Worried About Rates

Now we see Fast Money bring up the bond market excuse for stock market weakness.  This often happens late in a down move for bonds, as those who usually don't care about that market suddenly get interested, almost like passers by who stare  at two people yelling and pushing each other, and about ready to start a fist fight.

You've got to have a long term fundamental basis for your trades if you really want to be able to hold on through the volatility and drawdowns.  The current levels for bonds are quite compelling from a long term view.  I don't believe the global economy can take much higher rates, which means that rates can't go up much before the stock market has a tantrum, and in a circular loop, that will keep rates low.

But we live in a short term driven hedge fund world, so the short term price action can run counter to your long term view, even though the view is still valid.  While you are seeing stronger economic data recently, a lot of it is based on rebound effects from the 2016 slowdown, and the extra confidence boost provided by a rising stock market.

You cannot rule out the bubble expanding, especially since volatility is still low and it doesn't appear like we have topped out.  But longer term, beyond the next few months, into the next few years, you are looking at future stock market weakness, that could persist for quite some time.  The valuation levels just are too high for this type of earnings growth.  You are looking at a demographic headwind of Japan, Europe, and U.S. getting older, with many retiring and reducing consumption.  That is a powerful headwind that could only be held back by massive amounts of global QE, and that was just to keep the developed economies growing at low single digits.

At an S&P of 2560+, you are pricing a continuation of the past 5 years of steady growth because of low interest rates.  Yes, the monetary policy will be easy in the future and interest rates will probably stay low, but the market has gotten used to low rates, and priced it in, so that's not a positive catalyst anymore going forward.  Monetary stimulus works because you are changing conditions by making them easier, not by keeping them easy.  So just keeping rates low will not stimulate anything.  You will have to have growth, for stocks to keep going higher from these levels, and that will be harder to come by in the future.

Short term, this a hard market to trade, although buying intraday dips like yesterday usually works, at least until the dips become more frequent, in which case, the dips become more dangerous to buy.  We are not at that point yet, but a few more intraday down days like yesterday in the near future, and you will likely see that weakness go all the way to the market close.