Jimi Hendrix & Bipolar Markets
By David Nelson, CFA
Strategists and talking heads are always looking for a phrase to describe market events in a way that you the reader will click on the story and risk your very valuable time. For many of you, Jimi Hendrix was just some rocker your parents used to talk about when you were kids. For me as former recording artist he was the reason I got in the business.
Connecting the dots from Jimi Hendrix to stocks might seem like a stretch but the popular Hendrix song “Manic Depression” should be the anthem for stock markets around the world. Like a psychiatrist, most strategists and portfolio managers recognize something is just a little odd with the patient.
Manic Depression – Alternating moods of abnormal highs (mania) and lows (depression). Called bipolar disorder because of the swings between these opposing poles in mood. A type of depressive disease. – Web.com
A clinical look at the last two trading days in markets both here and abroad would all but confirm investors are suffering from bipolar disorder.
Thursday’s ECB decision and conference that followed set off a chain reaction sending asset classes and investors on a roller coaster ride ending Friday with stocks here and on the continent closing at a Manic Depressive high.
The ECB’s decision to push rates further into negative territory initially drove the Euro lower and stocks higher. Before reporters could put pen to paper traders were busy unwinding trades put on just moments earlier.
Draghi’s comments gave some investors pause sending the DAX into a nearly 5% plunge from the morning highs to the closing low. Here in the U.S. Thursday’s positive open quickly rolled over with the index down 1% by early afternoon. Like we’ve seen so many other times this year the end of day stealth rally picked up steam closing just above the flat line by 4PM EST.
On Friday U.S. markets (SPY)* picked up where they left off never looking back putting in the second strongest day this month.
Market moves that resemble a bipolar disorder are usually a strong signal investors are confused. At the lows the conversation centers on the probability of recession and at highs investors see green shoots everywhere.
The challenges investors face are well understood:
- Market isn’t particularly expensive but certainly not compelling on a valuation basis
- Even with oil off the lows balance sheets in the oil patch are challenged
- Trouble in credit markets – sub-prime auto loans defaulting and credit issues in the oil patch are spilling over into the financial sector
- CEO’s continue to use buybacks at the expense of R&D and CAPEX
- Gundlach: “stocks have 2% upside and 20% downside
Jim Cramer said it best recently when he talked about Jeff Gundlach’s recent comments. “Like most bond managers he does tend to paint stocks with too broad a brush” – Jim Cramer
Mr. Gundlach is one of the most talented fixed income managers to come along in some time however, I’m reminded of another Bond Guru Bill Gross’s call; We’re Witnessing the Death of Equities made back in 2012.
No question the indices are challenged but most portfolio managers are stock specific. The technical evidence continues to suggest that this may be more than a dead cat bounce.
The rally continues to be unloved and it’s clear the pain trade has been up. Could this be another false rally that ultimately fails? Of course it could but I assure you that if and when there is evidence confirming the economy is on the mend the market will be significantly higher than it is today.
The technical sign posts that got us here
Here it is today
The percentage of stocks above their 200 day moving average continues to rise off the lows of January.
Even the index itself has poked its nose above the 200 day. What’s important now is that it starts to live above the average and the slope turns from negative to positive. 1950 in the S&P 500 (SPX) was an important line in the sand for the index to break through. That resistance now becomes the new support.
Wars are won 1 battle at a time and despite a recent string of victories the next battle could last a while. The enemy has a formidable wall built over the last year at around 2100 in the S&P. The overhead supply of sellers who are under water looking to get out is huge and admittedly will take some time to unwind. In an earlier post “Tweet heard round the world” I discussed how the fundamental look forward always looks terrible at market inflection points.
Just think back to 1998, 2002, 2009 and even 2011. In 1998 we had an emerging market currency crisis. Some banks like Citigroup (C) we’re being pummeled on a daily basis. In 02 we were trying to crawl out of a recession. In 2009 we were deep in a financial crisis and again in 2011 many believed the Bull Run was over.
Separating the trees from the forest
Price performance almost always leads the fundamentals. The rally is only 1 month old and has moved too quickly for most investors to buy in. Eventually improving fundamentals will have to confirm the recent price action or like the bears suggest the rally in risk assets will ultimately fail.
Despite the broad economic challenges we face here at home there are still many U.S. companies whose business models are seeing success.
Even after removing Utilities (XLU) from the S&P 500 (SPX) an obviously defensive sector you’ll find at least 76 companies within 3% of a 52 week high and 114 within 5%. Click here for list. Something’s going on. Investors will do better spending more time focused on the trees and less time worrying about the forest.
*David Nelson owns SPY in tactical accounts he manages for Belpointe