The S&P500, as encouraged by the Fed, continued its orderly march higher, this time rising by 1.1% on ever lower volume…..something the Fed can’t control as easily as price. In other words, the Fed can’t force an enthusiastic love affair with stocks, something that increasing—rather than decreasing—volume would imply. Volatility, a proxy for complacency, didn’t fall (actually rose a bit) but perhaps only because it’s as low as it can get, according to 20 years+ of historical data.
Unlike prices in risk asset markets, US macro data continued to deteriorate….markedly. The Chicago Fed National Activity Index (very much a leading indicator, rather than a coincident or lagging indicator such as unemployment) fell, when it was expected to improve. Existing home sales also fell, also after consensus predictions of a rise. The Richmond Fed manufacturing survey collapsed, as did the Kansas City Fed index—both of these are also key leading indicators. Jobless claims were better than expected but mainly because of huge seasonal adjustments (yes, even this number is manipulated by the government) and because key states like California provided estimates of claims (rather than raw counts). Leading indicators were slightly better than expected, but mainly because a key component, the stock market, has been rising (this implies a circular reasoning within this metric). Finally, new home sales disappointed.
Technically, the US stock markets are clearly overbought…..on a daily basis, a weekly basis and a monthly basis. To say that the stock markets are “stretched” at this point (even ignoring the poor economic and corporate fundamentals), is an understatement. Can this overbought condition continue to build? Sure. But making new stock market allocations at this point clearly means that you’d be “buying high” rather than what you should be doing which is “buying low”.
In the mainstream media, the story of the great rotation has been gaining momentum. In short, Wall Street has been trying to sell the idea that the average retail investor has been sitting on the sidelines for the past three years missing out on the stock market rally and is now starting to “rotate” his money into stocks, and that this will provide a surge of upward pressure on prices that everyone can profit from.
There’s just one huge problem with this story. It’s a myth. What these financial peddlers never mention is that if the little guy starts to buy stocks, then WHO will be selling him their shares?
For every new dollar entering the market from Joe Sixpack, there has to be a dollar LEAVING the market….most likely from large sophisticated investors who are looking to get out!
John Hussman, in his weekly commentary, describes this process very well:
The newest iteration of the bullish case is the idea of a “great rotation” from bonds and cash to stocks, as if the outstanding quantity of each is not held by someone at every point in time. The head of a “too big to fail” investment firm argued last week that stocks are “underowned” – as if every share of stock presently in existence is not actually owned by someone. To assert that stocks can be “underowned” seems to reflect either a misunderstanding of how markets work, or a desire to distribute overvalued institutional holdings onto the unwashed muppets. Likewise, the idea of a “rotation” out of bonds and into stocks begs the question of who will buy the bonds and sell the stocks, as someone must be on the other side of that trade. Similarly, to “move cash into the market” requires a seller of stock who becomes the new holder of said cash.
So don’t be fooled. Don’t become the unwashed muppet, the greater fool, and buy stocks now—very near their record highs—and become victims, again, for the benefit of those who are seeking to get out now.