Monday, November 11, 2013

Choppy Till March

The amount of issuance of stock is starting to catch up with the market, as investor inflows and stock buybacks are met with supply.  There is a limit to how much corporations can lever up to buy back their own stock.  Who is going to buy corporate bonds from an already levered out company when the economy is slowing down?

Corporate bond market spreads over Treasuries will be a canary in the coal mine.  The worst case scenario for this market is to see corporate bond spreads blow out, financials underperform, and breadth deteriorate.  Right now, the stock market is pricing in something that appears unlikely to these eyes: an economy that can stand on its own without increasing asset prices and/or increased deficit spending.  With investors finally getting positive about stocks and pouring money in, you have already used up a lot of potential buying power from the retail crowd.  Thus, these inflows will buoy the market on dips for a few months, but the increase in stock supply will dampen any rally attempts, leading to flat, but choppy markets.  By the middle of next year, I see the market having the biggest shakeout since 2011, falling from its own weight of overvaluation and optimism.

6 comments:

Anonymous said...

I think we go parabolic starting next week after some chop this week. Should end around Christmas.

Market Owl said...

This market is too boring for it to go parabolic. You either need a V bottom setup or a euphoric blowoff to get a parabola. Neither is the case here. There are some interesting individual segments of the market, like DDD and VJET (3D printers), but overall boring low volatility market.

Anonymous said...

you got the v bottom on 10/9

Market Owl said...

Well you could say we got the V bottom on March 2009 as well. LOL.

Anonymous said...

Hi
1. I am reading up your past writings. Wonder why there is none for Aug 2013?

2. How do you see the significance of NYSE margin debt as a market indicator?

Thx.

Market Owl said...

1. Took a blog break.
2. NYSE margin debt is a long term indicator, in the short term, it doesn't affect my trading. With low interest rates, there is less of an interest cost to margin out to buy stocks.