Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.
7m1. A Different Week or just a Week in Waiting?
This week seemed different than the ones earlier in the year. The flavor can be seen from the tweets below:
Bespoke @bespokeinvest on Wednesday – Just saw another huge sell program. Bigger than the one from yesterday afternoon, which was the biggest of the last month.
- Ryan Detrick, @RyanDetrick – Tuesday – We went over seven months without a 4-day $SPX losing streak. Now could have two in consecutive months if red today.
The stock indices closed down 4 of 5 days this week. And interest rates fell on the same 4 days. Was this just a give back of the euphoric rally on Fed Wednesday, September 18? Or was this a building worry about the government shutdown fight coming to a head next week? The economy did not provide any real insight this week. That changes next week with the Payroll Report on next Friday.
2. U.S. Equities
Art Cashin noted on Friday that the S&P had broken the 1695 neckline of a head & shoulders pattern and gone decisively below the key support level of 1693-1695. He felt the S&P could get down to 1660 as a result of the break. He declared “Monday is very a critical day” and repeated what political reporters had been suggesting – that the House Republicans would send back a 2-3 week continuing resolution that will postpone the day of reckoning.
Steven Suttmeier of BAC-Merrill Lynch said on Tuesday on CNBC Futures Now that a closing break of 1700 would lead a drop to 1674, 1650 on the S&P.
Lawrence McMillan sort of changed his mind for the second consecutive week on Friday:
- “$SPX now has resistance at the mid-September highs of 1730. There is support at 1680, 1660, and then at the August lows of 1630. This week, $SPX generated a sell signal, based on a recent overbought condition. That is one of the few confirmed sell signals. … If $VIX closes above 15, though (VIX closed at 15.46 on Friday), that would turn this indicator negative.”
- “In summary, the fact that the bears couldn’t complete simple sell signals in breadth and $VIX speaks volumes about their ineffectiveness. But it doesn’t mean they can’t regroup, so we want to keep a contingent sell signal in place.”
Tom McClellan in his Friday’s article Seasonal Pattern:
- “… way of looking at this is that the market’s anticipation and response to the Fed’s action took prices well off track, and that the market’s mission is to get back on track. The further that prices wander off track, the harder they have to work to get back on track. In simpler terms, the stock market went up when it was supposed to go down, and now it must pay the price for wandering off course.”
- “The seasonal weak period does not end until late October. … so … the stock market still has until late October, on average, to finish getting itself back on track with what it is supposed to be doing during the normal seasonal weakness period”
- Lawrence McDonald @Convertbond – Down 40 handles on the S&P 500 from last week’s highs, time to cover some shorts
3. U.S. Treasuries
While stocks fell, interest rates also fell across the curve. It felt very strange to hear bullish trading calls on CNBC Fast Money with Guy Adami forecasting a drop to 2.25% for the 10-year yield and JC Parets making Treasuries his final trade of the show.
Last week, we quoted the comments made on BTV Street Smart by Scott Minerd of Guggenheim Partners after the close on Fed Wednesday, September 18. This week, we saw his article on Advisor Perspectives. A couple of excerpts below:
- “Once rates peak, the average decline of the previous 16 interest rate cycles is 35 percent. That means, if 3 percent was the top of the current interest rate cycle we could expect rates to fall below 2 percent before another meaningful sell-off. “
- “There has been much talk in recent months of the end of the 30-year bull market in bonds, but the coming bear market likely remains several years away. I believe rates will stay low and hover in a trading pattern for the next three to five years, similar to the 1940s, the period most analogous to today.”
- “In the near-term, if these dynamics play out as I expect, investors might begin planning to add longer duration, high-quality assets such as investment-grade corporate bonds to their portfolios. If rates peak in the near-term and reverse course, these assets, in particular, will be the primary beneficiaries.”
Minerd’s conclusion – “Now may be the best time to buy bonds in years.”
A more technically driven article was by Ryan Detrick of Schaffers titled Why Bonds Could Have Just Made A Major Low. A few excerpts are below but the charts in that article tell the story more vividly.
- “… longer-term bonds look very nice here. The TLT is a good way to gauge this and it just made a nice looking double bottom with improving technicals.”
- “I really like is sentiment is off-the-charts bearish on bonds here. That is a recipe for how explosive surprise moves can happen. Below is the Consensus % bulls on bonds. It is down near the early 2011 lows, which was a major buying opportunity for the TLT“
- Building on this, a recent Bank of America Merrill Lynch poll showed a net 68 percent of investors are underweight bonds, the lowest since April 2006.
- Lastly, looking at the Commitment of Traders (COT) report on the 10-year note, we see that Commercial Hedgers (smart money) are very net long, while Small Traders (dumb money) are very net short. Another nice sign if you are longer-term bullish bonds here.
So should you buy now? Detrick wrote on September 24,
- “Bonds have had a nic
e move, so maybe a little pullback is in the cards. Still, from a longer-term point of view I like the price action and love the negative sentiment. It all adds up to potentially a significant surprise bond rally over the coming months”
Carter Worth of CNBC Options Action said on Friday, “rally just got going; stay in the [TLT calls] trade“
A very interesting comment came from Jeff Gundlach in his investor call this week. Gundlach
has maintained for over an year that the 1.38% level for the 10-year yield of last July would serve as the final low of this interest rate cycle. This week, he said he is no longer sure of that. He said he could see the 10-year yield fall below 1.38% in a fat tail scenario.
Let us be clear. He is not predicting that and he is not asking anyone to trade on that thesis now. But it is still interesting that Gundlach is no longer sure that the 10-year yield will stay above 1.38%, a level that is almost 50% lower than Friday’s 2.65% close. This speaks only to the possibility that some things could go horribly wrong in the world according to Gundlach.
David Rosenberg, on the other hand, was bullish on BTV Street Smart on Friday. He sees the US economy growing at 2.5%-3% in 2014 leading to higher employment creation, in excess of 200,000 per month. That makes him bullish on the direction of the stock market with focus on consumer discretionary stocks.
All this bullish action and talk must have led to some inflows into bonds, right? Yes, according to Michael Hartnett of BAC-Merrill Lynch.
4. Fund Flows
Following are the highlights of Hartnett’s report:
- Biggest inflows to bond funds in 5 months ($4.5bn – largest in 5 months) – ends 8week outflow streak
- First inflows to unloved EM debt funds in 18 weeks ($0.6bn)
- First inflows to Muni funds in 18 weeks (albeit small $59mn)
- Largest inflows to IG bond funds in 17 weeks ($1.0bn)
- And, for first time in 7 months EM equity inflows coincided with DM equity outflows – sentiment toward EM assets continue to improve, which suggests tactical bear market EM rally not over yet
- Equities: $1.5bn outflows after last week’s record inflows (note $4.3bn ETF outflows vs $2.7bn LO inflows this week)
- Commodities: $0.4bn outflows
- MMF: $16bn inflows ($68bn inflows over past 2 months)
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