Beyond the Market's Mid-Life Crisis?
The fourth-quarter U.S. equity sell-off was nothing more than a “mid-life crisis” that set the stage for further gains in the market, according to Tom Lee, the co-founder of Fundstrat Global Advisors LLC.Tyler Clifford of CNBC also reports, Strategist Tom Lee: ‘Buy the dip’ because the S&P could rally 17 percent in 2019:
The S&P 500 Index will rise 13 percent this year to 2,835, driven by a continued profit expansion, Lee said. Earnings will increase to $169 a share in 2019 and $183 next year, he predicted.
Lee’s optimism echoes Wall Street strategists calling for a big comeback after stocks fell to the brink of a bear market in December. To Lee, the latest rout was reminiscent of two other episodes, in 1962 and 1987, when a sell-off sent the S&P 500 to its 200-week moving average price and proved only an interruption to a prolonged bull market (click on image).
This time, “stocks overshot to the downside, on the heels of a cumulative panic around mounting trade tensions, excessive bullishness and then a knockout blow from the Fed,” Lee wrote in a note to clients. “Unless the U.S. is headed for a recession, this should lead to a bounce in stocks in 2019.”
For now, history is on the bulls’ side, judging from the Institute for Supply Management’s manufacturing index that has called the tune of past market turmoil, according to Fundstrat (click on image).
In addition to the one that happened at the end of last year, the S&P 500 had posted ten other declines of 19 percent or more over 60 days since World War II. Three of them were accompanied by the manufacturing index sitting below 50, an indication of contraction, and stocks eventually plunged into bear markets. The others coincided with expansions and the market ended up faring well. The measure’s latest reading was 54.
Last year’s plunge in stocks “is a sign of a major tradeable bottom,” Lee wrote. “This was true especially considering that PMIs >50.”
Stocks are poised for double digit growth in 2019 — and could potentially jump as high as 17 percent, Wall Street strategist Tom Lee said Friday.Lee also stated technology shares (XLK) will lead the secular bull higher and there's a new technology bull being formed, away from FAANG stocks and into newer tech names millennials love.
“The buy the dip, which people thought died last year, is back,” the Fundstrat Global Advisors co-founder and head of research said on CNBC’s “Fast Money: Half Time Report.”
“The probability of a double-digit year we think is the highest since 2009,” added Lee, who is also the firm’s head of research.
In his latest investor note released Friday morning, Lee predicted the S&P 500 would hit 2,835 by the end of the year. That would be a 13 percent increase from where the index finished 2018.
Lee acknowledged in his note that “contrarians were slaughtered” last year. In mid-December, after a late-year collapse in stocks, he told CNBC there was still time for the S&P 500 to catch a 10 percent rally going into 2019.
However, the stock market actually fell further into the red, with the S&P 500 hitting a 2018 low of 2,346 during the Dec. 26 trading session. Since that intraday low, the S&P 500 has gained more than 10 percent based on Wednesday’s close. The index was up 3.5 percent year-to-date.
“The crash of 2018 mirrors the mid-life crisis seen during the middle of bull markets a la 1962 and 1987,” Lee said in his note. In both those cases, he argued, the bull market found its footing at the 200-week moving average, which currently is “2,350 or so” on the S&P 500.
“Is a retest in 2019 possible? Yes, but if so, we would view that as a buying opportunity,” he wrote.
Got to hand it to Tom Lee, he reminds me so much of Abby Joseph Cohen, another famous bull on Wall Street who eventually succumbed to the 2008 crisis and ensuing long bear market.
So, is Tom Lee right? Did the market just have a mid-life crisis? Is this a huge buying opportunity, especially if we retest the lows of the Christmas Eve Mnuchin massacre?
The first thing I would suggest is you all read last week's comment, Outlook 2019: When Doves Cry, as well as my comments on the bad Santa selloff of 2018 and making stocks great again.
I wrote a lengthy outlook last week which is well worth reading and watching the clips at the end.
In short, my thesis was going into the new year, I thought stocks were extremely oversold and due for a major bounce just based on rebalancing going on at major pension and sovereign wealth funds around the world, the most influential allocators, and when the Fed turned dovish last week, it assuaged my concerns that a global recession was right around the corner and the shift in tone also fed the upward momentum in all risk assets, not just stocks.
Now, I'm still concerned about a slowing US and global economy, just a little less so since Fed Chair Jerome Powell stole Christmas.
I still think the US economy is slowing and the government shutdown isn't helping, which explains why US long bond yields are declining.
But I'm unclear to what extent it will slow and whether global economies can start growing now that the Fed is supposedly out of the way for the year and the US dollar (DXY) seems to be rolling over, relieving dollar-denominated debt pressures all over the world (click on image):
As I stated in my outlook, you need to pay attention to what the Fed is saying and doing, to the US dollar (UUP), emerging market stocks (EEM) and bonds (EMB), and you need to keep an eye on financials (XLF), high yield bonds (HYG) and US long bonds (TLT). You also need to pay attention to some of the riskier sectors of the market, like biotech (XBI), to try to gauge risk appetite.
Think of the market as a bunch of moving parts, a symphony if you'd like. When the composer (the Fed) is on their game, the orchestra is playing beautiful music, but when the composer if off their game, it sounds god awful. And when the music stops abruptly, like in mid-December, it gets real ugly, real fast.
So what's going on right now at the concert? Fred Imbert and Sam Meredith of CNBC report, Stocks rise more than 2% for the week:
Stocks posted solid weekly gains, but an ongoing U.S. government shutdown and worries about an economic slowdown in China pushed shares marginally lower on Friday.It remains unclear what's going on with US-China trade negotiations and according to some analysts, the risk of talks breaking down remains high.
The Dow Jones Industrial Average and S&P 500 both rose more than 2 percent this week while the Nasdaq Composite jumped 3.45 percent. Amazon and Facebook both rose more than 4 percent this week, while Netflix surged 13.45 percent as investors put money into the beaten-down names from December. The Dow and S&P 500 also posted their first three-week winning streak since August.
This week was also the calmest on Wall Street in a while. It was the fifth day without an S&P 500 move greater than 1 percent in either direction, the longest quiet streak since early October for the benchmark.
But Nancy Davis, CIO of Quadratic Capital, thinks volatility will remain high in the foreseeable future. “We’ve seen the rise in volatility coming back into the markets,” said Davis. “This is just the beginning of what we should expect to see. These big ups and downs are going to become more common.”
On Friday, the Dow slipped 5.97 points to 23,995.95 while the S&P 500 closed just below breakeven at 2,596.26. The Nasdaq Composite dipped 0.2 percent to 6,971.48. This was the first decline for the major indexes in six sessions.
The federal government remained partially closed on Friday for a 21st straight day, stoking fears the shutdown could drag on for a long time. On Thursday, President Donald Trump tweeted he would skip the annual World Economic Forum at Davos later this month due to the shutdown.
Because of the Democrats intransigence on Border Security and the great importance of Safety for our Nation, I am respectfully cancelling my very important trip to Davos, Switzerland for the World Economic Forum. My warmest regards and apologies to the @WEF!— Donald J. Trump (@realDonaldTrump) January 10, 2019
Trump also said he will “probably ” declare a national emergency if the White House and Congress cannot reach a deal to end the shutdown.
“We think a deal will be reached to reopen the government, but only after economic, financial and/or political pain is felt,” Joseph Song, an economist at Bank of America Merrill Lynch, said in a note to clients. “Every two weeks of a shutdown trims 0.1 [percentage points] from growth; additional drag is likely due to delays in spending and investment.”
Concerns over a possible slowdown in China weighed on equities Friday.
Goldman Sachs analyst Karen Holthouse said Starbucks would be the next company to warn of a slowdown in China following Apple’s recent revenue guidance cut. “The recent AAPL [Apple] announcement (while potentially also product-driven) cited trade concerns/macro, and MCD [McDonald’s] acknowledged softer trends in the region at a late November event,” said Holthouse, who downgraded the coffee maker to neutral from buy.
Starbucks shares fell 0.7 percent.
Apple slashed its revenue guidance for fiscal first quarter last week, citing an unexpected slowdown in China. On Thursday, Federal Reserve Chairman Jerome Powell said that warnings shows the Chinese economy is slowing. “It’s showing up a lot in consumer spending,” Powell said. “Weak retail spending; everyone has seen the Apple news.”
Concerns around Chinese economic growth come as China tries to strike a permanent deal with the U.S. to settle a punitive trade war. The world’s largest economies have slapped tariffs on billions of dollars worth of goods since last year.
I'm not so sure. Trump knows the stock market will tank if talks break down and China flirting with deflation can ill-afford to have talks break down.
All this to say, there remains uncertainty on the macro front, whether it's trade talks with China or the US government shutdown which is already the longest shutdown ever and costing the economy more than Trump's wall.
If you watched the news tonight, you saw federal workers weren't paid today, many are hurting and rightfully worried as they cannot afford to make their house and car payments. Some are resorting to food banks too because they cannot afford groceries.
It's crazy when you think about it, all this economic pain and anxiety to fund a $5 billion wall which Trump promised his base.
I don't know what the president is going to do but he's already backtracking from declaring a national emergency and if he's not careful, this bloody wall is going to cost him political capital from within his own party and possibly his re-election bid (sometimes I wonder if he really wants a second term or just to build 'his' wall).
Anyway, enough politics, let's get back to markets. As shown below, if you look at the one-year daily chart of the S&P 500 ETF (SPY), you'll see it's well off its December 24th low (234) and trying to cross back above its 50-day moving average (click on image):
Bearish technicians will point out the index's price action broke down in early December when we had the dreaded "death cross" (where the 50-day moving average fell below the 200-day moving average) but I would caution all of you to take all this talk of death crosses with a shaker, not pint, of salt.
Importantly, if you step back and look at the 5-year weekly chart, you'll see the SPY crossed back above its 100-week moving average this week and remains well above its 200-week moving average but still below the 50-week which it needs to cross above to resume an uptrend and make new highs (click on image):
In fact, looking at that chart, it does look a lot like Tom Lee's mid-life crisis thesis but I warn you, the easy gains have been made and if something goes wrong, we will retest the December 24 lows and possibly go much lower.
I don't want to sound the alarm on this market or leveraged loans, I'm constantly looking at a lot of things and thinking ahead of the curve.
Next week, the big US banks are reporting earnings and I want to see if financials (XLF) surge higher to cross above the 100-week moving average or get hit and drift lower back down to the 200-week moving average (click on image):
I must confess, I'm not very bullish on financials given my view that the US economy is slowing and rates are headed lower this year but we shall see.
What else? I'm looking at early cyclicals like homebuilders (XHB) to see if the worst is over in this key sector of the economy or just starting (click on image):
I'm also looking at biotech stocks (XBI) which surged this week but are now at important resistance levels (click on image):
And while many stocks have bounced back strongly, it's worth noting only 30% of S&P 500 stocks are above their 50-day moving average, most remain below their 200-day and there are very few stocks making new 52-week highs in this market (you can check here).
These aren't bullish signs and shows the market remains sick and we're definitely not out of the woods yet.
Still, if Risk On dominates markets this month and you see sectors and industries like financials (XLF), homebuilders (XHB), and biotech stocks (XBI) surge higher, that's good news. Also, if you see industrials (XLI), metal & mining (XME), energy (XLE) and emerging markets (EEM) move higher, that too is good news because it shows global growth is staging a comeback.
I remain highly skeptical that global growth is coming back but I'm keeping my eye on markets to try to gauge what's going on.
What I can tell you is I think rates on the US 10-year Treasury note peaked in early October and typically the worst of the economy isn't felt till a year later (click on image):
I hope I'm wrong but I fear that come this fall, the US economy will be in a recession and the magnitude of the slowdown depends on what the Fed and Congress do in the months ahead.
If there is a policy error on any front, Tom Lee's mid-life crisis will spiral into something far, far worse.
This is why I think it's way too early to throw in the towel on defensive sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecoms (IYZ) and US long bonds (TLT) which could get hit in Q1 if Risk On markets dominate.
The year is very long, anything can happen at any time but right now, I'm cautiously bullish and short volatility. We'll see if my mind changes next week after financials report.
Lastly, I share something new, the biggest gainers in the stock market over the last week (click on image):
The full list is available on barchart here.
I'm only sharing this to show you there were some huge moves in individual stocks this week and there were even nice trades to be made in stocks that got killed earlier this week, like La Jolla Pharmaceutical Company (LJPC) which took a 50%+ haircut on Monday and then rallied nicely into end of week (click on image):
Don't get excited, if you look at the 5-year weekly chart, you'll see this biotech has been decimated (click on image):
But some very big biotech funds like Perceptive Advisors, Tang, and Fidelity are major holders and I'm curious to see if they dumped or added to it as it got killed.
Here are some other stocks I was looking at this week (click on image):
That's all from me. Hope you enjoyed reading this comment. As always, I ask all my readers to please donate or subscribe via PayPal on the right-hand side, under my picture. I thank all of you who take the time to donate, it's greatly appreciated.
Below, Fundstrat's Tom Lee makes the bullish case for stocks in 2019, stating we will see double-digit gains. He may be right but I seriously doubt it, think it will be another very choppy and weak year when we reach the end.
And top technician Carter Worth says it's time to fade the financials heading into earnings with CNBC's Melissa Lee and the Options Action traders, Mike Khouw and Dan Nathan. Keep your eyes on financials this week and how they trade after they announce their earnings.
Third, David Zervos, Jefferies chief strategist, and Alli McCartney, UBS Managing Director, join 'The Exchange' to discuss their predictions for bank earnings next week and the state of US markets. Zervos said the Fed could cut rates this year but I doubt it unless the economy tanks really bad (never say never).
Fourth, Oxbow Advisors Managing Partner Ted Oakley joins Fox Business to discuss the factors that could potentially weigh on the markets in 2019, stating there's a bigger risk of recession than everybody thinks. I'm afraid he's absolutely right.
Lastly, my favorite interview of the week. Jeff Vinik, CEO and CIO of Vinik Asset Management, joins "Squawk Box" to discuss why he's re-opening his hedge fund and why it's a good time for stock picking. Vinik is a legend in money management, will be tracking his fund's activity closely.