market


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Totally ignoring all of the media stories, fundamentals, anything other than the 3 charts, the charts would suggest that for a long while since 2000, the market has gone essentially nowhere until the current breakout.

The charts would suggest that the breakout has a long way to run yet. In fact, it is just getting started.

I’ve blogged about the eventual breakout previously and recommended hanging on, which I still would advocate, purely on a chart basis.

The important thing is that the ‘news’ around the breakout, as it was historically, is usually bad. There are all manner of problems. Hang on, somehow.

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If you were waiting for a pullback to buy, here it is. Of course now the question is: will it keep pulling-back and get cheaper etc.

That is always the problem buying markets that have already made a run.

Personally, I wouldn’t buy here. Not that I know whether it goes higher/lower, simply that the potential volatility is too much to buy here.

For what it’s worth, I think the market goes higher again. Best guess.

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A Le Pen victory in May, pretty much signals the end of Europe as a European Union.

Is a Le Pen victory possible? I would say definitely yes. The ‘nationalistic’ winds are blowing strongly at the moment, Brexit and Trump being the 2 standout examples.

I’ll probably start to pay a little more attention to this now that Trump has taken power in the US. I also have some definite ideas about where I would want to invest for this coming political cycle.

 

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The whole problem with the world is that fools and fanatics are always so sure of themselves, and wiser people are full of doubts”

–Bertrand Russell

I always have admired the writings of British philosopher Bertrand Russell, who died in 1970, 14 years before the Russell 2000 Index was created and compiled.

The Russell Index, his “namesake,” now may be priced to perfection.

Nothing moves in a straight line, especially in the markets.

Fade the Trump small-cap rally, as hope seems to be triumphing over experience.

In “Donald Trump, You Are No Ronald Reagan (Part One)” and “Yell and Roar … and Sell Some More,” I struck a cautionary tone about economic and market cycles, political partisanship leading to delays or more modest tax reductions, and the leadership skills and avowed policies of President-elect Trump compared to those of President Reagan. I also compared the current market advance with the honeymoon the markets delivered 35 years ago. (I will be expanding on my thesis and concerns this week).

This morning, in “How Long Will We Ignore the Negatives of This New Presidency, ” Jim “El Capitan” Cramer voices and adds to many of my concerns.

While respecting the strength of the last month’s stunning and almost parabolic move (see Bertrand Russell’s quote above) and recognizing that the only certainty is the lack of certainty, the markets to this observer are overvalued on almost every basis and the reward versus risk is substantially tilted toward the downside.

My pal David Rosenberg, chief economist and strategist with Gluskin Sheff, shares my view that the market is being over optimistic:

“If you were to do a fair-value estimate of the multiple against where it is today, you could actually then back out what the implicit earnings forecast is. And right now, it’s 30%. That is the implicit earnings increase that is priced in. So if you’re buying the equity market today, just know that you’re buying an asset class writ large that is expecting a V-shaped +30% bounce in earnings growth over the course of the coming year. Trouble is, that it is a 1-in-20 event — and normally that 1 in 20 happens early in the cycle, not late in the cycle …. Actually, six quarters of negative comparisons. I mean, if the earnings recession is behind us and if there are Trump tax cuts ahead of us — even if I allow for the full brunt of corporate tax cuts — and if I allow for whatever nominal GDP growth is going to be, I still can’t get earnings growth much above 10%. 15% is a stretch, but you might still get there. But even that doesn’t get you to a 30% earnings expectation.”

–Welling on Wall Street: An Interview with David Rosenberg

So, what is the best short? Perhaps it’s the Russell Index.

“When all the forecasters and experts agree, something else is going to happen.”

–Bob Farrell’s Rule #9

In keeping with my negative market outlook for 2017, I am making Direxion Daily Small-Cap Bear 3x ETF (TZA) , at $18.78, my Trade of the Week. Here’s why:

* Over the last year the Russell Index has materially outperformed the broader indices: Since mid-December 2015, the Russell Index has doubled the performance of the S&P Index (up 24% compared to 12%). As Bertrand Russell noted, “extreme hopes are born from extreme misery” — at least if you have been short iShares Russell 2000 ETFIWM! (Note: In its history, the Russell Index never has been as extended relative to the Bollinger Bands.)

* The recent widening in relative performance (Russell vs. S&P) may be a function of the president-elect’s policies toward protectionism and against globalization; the timeliness and extent of impact might be overestimated.

* The Russell Index is more richly valued than the broader indices. The 2016 price/earnings multiple for the Russell Index is 32x and 25x 2017 estimates (before any new effective tax rate) on non-GAAP earnings. The S&P Index is trading at 19x 2016 non-GAAP and 17.5x 2017 estimates. However, the S&P multiple of GAAP is 26x — there is no currently available GAAP multiple of the Russell.

* As interest rates gap higher, the cost of capital is rising for small and medium-size companies: This is occurring at a speed far faster than many previously thought. Large, multinational companies have better and cheaper access to capital through the markets and/or on their cash-rich balance sheets. (Note: This morning’s move in the 10-year U.S. note yield to more than 2.50% may be a tipping point).

* The rate of growth in the cost of commodities and services is starting to accelerate. This hurts smaller domestic companies that are less diversified compared to the larger companies. Remember, mono-line smaller companies often have less pricing power than their larger brethren. (Note: This morning’s $2.35 rise in the price of crude oil to nearly $54 also may be a tipping point).

* Smaller capitalized, domestically based companies are not beneficiaries of possible repatriation of overseas capital. As Russell wrote, “Sin is geographical!”

* The president-elect’s infrastructure plans likely will be slow to advance. There will be some opposition from both parties, members of which will be looking for a revenue-neutral and not “budget-busting” fiscal jump-start. At best, this is a 2018-2019 event. Moreover, the build-out could benefit some of our larger companies (e.g., Caterpillar(CAT) and United Rentals (URI) ) over smaller companies. In the broadest sense, however, infrastructure build-outs rarely contribute to sustained prosperity; just look at the sophisticated and state-of-the-art infrastructure in Japan.
That build-out has failed to bring sustainable economic growth to that country. The same can be said for Canada, which is mired in a 1% Real GDP growth backdrop despite Prime Minister Trudeau’s large infrastructure spending of years ago.

* The president-elect’s immigration policy — building a wall, limiting in-migration and exporting those who are in our country illegally — are not pro-domestic growth and could hurt small to medium-size companies.

* The president-elect’s China policy and broader protectionism policy could end up hurting the sourcing (impacting availability and cost) of many smaller companies, potentially squeezing profits by lowering margins and reducing sales.

Bottom Line

“All movements go too far.”

–Bertrand Russell

My view is that the Russell may soon stop crowing and I am moving toward a more aggressive short of that Index.

 

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I’ve highlighted that the 2 bond Kings are less than impressed with the move in stocks. The majority of articles however are very bullish for stocks moving forward. They are also bullish on the economy generally.

I haven’t really had time to sit down and really think my way through the issues, so I’m just reading the articles at the moment.

From a purely historical/technical perspective, this current market resembles somewhat the market of the 1970’s into the early 1980’s. The obvious difference however is that the interest rate environment is inverted.

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Ignoring the headlines, as headlines are headlines, the prolonged ‘nowhere’ finally broke out into a massive bull market. This coincided with a fall [for 30 years] of interest rates.

We have the massive ‘nowhere’ pattern. We don’t have an interest rate environment that can fall any lower. The only new direction is up, or a continuance of low interest rates.

‘Low’ would be anything up to 7%. As long as interest rates gradually move up to, and do not exceed that sort of number, we could have another bull market leg.

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Today’s jobs report isn’t looking like it can prevent a rate hike. That means investors are closing out the week with more head-scratching about the “Trump trade.”

The big question is whether it’s back into the cage for those animal spiritsunleashed by The Donald’s election win. Maybe the wild rumpus is just getting started, suggests Josh Brown.

“If this sort of thing extends beyond the speculators in the stock market into the actual C-suites where spending and investment decisions are made, then it becomes self-fulfilling and it could actually work,” Brown writes over at his Reformed Broker blog. “If it doesn’t, well then at least we’ll have some fun in the meantime.”

Count Jeff Gundlach among those arguing that the party is over. He provides our call of the day.

“The dollar is going to go down, yields have peaked and will move sideways, stocks have peaked as well, and gold is going to go up in the short term,” the DoubleLine Capital CEO says in an interview with Reuters. “It is so late to be buying the Trump trade.”

Gundlach, who voted for Trump and predicted the GOP nominee would win, says people are expecting too much, after earlier being too gloomy.

“People were expecting markets will go down 80 percent and global depression — and now this guy is the Wizard of Oz,” the star manager says, adding that “there’s no magic here.”

Gundlach is known for savvy calls, but the “bond king” doesn’t always nail it. He predicted in mid-November that the 10-year Treasury yieldTMUBMUSD10Y, +0.16% would not move above 2.35%, but it has hovered around 2.45% this week.

Staying on the topic of the president-elect’s effect on markets, our chart of the day shows how one of the friskiest Trump trades just lost 75% of its post-election gain.

Futures for the Dow YMZ6, +0.04%  , S&P 500 ESZ6, +0.06% and Nasdaq-100NQZ6, +0.06%  are dipping, as the Dow DJIA, +0.18%  eyes a small weekly gain after another record close yesterday. The S&P SPX, +0.34% and Nasdaq Composite COMP, +0.45%  , on the other hand, are on track for weekly drops of roughly 1% and 3%, respectively.

Oil prices CLF7, -0.22%  are giving up a little bit of their OPEC-fueled gains, while Europe SXXP, +0.97%  is significantly lower as investors worry about Italy’s referendum on Sunday. See the Market Snapshot column for the latest action.

Traders here and there are pointing out the “Trump rally” has faded for biotech stocks XBI, +1.85%  .

The chart above shows how one key biotech ETF IBB, +0.89%  has knifed below its 200-day moving average, a level that it had been living above since the day after Election Day. This ETF was up 12% from its Nov. 8 close as of mid-November, but it’s up just 3% as of Thursday’s close.

This can’t be helping: Allergan’s AGN, -0.13%  CEO argued yesterday that Trump’s election won’t take the focus off high drug prices.

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Bill Gross isn’t buying the Trump rally and the prospects for growth driving it.

As President-elect Donald Trump’s economic team takes shape, led by Treasury Secretary nominee Steven Mnuchin, investors are misguided in betting that promised tax cuts, infrastructure spending and deregulation will spur faster growth, according to an e-mail Thursday from Gross, the billionaire bond fund manager. He said the benefits from such fiscal stimulus likely would be temporary.

Gross said future growth is primarily a function of productivity, which has flat lined for the last several years and shows little promise of accelerating.

“A strong dollar and continuing structural headwinds including aging demographics, de-globalization trade policies, and accelerating debt-to-GDP in almost all countries at now higher interest rates, promise to contain productivity at perhaps 1 percent annual growth rates and therefore real GDP growth at 2 percent,” he wrote.

The Dow Jones Industrial Average was up Thursday, the 13th daily gain in the 16 trading days since Trump’s surprise Nov. 8 election victory. Treasuries extended losses, continuing the biggest increase in yields on 10-year notes since 2009 following Trump’s triumph. Yields on the 10-year may rise to almost 2.5 percent by the end of this month, Gross said.

“An investor should move to cash and cash alternatives, such as high probability equity arbitrage situations,” Gross, who runs the $1.7 billion Janus Global Unconstrained Bond Fund, said. “Bond durations should be far below benchmarks.”

Jeffrey Gundlach, whose DoubleLine Capital oversaw more than $106 billion as of Sept. 30, also warned investors Thursday to be wary of a Trump rally.

“There is going to be a buyer’s remorse period,” Gundlach said in an interview with Reuters. “The dollar is going to go down, yields have peaked and will move sideways, stocks have peaked as well and gold is going to go up in the short term.”

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