’s year to date gains equal about $600 billion in market cap, its starts to paint a fairly dim picture about the current health of, and the potential continuation of the 7 year bull market in the Nasdaq.

Here is the NDX over the last 20 years on a log scale:

NDX 20 year log chart from Bloomberg

This chart and the concentration of a handful of stocks should scare the crap out of steadfast equity bulls.

So what does this all boil down to in plain English? From a purely technical and momentum set up, new longs in U.S. equities would look a lot better after a decent pull back. I’m not sure starting the New Year is the time to put fresh cash to work.

I don’t mean to sound like a broken record, but unless you have been invested in a couple dozen U.S. growth stocks in 2015, positive returns were hard to come by. But with rates where they are, and real estate gains decelerating, where do you put your moolah?  The answer for me is quite simple, the positive performance in global equities in 2015 (excluding the Nasdaq) came in countries/regions (China, Japan & Eurozone) where central banks continue easing monetary policy and subsequently devaluing their currencies.  If you remain wed to the don’t fight the Fed playbook that worked so well for most of the last 7 years, then you may want to look overseas, but by the look of the early 2015 price action in China, Japan and Europe, it might have run its course. Yeah one day does not kill a global rally, but investors willingness to give back two thirds of the Shanghai’s 2015 gains in one session, and nearly half of the DAX’s suggest that sentiment changes, and risk happens fast.

Despite this now being a consensus view, I suspect the dollar at the very least remains firm, holding much of its near 10% gains for 2015. What that means is a challenging earnings growth environment for U.S. multinationals, and quite possibly continuing price action that signals the end of an epic bull market.

For the better part of 2015, I had a fairly cautious tone towards U.S. stocks.  What I got wrong in 2015 though was the continued outperformance of a few dozen stocks, and their ability to mask a heck of lot of bad performance in the broad market.  Here are some posts since August that detail my views:

MorningWord 12/30/15: The Path of Least Resistance is No Longer Higher

MorningWord 12/17/18: I $SPY Lower Highs

MorningWord 12/11/15: Macro Tremors

MorningWord 12/1/15: December Regaling and The New Year’s Hangover

MorningWord 11/12/15: Not A Zero-Sum Game

MorningWord 11/10/15: Sail A Junk to China

MorningWord 10/9/15: ¯\_(ツ)_/¯

MorningWord 10/14/15: Russell – your looks are becoming a problem $IWM

MorningWord 9/28/15: The Investment Landscape Is Moving Beneath Our Feet

MorningWord 8/18/15: Warning Bells Scream in Silence