In his latest market commentary, presented by Reuters on Tuesday night, Gundlach remained skeptical on the stock market. Specifically, he said that the rally in U.S. stocks, which began on Monday, feels like a short squeeze and characterized U.S. stocks as “dead money.”
He also mocked the return of the rate hikes are good fabulation, which has reemerged in recent days following the Fed’s hawkish shift, and which is a carbon copy of what happened late last year when the Fed’s first rate hike was also spun as positive: “I feel like we are back in December again, where everyone thinks that there is a super secret that some Fed officials have this knowledge that the economy is really good.”
But back to the market, which the DoubleLine manager said an interview with MarketWatch on Wednesday that he’s not ready to endorse, even as the S&P 500 index has climbed 1.9% over the past week.
So is there anything that would make a gloomy Gundlach bullish? As it turns out the answer is yes, but it is a big bogey.
As MarketWatch quotes, Gundlach needs to see a truly breakout level for the S&P 500 to get excited about this market. The DoubleLine chief executive said a climb above 2,200 for the S&P 500 would be a bullish sign. Then again, the S&P 500 has never hit 2,200, with an all time high of 2,131 set on May 21, 2015.
“The market has been going sideways for 18 months, and when it breaks, either up or down, it should be a large move. So let the market prove itself. If it breaks to the upside, which I define as accelerating above 2,200, it is a good, low-risk, ‘go with’ buy.” Aka, chase the momentum in either direction. In a market as broken as this, where momentum-ignition algos have been the trend leaders for years, one might as well listen.
In other words, as MarketWatch adds, Gundlach is saying the S&P 500 not only needs to set a fresh record, but it also needs to trade more than 3% above its highest closing level. As of Wednesday, the index is 1.9% off its record close, which as we showed recently is a 18x non-GAAP multiple and a post-crisis record 24x for GAAP EPS.
Gundlach’s vaunted expectations are at least partially grounded in the view that stocks’ recent advances aren’t based on any shift in market fundamentals. As noted yesterday, Gundlach believes the recent run up is due to a short squeeze.
Some observers have credited Wall Street’s push higher to investors’ belief that U.S. central bank’s desire to raise rates is a reflection of the health of the U.S. economy. Last week, investors and market pundits grappled with the prospect of higher rates after minutes from the Fed’s April meeting, released May 18, indicated that most members were inclined to raise interest rates as early as June.
Gundlach does not buy it. MW adds that “Gundlach isn’t confident that the economy is out of the woods, even as data, including Tuesday’s report on the sale of new homes, show improvement. April’s new-home sales soared 16.6%, representing the biggest monthly jump in 24 years. “Embedded in the market is the belief that the Fed has some supersecret knowledge that the economy is really good,” Gundlach said.”
Gundlach’s take, or lack thereof, on the market was the same as that presented previously to Reuters: “It’s just an observation, but stocks over the past 18 months have gone nowhere,” Gundlach said, reiterating comments he made earlier in the week when he characterized investing in stocks as “dead money.” The S&P 500 is up 1.8% so far in 2016.
Contrarian to prevailing sentiment that Yellen will continue beating a hawkish drum, Gundlach believes that Fed Chairwoman Janet Yellen will continue to maintain a relatively dovish posture at her next public appearance on Friday, espousing a cautious approach to rate hikes. And how the market responds to Yellen may provide better insight into the sustainability of this rally.
To summarize: rangebound market, limited by the Fed’s actions, but chase any big bounce above 2,200… or substantial drop.
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