MorningWord 3/8/16: Uncle Mo’

by Dan March 8, 2016 9:33 am • Commentary

Last night on CNBC’s Fast Money, Cornerstone Research’s Carter Worth highlighted the relative under-performance of some, high growth, high valuation prior leaders that have broken trend and are now in the midst of what he called a “feeble” attempt to recover, watch here:

Carter highlighted an etf called the iShares MSCI Momentum Index (MTUM), which is not just tech as you might expect, the top 10 holdings (FB, HD, AMZN, V, SBUX, MO, MCD, NKE, GOOGL, UNH) make up about  40% of the weight. Carter’s view is quite simple. The Index’s inability to retake the trend after such a sharp bounce in the broad market could suggest that this group sees lower lows. He would be a seller of these stocks.

Carter also said that the rally in energy and materials of late, while eye popping in absolute return terms, is minuscule in market cap terms to the group listed above.

I’ve been consistent on this view but I was early in fading the bounce in materials, retail and transports. These sectors remain in sharp downturns from the highs and I still feel we are merely in the midst of a sharp and violent bear market rally.  The rally in energy, material and mining stocks has largely been the result of a sharp rally in commodities. But that has not been the result of a positive fundamental change.  Talk of capacity cuts in China, or production freezes in the Middle East are just that, talk. And headlines like this from Bloomberg China Crude Imports Hit Record as Price Crash Boosts Buying won’t assuage fears because last night China released a 24% decline in exports last month:


So yeah, it all still comes back to China.

So for Carter’s U.S. Momentum stock call, as I said in the video, the inability for so many stocks and sectors to get back above their long term trend is troubling, especially after such a sharp broad market rally. Similar to MTUM, U.S. small cap stocks look vulnerable in a similar way. Yesterday I took a look at the IWM, the etf that tracks the Russell 2000 ($IWM: Russell – your looks are becoming a problem) and concluded:

For those that think the rally in U.S. stocks is coming to an end, and are considering shorts, you may get the most bang for your buck in the IWM.  Of all the major U.S. stock indices, the IWM was the first to break its long term uptrend off of its 2008 lows, and remains below it.  Playing for a failure at the uptrend, which was long term support, now resistance could be a high probability play from here:

IWM 8 year chart from Bloomberg

IWM 8 year chart from Bloomberg

For my money, the single best trade in equities, both here and abroad is to find charts that look like MTUM, or IWM. Charts that have come back to their long term uptrend and have stalled. I think you short them with a fairly tight stop. If you get stopped out, fine. Try again. It’s unlikely that global economic data is actually improving, and any reversal by commodities towards the prior lows could cause credit and equity markets to go haywire again.