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Nothing ever goes exactly according to plan in the capital markets. I’ve seen minor divergences, disconnects, and dichotomies from time to time in the almost two decades I’ve been in the investment and financial education business.
But right now? I’m seeing some of the greatest disconnects EVER!
Take earnings versus stock prices. Corporate managements have been warning about weakness left and right. Overall S&P 500 earnings are poised to drop as much as 4% this quarter, while revenues are going to drop for the third straight quarter. That hasn’t happened since the Great Recession.
But the Dow Jones Industrial Average has surged almost 1,700 points from its late September low. The PowerShares QQQ Trust (QQQ) just traded to within a couple bucks of its summer high. Since stock prices are supposed to track earnings results closely, the divergence makes no sense.
That brings us to the next major disconnect: Mega-cap stocks and broad market averages versus several market sectors and small caps.
Sure, the QQQ has been strong and so has the Dow. But the Russell 2000 has barely bounced. It’s still roughly 10% below its June high. The Dow Jones Transportation Average is also more than 1,100 points off its highs.
Retail stocks trade like death warmed over, as do biotechnology names. Energy joined them in the doghouse this week after crude oil and natural gas plunged.
Can a gain in a handful of big cap stocks hold up the averages, even as hundreds of stocks behind them wilt? That seems nuts to me, frankly.
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| Can a gain in a handful of big cap stocks hold up the averages, even as hundreds of stocks behind them wilt? That seems nuts to me. |
Or how about the disconnect between the performance of Treasury bonds and stocks? When stocks rise, bonds typically fall, and vice versa.
But that hasn’t happened this time around. Bond prices have risen and bond yields have fallen despite the rise in stocks. That’s a glaring non-confirmation of the rally.
Then there’s the massive disconnect between commodities and stocks. You would expect to see both asset classes rally sharply if the global economy was strong, and demand for commodities and the products they go into was firm. But commodities can’t get off the mat despite the rally in stocks.
That brings me to yet another major disconnect — the plunge in energy prices and the consumer’s lack of a response to it. How many times have we been told that falling gasoline prices would cause retail spending to skyrocket? How many so-called “experts” came on television and said American consumers would be dancing in the streets?
But have you been listening to Wal-Mart Stores (WMT)? Have you seen a chart of the SPDR S&P Retail ETF (XRT)? Did you see how retail sales missed forecasts in September, and flat-lined in August? Or how consumer confidence fell to 97.6 in October versus 102.6 a month earlier, despite further declines in gas prices? These and other data points show the “retail boom” thesis isn’t panning out at all.
I’m going to be exploring these great disconnects in much more detail in this month’s Safe Money Report. You still have a few days to get on board before that issue goes to press, which you can do so by clicking here.
But suffice it to say my research suggests these disconnects are going to be a big problem for investors. I believe they merit a cautious investment approach — one that focuses on using hedges to protect against downside risk, maintaining elevated cash levels, and owning only the “best of the best” stocks in non-economically sensitive and higher-yielding sectors of the market.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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look for the proverbial “bear trap” in november. this will be the turning point in this correction, and is usually the last good buying opportunity before the bull market resumes. a bear trap is when a rally out of a correction like we’re in reverses, scares the daylights out of the bulls and brings the bears out in force one last time only to be proven wrong again, hence a bear trap. an abundance of commodities will keep a lid on prices for some time to come and this will fuel the next earnings expansion, which eventually will end in our first recession since the great recession of 2009. the economy will now become so strong that the fed will have to rein in the over exuberance by raising the funds rate. i’ve never in my life met a correction or recession like we’re now in that wasn’t a great buying opportunity for those have have the patients to ride it out for the long haul.
Mike Larson: What does Larry Edelson say about this “Bear Trap”?
corrections last about 3-4 months. this correction we’re in started in august, so we’re a couple months into it. the s&p has almost returned to its upper level. this is the point where i look for another scary pullback to the neckline of the inverted head & shoulders formation that has now completed. if i see this happen, i’ll consider this the confirmation i need to buy into this correction.
Hi Mike
Many understand these are not normal markets and that something smells. Whether it is large corporates with their money offshore, of the little players like me. Some stocks bases on their level of debt and market share should be underwater and yet they aren’t. The only certainty and flexibility I have with complete control is cash.
And that is why there are efforts to outlaw cash. A negative interest rate policy would make it so banks would charge you for having cash in their bank. Those who control the money want you to spend and not save to get the economy going. Cash takes control away from them and governments so expect to see a move in that direction. Many countries already have used negative interest rates.
Steve
This is what forces older folks and retired couples in higher levels of risk.
…or does it force older folks into bond funds, which go up in value as interest rates drop?
This is a valid observation Mike. In my opinion the large disconnects is taking place because of the efforts of big moneyed interests to manipulate the markets to their benefit.
Zero interest rate policy has made available cheap money for the equity departments of the largest players. Once movement is detected in a stock the computer buying programs of the hedge funds, mutual funds, bank departments, etc, kick in and follow like a flock of birds. There are many who benefit when equities go up and are hurt when they go down so they have a vested interest in one direction. Perception means a lot so there is much effort to support the indexes and stocks that a lot of people follow.
Mike, thanks, I TOTALLY agree and think this is one of your best articles ever! Keep up the good work. Somethings rotten in Denmark.
Obama is about to start a war with Russia. We know Russia is bombing “moderate” rebels that Obama supports, now he will sacrifice Americans as their only mission seems to be to die from Russian bombs. Just wait for the spark, we will be at war before you know it.
I wonder how embarrassed the Nobel committee must be for giving Obama the Peace Prize!
In my opinion at this time if someone needs to be in stocks then they need to go back to basics, everything else is overhyped and overpriced. Stocks in basic resources are already well discounted, but the thud from over inflated stocks will be heard around the world when the grim reaper calls. Basics resources include such things as: Money (cash and precious metals), Energy, Food, Transportation, Utilities, Health, and such ilk; but I limit myself to only the spectrum of stuff related to cash, precious metals and energy related companies because that is what I am more familiar with. Life will go on, but I want to be able to sleep knowing that value will build on a sound foundation of stocks bought at already discounted prices. Further bottom fishing can lead to snaged hooks. Maybe someone else thinks Buy Low, Build Value and Sell High is out of date, but I think the Fed is what is out of date.
As long as the Fed can keep stimulating the economy,with interest rates well below actual inflation,you would expect desirable investments,like some stocks,to appreciate.The Dollars have to go somewhere.I would worry about stock prices,when inflation gets so bad,govt can’t hide it anymore and the Fed is FORCED to raise interest rates.Not there yet.
Free markets is a misnomer. If they were free then interest rates on treasury bills would be more in the 4 to 5 percent range. Why should a senior citizen who saved all his life earn nothing on his savings and be forced into risky assets to survive. At normal rates debt would diminish and maybe the government would start to live within its means. It is undoubtedly true that if rates were to rise to those percentages the stock market would collapse and the economy would go into recession but that is what we need to get back to normal markets (over time not all at once) bear cycles are needed from time to time to get rid of the excesses and frauds. Borrowing should be for legitimate endeavors and not to manipulate or goose the markets nor to buy back stock to cover up poor management.
Another litany of the usual complaints when the markets fail to reflect our (always bearish) expectations:
— some evil force (Obama, Yellen, big money) is manipulating the markets.
— economic data (particularly the CPI) are being cooked.
Throw in a warning about “fiat money” or the more recent allegation that the government is about to outlaw cash, and add a pinch of xenophobia about Russia or China.
Enjoy your inverse ETFs and non-performing cash. Be on the lookout for “The Big Reversal” and beware of “Bloody Wednesday.” And don’t forget about that “once in a generation” opportunity in energy that was touted earlier this year. Eventually the markets will correct and you will be proven wise.
http://www.nytimes.com/2015/11/01/upshot/is-the-economy-really-in-trouble.html?ref=business