MorningWord 7/12/16: Maybe so, but I doubt it

by Dan July 12, 2016 9:54 am • Commentary

My CNBC’s Options Action co-panelist and technician at Cornerstone Macro Research Carter Worth has had a bearish slant towards U.S. stocks for some time now, like myself. Yesterday, he succinctly laid out why yesterday’s new all time highs in the S&P 500 (SPX) may not be as momentous as some are making out relative to other risk assets. Watch here from last night’s Fast Money:

Carter contends that on a risk adjusted basis, the new highs in the SPX are just not that impressive over the last year, especially relative to the performance in Bonds, defensive equities like utilities, staples and telcos.  Since making all time highs in May of 2015, the SPX as of now is flat. Yet for that performance we have had two peak to trough declines of 12.5% and 14.5%.  As far as a new bull phase emerging from a 14 month consolidation Carter concludes, “maybe so, but I doubt it”.

The segment provided plenty of fodder on Twitter for all of those geniuses that don’t want to hear opposing views to their own when it comes to market. But watch the video, Carter makes nothing but rational points about the performance of the SPX.  If I were a raging bull at all time highs, I certainly would want to be cognizant of where and how my thesis could go terribly wrong. And let’s be frank, just because the SPX has made new highs, that does not mean that all single stocks are ringing the register.  So there’s still a ton of single stock and sector risk. For instance some of the favorite household names and consumer discretionary stocks (that held a great amount of sway in the bull market until recently, massively out-performing the SPX off of the 2009 lows) have lost their mojo.  I suspect plenty of people are waiting for them to join the party. Apple (AAPL), Disney (DIS), Nike (NKE) and Starbucks (SBUX) have not participated in the rally back to new highs, with AAPL down 27% from its 52 week highs, DIS down 18%, NKE down 17%, and SBUX down 12%.

The flip side of that is that new highs in the SPX, without these stocks (and a sector like banks) is very bullish. It’s very possible that the last year was nothing more than a consolidation, and now we are seeing a broadening out that could give this breakout legs. And late participation from prior leaders could provide a turbo boost. That is a scenario I could definitely see.

But given the fragile state of the global economy, and markets, a lot has to go right to keep this Goldilocks scenario in order for more than a couple of months. This breakout is largely predicated on low interest rates and an assumption that the Fed is trapped by global events and can’t raise them. That’s not a very fundamental argument for owning stocks. That’s musical chairs.

I remain in the camp that all time lows in the 10 year Treasury yield, and the $13 trillion of negative yielding sovereign debt is a canary in the coal mine for risk asset prices. But for now, none of that matters.

Oh and one more thing. This is just nuts, it’s the SPX vs US Treasuries over the last decade, risk vs risk free: