“Waiting for Something to go Kaboom”

The S&P500 managed to squeeze out another gain last week, but this time for only 0.5%. Volume was light for a week that was not holiday shorted. Volatility actually rose, but it did so from a still extremely low, or complacent, level. Breadth was reasonably strong; the percent of stocks above the 50 day moving average continued to rise and is not almost 60%. And the new highs minus the new lows advanced, but it’s not back to levels seen during most of the summer.

US macro data, on average, disappointed last week. The Chicago Fed missed  badly, as did the Dallas Fed survey and the Kansas City Fed survey. Durable goods orders beat expectations, but mostly due to inventory builds, which is not a good sign if it’s not selling. A key sub-index, new orders, plunged by the greatest percentage since 2009. New home sales disappointed. GDP missed expectations. Initial jobless claims were greater than predicted and still near the ominous 400,000 threshold. Personal income and personal spending both badly missed.

Technically, the S&P500 is overbought on the daily charts. Yet the uptrend is still in effect. On a weekly basis, the downtrend is still intact. As a result, the S&P is nearing a crossroads. For the weekly downtrend to break, the S&P must continue rallying in the face of its overbought headwinds. The next two weeks will determine if the weekly downtrend holds, or not.

Recently, Jeffrey Gundlach of DoubleLine Capital was profiled in Bloomberg and spoke about his views on the US economy, that of the rest of the world, and markets.

What stood out were his worries.

Gundlach is convinced that a more ominous, “phase three” of the global financial crisis is on its way. But he doesn’t think there will be an “early warning” that it’s about to hit.

In fact, he calls this process “waiting for something to go Kaboom”.

What’s he doing about it?

Since he believes that the amount of money folks could make in this phase three will “dwarf” what the can make now, he’s building cash by reducing US equity exposure.

He insists that “if phase three takes two years, it’s worth waiting for. The markets don’t have lots of opportunity now.”

For sure, these thoughts are far from the consensus view that “things will work out just fine in the end, so buy buy buy stocks.”

But coming from an investor whose performance has been outstanding for over 20 years, these thoughts are worth considering.

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