As previously discussed, I cleaned out stock longs on Nov. 2 after playing the Oct. rally and posted
a "tight money sell" rating on Dec. 16, when the Fed's decision to begin raising short rates was
implemented and my primary fundamental indicators turned negative. My biggest concern for well
over a year has been that history shows that the stock market and the economy have troubles when
the Fed turns off the liquidity tap after a lengthy and very large build up. Although there have been
few instances in US history when this type of sequence has occurred, it has turned out to be so
this time as the economy has steadily lost growth momentum since mid - 2014 and the stock market
has followed suit. Surely, the bust in the oil market has substantially magnified the effects of the
major tightening by the Fed, but the die was cast. The economy has remained in positive territory
so it could have been worse.
The stock market can rise when my primary indicators are negative, but whatever the degree of
positive return potential, the risks to equity capital are quite a bit higher. Without liquidity support
from the Fed, the economy is dependent on sustaining growth from its own internal resources.
The steady erosion of economic growth momentum with the added burden of a weak energy sector
shows the economy is struggling to transition to sustainable progress and has led to a trend of
declining earnings in the bargain. The p/e ratio is also eroding as confidence wains, having fallen
from 20.3 x net per share to 17.9 since the spring of last year. The current lower multiple on $105
per share earnings for the SPX can slip lower if investor confidence continues to wain.
The economy can still right itself as the year progresses. Jobs are expanding, the level of consumer
confidence is positive and fiscal policy is in transition from being a drag to being stimulative.
There are excess inventories in the system, particularly petro based, and these overages should
tend to wear down as the year progresses. Be mindful too that net petro product consumers are
continuing to experience a windfall from the tanking of the oil market.
Historic weakness so far here in Jan. has brought the SPX to a deeply oversold condition short
term and an interesting oversold is also fast developing for the intermediate term as well.
The bottom panel of the chart shows that a major oversold on the 14 wk. stochastic measure is
developing for only the sixth time since 2011. Stochastic oversolds like that shown often yield
rallies even in bear markets. So pay heed.
As a testament to the whipsaw volatility of the recent market, note as well how the MACD
gave only a short term rally signal in Oct.before it rolled over wickedly just as it was on the cusp
of a buy signal that could have provided several months of positive return (I lucked out on
Welcome to the world of having to go it alone without help from the Fed. You are not alone.
Keep the Nexium handy and try not to use the john when the market is open.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!