Six Reasons Why We Have Not Yet Seen The Top In Stocks… And Six Why We Have
With the past 3 days sending a shockwave of sentiment reversal around global markets, as first Powell then Trump double-teamed to stun bulls to the point where even grizzled veteran traders like Nomura’s Charlie McElligott said that “That Was One Of The Most Manic 36 Hours Of Trading In My 18 Year Career“, the question many traders are now asking, namely “was this the top” is unlikely to have a positive response, at least not yet.
The first reason why stocks likely have at least one more push higher before the “big fall” is that following the current wobble coming in a period of dovish central bank reversal (which needs a favorable market reaction to avoid being seen as policy failure) is that we will now see another wave of fresh Central Bank “capitulatory easing”, with the danger of a ripping-rally thereafter even more clear when one considers the technicals, i.e,, “the amount of dynamic hedging Futures Shorts laid-out yesterday—as well as the fact that Equities funds were violently pressing their Shorts.”
Another five reason come this morning from Bank of America’s CIO Michael Hartnett who lays out “the case for further upside in risk assets“, which are as follows:
1. There’s no euphoria in global equities: YTD $152 billion in outflows from stocks corroborated by -0.8sd global equity underweight relative to 20-year history in BofAML Global Fund Manager Survey. In the same time there have been record inflows to bonds in in 2019 coinciding with another year of BofAML private clients adding to bonds; As a result, any hint of a late-summer pulse in the global economy leading to a rise in yields would drive rotation from cash & bonds to stocks.
2. US stock buybacks: on course for record $823 billion in 2019: of note, corporations will for 2nd year running spend more on stocks than capital equipment); US companies spent $114 on buybacks for every $100 of capex in past 2 years (vs. $60 for every $100 of capex in prior 19 years), which as even politicians have figured out, is “good for Wall Street, bad for Main Street.”
3. The price of money continues to fall: lower rates have been the driver of the bull market in corporate bonds & equities; key is whether and how forcefully the PBoC joins Fed/ECB easing; in the US, there is limited evidence of Fed policy impotence (lower rates, lower spreads, higher US bank stocks YTD); melt-up risk remains 1998 redux when “mid-cycle” insurance cuts quickly inflated asset prices the moment growth expectations troughed.
4. The US consumer fine and dandy: level of US consumer confidence relative to German business confidence highest since Q4’98.
5. The ECRI US lead indicator has inflected higher, correlates strongly with ISM index; global inventory-shipment ratio has stabilized in recent months and global earnings revisions edging higher; Emerging Market stocks at 16-year low vs. US stocks illustrates bad China/Asia/global macro priced-in.
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That said, one can just as easily counter that the topic has already been seen in the S&P500, in line with the conventional wisdom that when the Fed cuts rates, a recession usually follows… and the market is not too far behind. Below is Hartnett’s “case for downside in risk assets.“
1. The Fed cut this week but financial conditions did not ease: US dollar appreciated, yield curve steepened, credit spreads rose…first hints of US policy impotence.
2. “Trade war” is getting worse: fresh China tariffs in Sept would raise average US tariff on total imports to 5.6% from 4.5%, highest since 1972 (the level was 1.5% before Trump).
3. BofAML Global EPS Growth Model says EPS recession: model forecasts -7.5% global EPS growth next 12-months driven by stagnant PMIs, weak Asian exports, flattening yield curves, tighter Chinese financial conditions. A projected 5% cut in US EPS even assuming a stable PE of 17.0x PE would imply SPX @ 2800.
4. Euphoria in fixed income: era of Maximum Liquidity & Minimal Growth (and Inflation and Volatility) driving massive capitulation into bonds; nouveau bulls should be wary of deterioration in corporate credit, most ominously spread between HY CCC-rated bonds and BB-rated bonds (aka the “credit curve”, a lead indicator for HY corporate bond spreads) touched 3-year high this week.
5. Equity fast money long: BofAML equity hedge fund client ratio of long-short positions relative to total assets currently 0.63 (0.7sd above norm); US options market shows $469bn delta-adjusted open interest (1.1sd above norm and approaching 1.5sd warning level – Chart 11).
6. Bull market in stocks is very narrow: 6% of MSCI ACWI stocks account for 53% of YTD global equity return and 1803 global stocks (out of 2750) remain in bear market; this is driven by the accelerating shift from active to passive (YTD equity passive inflows $74bn vs. $224bn active outflows).