Despite The Rally Off Of The 10 Feb Lows, Facts Favor Bears
$GLD, $SLV, $OIL, $USO, $DXY, $EUR, $JPY, $USD, $AUD, $SPY
The US stock market has made a fast comeback from 1 bad start this year. At its worst the S&P 500 stock index of was down 11% YTD and 15% off its highs late last Spring.
At that mark the market was trading at roughly the same as it was in November 2013, over 2 years of gains wiped out by what appeared to be the start of a Bear market. Since bottoming on 10 February, the S&P has traded up 13% and is now Green on the year.
The Big Q: Has the Bear been sent back into its cave?
The Big A: Despite that rally the market still trades at about the same marks as of November 2014.
A participant could have collected 10-yr US Treasury coupons and made about the same as collecting the S&P dividend during that frame, avoided the stock market volatility and be sitting on a capital gain.
Over the last 2 years the returns from the 10-yr US Treasury and the S&P 500 are not that dissimilar.
The 10-yr US Treasury has produced a total return of about 11.25% Vs the S&P 500’s 12.4%.
When considering the volatility of the stock market Vs the bond market, the clear risk adjusted winner is the bond market.
So, while the rally has been good, it has has not been enough to change the math of a decision to remain Bearish and underweight stocks.
The stock market Bulls are talking about how this was just another correction, another dip to buy and that people better get back in.
I am still Bearish of the lure of easy money in a market I know is overvalued, but that has kept moving North.
The economic data has been getting better recently, right?
The positive of the recent Fed report was offset by the negative of the Chicago Fed National Activity Index which fell back into negative territory indicating growth below trend.
There is also some slippage in the 2 areas of the economy that have been unambiguously good the last couple of years, autos and housing.
Inventories would seem to still present a headwind for an economy already growing below trend.
Housing looks to be struggling some with existing home sales falling back, year over year sales gains down to just 2.2% from double digits last month. Housing starts have been okay but permits have flattened and new home sales are down over 6% from last year.
Personal income has been growing although savings seems the more preferred disposition at the moment.
The employment picture is OK, although the quality and quantity of jobs leaves a lot to be desired.
Unemployment claims are near cycle lows and despite the Phillips curve rhetoric from the Fed, inflation continues to be a non-factor for now.
What has changed is the value of the USD and the expected path of monetary policy. The weaker Buck has pushed up commodity prices and the stock prices of companies in associated industries.
The rise of the market over the last 5 weeks has been led by energy stocks, makes sense given they led on the way South.
Credit spreads have narrowed along with the rising price of Crude Oil (USO) as investors get optimistic about the fate of the tight (shale) Oil industry. Too optimistic from where I sit.
Is a rally based on a weakening USD sustainable?
If you think about what drove the market lower, you are tempted to answer Yes.
How many earnings reports have we seen the last year that were negatively impacted by the strong USD?
Multinational companies with a lot of non-USD revenue have been a big part of the earnings decline, which will likely total 4 Quarters running when Q-1 numbers are released.
If the Buck pulls back, theoretically some of that should be relieved. But, that assumes those companies did notdo something to mitigate the damage of a strong USD.
How many of them hedged their exposure and will now be reporting losses on those hedges?
With US stock valuations on the expensive side and earnings estimates still falling, it is hard to see the S&P 500 making new highs. The weaker dollar does take some pressure off the Oil industry but it doesn’t change the fundamental picture of way too much supply and not enough growth to offset the glut.
If the USD does stay weak and the US manages to avoid recession then the more attractive investments are probably found outside of the USA.
A falling USD Vs a rising Euro or Japanese Yen or Real, or $AU will put the wind at the back of investors in non-USD assets.
A soft USD would be a positive for commodities other than Crude Oil after working off their fundamental excesses.
Gold and Silver will be likely be in demand as well if the Buck continues South.
A majority of my technical indicators are negative.
Credit spreads have narrowed, but not enough to reverse a defensive posture. The yield curve has steepened a bit which is positive but it is slight, and do not know how to interpret the 10/2 curve in a ZIRP world.
Valuations are rich Vs historical norms.
Long term momentum favors bonds and Gold over stocks, a trend that has more to go.
What seems likely in here is a continued move toward investments that benefit from a weak USD.
I am a Bear in a fast Bullish the market, it is a hard position. And for that reason, I have indicators, ones that have stood the test of time, and are not influenced by the Wall Street Bullish media blitz.
Despite the rally, the facts favor the Bears in here.
Have a terrific week.
Paul Ebeling
HeffX-LTN
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