Monday, June 5, 2017

Economy Slowing Stocks Don't Care

The initial economic thrust off of the 2016 mini dip in economic activity is running on fumes.  The inventory restocking cycle off the destocking in 2016 has mostly played out.  The economy is now running closer to its natural level, with no pent up demand.  You have seen that playing out in the economic surprise index over the last few months.

This shows you Wall Street getting ahead of itself in projecting increased consumer/business confidence into stronger hard data, and that hasn't panned out.  Also, you are getting the usual lagged effect of the few Fed rate hikes appearing in the economy.  Yes, even going from 0.5% to 1.00% is meaningful to the economy.  I continue to believe that the neutral interest rate for the economy is closer to 0% than PIMCO's new normal 2% that they often espouse.

The higher global debt ratios amidst a slower growing economy requires lower interest rates.  Otherwise, you get a scenario like Europe post 2008, pre NIRP, when you had really slow growth because the interest rate levels were too high to support such an indebted economy.  Now that NIRP has worked its way deep into the Euro financial system, it has boosted growth to levels that are long term unsustainable, but feels good while they pump.

In the next 12 months, you will see the other side of the complacency, as fear and worry will makes its way back into the markets with a vengeance, as the value buyers will only be willing to put in bids if you get back under 2000 in the SPX.  There is a lot of air underneath, it just doesn't feel dangerous because of the super low volatility.  But when the hedge funds and the index fund fans start seeing minus signs in their asset holdings, they will get nervous, like they always do.

Itching to get short, but will probably wait till the FOMC gives another dovish hike and inadvertently pumps this balloon even more.  SPX 2450-2460 area looks like a strong sell zone.


Anonymous said...

Yo I said 2500 yo. But even a short there wont take us down far. Range from 2200 to 2750 till the end of the year and next year crash by end of 1H18. Still best best to play long as fundies look to get into underinvested . Oil and gas gonna be a top play soon. Then after that bounces which will take a least a few months then we short with leap puts on the QQQ. You skate to where you think the puck is going to go not where its at.

Market Owl said...

Mr. Gretzky,

You seem quite bullish! I think we top out within 2 months, under 2500, somewhere between 2450 to 2500. Oil plays are a dog with fleas. Think oil goes under $40 by September. Gotta short soon. Don't get bulled up at the top.