Stock Market Entering Destructive Phase?
Morgan Stanley's Michael Wilson believes the stock market is entering a destructive phase.Today is Friday, time to have a bit of fun and talk stocks, enough about pensions piling into private markets.
"The Nasdaq could correct by 15 percent plus, the S&P 500 probably goes down about 10 [percent]," the firm's chief U.S. equity strategist said Thursday.
His comments came on CNBC's "Trading Nation," where he was speaking publicly on Monday's correction warning research note for the first time. Wilson contends financial conditions are tightening more than most investors appreciate, and a correction has already started.
"The market has just been getting narrower and narrower. So what we've seen is every sector within the S&P has gone through about a 20 percent correction on valuation except for two: technology and consumer discretionary — basically growth stocks," Wilson said. "Our view is that this rolling bear market has to complete itself by hitting those two sectors, and we think that's actually begun."
Wilson, who was one of last year's biggest bulls, sees this shift from growth to value stocks creating a lot of trouble because technology and consumer discretionary groups make up nearly half the S&P.
"If the growth stocks get hit disproportionately hard, it's going to be very difficult for that money to leak into other parts of the market without having some loss of value," he said.
Wilson's S&P year-end target is 2,750 — 4 percent below the index's record high of 2,872 hit on Jan. 26 and about 3 percent from current levels.
As for next year, he doesn't see the situation getting much better.
"There are definitely a lot of signs already that there's a view that things are going to slow materially next year whether there is a recession or not," Wilson said."
However, he isn't bailing on stocks altogether. Wilson likes energy, utilities, industrials and financials as a rotation from growth to value picks up steam.
Let's begin with the Nasdaq by looking at the Invesco QQQ Trust (QQQ), the Nasdaq ETF. As shown below, the one-year daily chart and 5-year weekly chart are very bullish, no reason to panic just yet (click on images):
Will the Nasdaq make new highs and keep edging higher? That remains to be seen because the Fed has raised rates seven times and there may be two more rate hikes this year and the lagged effects of rate hikes are starting to hit all risk assets, including tech stocks and stocks in general.
My own feeling from trading markets is this rally is becoming long in the tooth but there are some positive stock-specific stories in tech (Amazon, Google, Apple) counterbalancing negative ones (Netflix, Facebook, etc.), so it's very tough making broad sweeping generalizations at this point.
Yes, the tech sector and overall market are becoming narrower and narrower which isn't a good sign, but that doesn't necessarily mean you should be abandoning ship here.
Also, as François Trahan and Stephen Gregory at Cornerstone Macro demonstrated in their report this week, even though it has been tumultuous in markets lately, the structural case for growth (momentum) over value remains (less leverage in the economy has weakened earnings growth and this is hitting value stocks) and with global PMIs losing steam, this too doesn't bode well for value stocks.
François and Stephen believe any dip in growth (momentum) should be bought because we are still in a Risk-Off environment.
Of course, some growth stocks have done better than others but even if you look at Facebook (FB), its share price is still holding above the 100-week moving average (click on image):
And shares of Netflix (NFLX) got whacked hard but they are still trading above the 50-week moving average (click on image):
Still, I wouldn't touch these last two tech giants, at least not yet.
As I've stated before, the problem with big tech stocks is every big hedge fund and all index funds own them. They're overowned, so when something goes wrong, "BOOM! It's Wyle E. Coyote time!".
And it's not just big tech stocks getting clobbered. On Friday, I was checking out shares of Tesaro (TSRO) getting destroyed. It's one of the biotechs on my watch list, down almost 25% today on huge volume and way down from its peak back in February 2017 when it traded close to $200 a share (click on image):
In fact, this stock was a short-seller‘s dream stock, always to be shorted when it hit its 50-day moving average over the last year.
Why am I showing you this? Because momentum stocks are dangerous, you can literally have your head handed to you if you don't know what you're doing and it's always smarter to stick with bigger well-known companies than playing Russian roulette with smaller cap stocks that shoot up fast and plunge even faster.
Now, you might be tempted to buy the big dip on Tesaro (TSRO) here following its bad earnings report, playing a potential buyout, but be cognizant of the risks you're taking.
I'm more comfortable buying some dips over others. On Thursday, I told my followers on Stocktwits to buy the dip on Teva Pharmaceuticals (TEVA) as the almost 10% pullback was a big gift in my opinion. I see this company executing well on its turnaround strategy and the stock will continue doing well over the next year or two (click on image):
Now, Teva is a core long position of mine, I got in there early last year after the massive sell-off, so I couldn't care less if it sold off, I literally use any major pullback to keep adding to my shares (have lots of cash on hand).
Moreover, in two weeks, I will be able to view Q2 13F filings to see if Bershire added to its Teva stake which it more than doubled in Q1.
You can view all the major institutional holders of Teva here, and you'll see top value managers like David Abrams, Jonathan Jacobson and others but I don't get carried away with that stuff, I just focus, focus, focus and really like this company going forward.
But picking stocks is a tough, tough, TOUGH game. Just ask hedge fund billionaire David Einhorn whose Greenlight Capital lost 5.4 percent in the second quarter, bringing the performance of his fund to a year-to-date loss of 18.3 percent, its worst performance ever.
Einhorn is a value guy who has been shorting tech stocks like Tesla and he's been getting killed and is now being publicly humiliated by Elon Musk who wants to send him 'a box of shorts'.
Musk suffers from the same disease as Trump, Twitteritis, which has landed him in hot water before, most recently with the cave diver he called a pedophile. He apologized but the damage was done.
Still, Einhorn is getting killed this year, losing big institutional clients who are pulling the plug, and he really needs to stop saying the "market is wrong". That's the same nonsense Bill Ackman was saying as shares of Valeant (VRX) fell from the stratosphere back to earth.
Here is my trading philosophy in a nutshell: "The market is never wrong, she's a real moody bitch always trying to screw you over. You might not always like her but learn to live with her because she has you by the balls."
I apologize if I'm being vulgar but this truism doesn't just apply to me, it applies to Ackman, Einhorn, Buffett, Soros, Dalio, Simons, Griffin, Cohen and whoever else is trying to make a buck trading these crazy schizoid markets.
Stop trying to convince yourself you're right, the market is wrong, that is delusional and you're only as right as your latest P & L. Period.
Anyway, I'm getting off topic here so let me end by reminding ALL of you who regularly read my comments to please donate and support my efforts in bringing you great insights on pensions and markets.
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Below, Morgan Stanley's Michael Wilson believes the stock market is entering a destructive phase but he isn't bailing on stocks altogether. Wilson likes energy (XLE), utilities (XLU), industrials (XLI) and financials (XLF) as a rotation from growth to value picks up steam.
Take all this talk of destruction and rotation out of growth to value with a shaker of salt. This isn't another dangerous tech mania but it is time to get defensive and stop ignoring the flattening yield curve.
And unlike Wilson, that means the following in my opinion: You want to go long defensive sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecoms (IYZ) and hedge equity risk with good old US long bonds (TLT) and you want to underweight or short cyclical sectors like energy (XLE), metals and mining (XME), industrials (XLI), and financials (XLF).
There may be a summer bounce in emerging markets (EEM) helping cyclical stocks but I would use any rally there to prepare for the next downturn (short emerging markets on any rally and stay underweight).
As far as tech stocks (XLK), some will get battered and bruised but overall, they still look fine for now. If markets really get rattled, then the'll get hit hard but we aren't there yet, not by a long shot.
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