Buyer beware?
This is a challenging moment for investors attempting to discern whether a long-in-the-tooth bear market can truly end without a real crash and indeed without a decline consistent with the depth of equity troughs observed during historical drawdowns.
The Nasdaq 100 is ostensibly in a bull market, and there’s an argument to be made that the banking panic, as long as it doesn’t snowball into a national crisis, is just what the doctor ordered for too-hot demand and for a labor market which, so far, refuses to yield.
Big-cap US tech was on track for its best quarter since 2012, but as discussed here Thursday, there’s a breadth problem, and that’s part of why BofA’s pseudo-famous Bull & Bear Indicator dropped to 2.3 this week from 3.0. In addition to weaker breadth in equities, outflows from corporate bonds and EM debt also weighed.
Readings below 2.0 trigger a risk-asset “buy” signal, and the average three-month move following nine such signals going back a decade is nearly 8% for global equities.
“Conventional wisdom” is now the Fed cutting by more than 150bps after May, which means “long big tech” and a virtually guaranteed recession, which in turn suggests “short small-cap and banks and sell commodities, as China is troughing not surging,” BofA’s Michael Hartnett said.
The pain trade, then, is that the recession (both economic and EPS) gets delayed yet again “by stimulus” and a resilient US labor market. In that case, Hartnett said, the market would likely “reprice lower but [with] cyclicals outperform[ing].”
The table above gives you some additional context for “buy” signals on the Bull & Bear indicator which, I should note, is an indicative measure and nothing more. It’s not a benchmark or any sort of index.
In the same note, Hartnett described the zeitgeist. “Panic, flush, unwind, then [the] Fed blinked and off we rally into April, which is always up in the third year of a presidential cycle,” he wrote. “Then we’ll see if recession or new CRE or US Treasury panics await in the second half.”
“If SVB was Bear Stearns, we’re going to new lows,” he went on. If SVB was LTCM, “then we’re going to new highs.”
In this context, what would a “US Treasury panic” look like? Is that perhaps a reference to the debt ceiling issue?
Not to cause angst, but man needs the overconfidence gene to carry on….Herbert Stein said “If something can’t last forever, it won’t.” You could argue that logic for a stock market selloff is lining up convincingly, but it doesn’t seem like there is a very high professional allocation to the stock market…Years ago I used to say to the young man on my left every morning The quest for logic continues….
Some days we need to be grateful just for asking the right questions…..