Lazy Market Summer: Time to Buy Quality, or Short Junk

by: ClearFish Research

Is it just me, or is the market a bit shiftless right now?

The IPO market has taken a breather, it has become more difficult for private capital to cash out through the public markets, the technology market has been largely boring (no replacement cycle, hot new product trends, etc.), the ethanol market has taken a dive, the housing market remains ambiguous (consumption high, but producers continue to warn), and there are no large discernible secular trends. Does that mean we are stuck in a sideways market, on the first leg of a major downturn, or basing for a resurgent upturn?

It's hard to say with any confidence, but our sense is that the market is basing. The sell-in-May crowd clearly took over in, well, May. That is typical of most years, but has been a bit atypical for recent years. Interest rates, as well as geopolitics loom large in the market (the latter principally through oil and it's feedbacks). Can either of those get much worse (i.e. interest rates go up much higher, or oil prices continue to rise)? They could, but our guess is that there is not a lot of steam left in either of them.

At some point in the not too distant future, the Fed will pause. We think that will happen coincident with the typical timing for buyers coming back to the market after Summer. We don't expect much excitement until then. Individual plays continue to tick around, but big money flows are probably on the sidelines for another month or two. That means momentum investing is probably moribund for a bit, but it could be a good time to pick up quality, or to short junk.