MorningWord 6/15/16: Central Bank Teller

by Dan June 15, 2016 9:49 am • Commentary

I have been staring at stock charts every day for nearly 20 years. The following chart of the S&P 500 (SPX) over the last two years quite simply confounds me:

SPX 2yr chart from Bloomberg
SPX 2yr chart from Bloomberg

When I consider the potential range of outcomes for the pattern of the SPX above I am hard-pressed to come up with any near term catalysts that would cause a meaningful breakout above the prior two consolidations.  And I can come up with of no shortage of catalysts where that current consolidation ends badly. But obviously the market would already be lower if others didn’t have their reasons to believe. Right?

One theme I have been hitting on for a couple months now, is that T.I.N.A (there is no alternative……to stocks) is a false narrative. It’s mostly pushed by those that have a strong vested interest in the investing public owning stocks. The reason I say that is that is because the argument for T.I.N.A, that bond yields are low and going lower, may not actually be a good reason to own stocks. And it may actually be a near term foil.

For evidence, look at the last year as the amount of sovereign debt with negative yields has gone from $1 trillion to $11 trillion, with the bulk coming over the last 6 months. The currencies in the countries/regions have actually risen (the Euro is up nearly 7% vs the USD since mid December and the Yen is up 16%), while their respective equity markets are down nearly 20% during the same time period. There may have been no other alternative than equities. But equities sure weren’t a great alternative.

Fed Chair Yellen will deliver a deliberately vague statement today. And between the lines you may sense a realization that she can’t possibly raise rates this Summer/Fall. As you digest the commentary during her QnA this afternoon, resist the urge to blindly buy stocks while the market catches a bid on the fact that rate hikes this Summer look less likely (despite your years of training to do so which has proven to be the correct move).

The reason for the change the playbook is that continued accommodation from the U.S. Fed at this stage of the expansion is not really bullish for risk assets. It’s more a sign that the Fed is trapped and possibly a desperate last dash.

The set up with the SPX (just below 2100) feels eerily similar to last Summer in many ways. What’s different this Summer, and adds even more risk, is that small blip in the SPX chart from the lows in 2009, the February closing low below the uptrend. That was the first lower low made since the 200% rally began:

SPX since 2008 from Bloomberg
SPX since 2008 from Bloomberg

The inability for the SPX to make a new high on two instances since May 2015, and that chink in the armor it experienced in February looks an awful lot like a topping process. And it comes at a time when Central Banks, who to their credit have been behind much of the risk asset strength over the last 7 years, have shown signs that their tactics to stimulate growth no longer work so well. And quite possibly they’ve now entered into a phase of unintended consequences they can no longer control.