Are Stocks on the Verge of a Major Bullish Turn?

excerpts from this week's "Sectors and Styles Strategy Report":

"A huge disconnect is underway. The financial markets are signaling not just economic stabilization but a robust (V shaped) recovery. This is most evident in the accompanying two charts – the yield curve and the TED spread.

The yield curve suggests a robust recovery is in the cards while the TED spread shows a return to pre-credit/economic crises levels. When you add to this equation, the prospects that numerous Mega Trend bullish reversals appear to be just days to weeks away (see report), the “fundamental justification for a more bullish outlook in the coming months” noted last week gets stronger with each passing week. Yet, bottom-up earnings expectations remain mired in the low to mid $50 range (see page 3 in report), despite the steadily improving above-consensus macro economic reports.

Investment Strategy Implications

Stocks appear on the verge of major bullish signal, while fundamentals appear to support the technicals. All that’s left is a completed bottom with Mega Trend reversals in tow."

Comments

[Larry House:]

I believe what I see in the economy and consumers more than I believe in charts. Consumers are pulling back. How do I know? Because I am. Available credit is shrinking. Interest rates are going up. Boomers are entering retirement. All the "green shoots" are only visible because our government has dumped a pile of manure on our economy. It is yet to be seen if there is any life under the pile when the stinking mess is finally removed. I agree there is a "huge disconnect" underway. A lot of people have disconnected their common sense.

Jun 02 08:32 PM

[logicalman:]

larry, again i find myself agreeing with what you're saying..common sense will prevail in the end..the problem is that a lot of people who have $ to invest do so using very little common sense..that's why there are winners as well as a lot of losers in anything that has to do with $...to me the winners are those who can keep their emotions under control, don't treat investments as a crap game, don't play on margin, hedge most of their bets, and don't try to make a fortune in a day...i'm sure you and many others can add to this list...i've been doing this for a long time, and it served me well!!!



On Jun 02 08:32 PM Larry House wrote:

> I believe what I see in the economy and consumers more than I believe
> in charts. Consumers are pulling back. How do I know? Because I am.
> Available credit is shrinking. Interest rates are going up. Boomers
> are entering retirement. All the "green shoots" are only visible
> because our government has dumped a pile of manure on our economy.
> It is yet to be seen if there is any life under the pile when the
> stinking mess is finally removed. I agree there is a "huge disconnect"
> underway. A lot of people have disconnected their common sense.

Jun 02 09:05 PM

[E Nuff Sed:]

For whatever its worth the Coppock curve has also turned up signaling a buy.
www.tradersnarrative.c...
Also real time indicators of the economy are on the uptrend.
www.philadelphiafed.or.../

Jun 02 09:56 PM

[Jasper M:]

So, 3 months and 2000+ points After a bottom, the author calls for a "Major Bullish turn".
I call it capitulation.
Fr0dop, no particular effort required at this point, the economy WILL contract. It's a falling safe now; Nothing is going to stop it now but the pavement.

On the other hand, we are getting a useful (and long) list of indicators we can ignore at major turns.

Jun 02 10:21 PM

[Alex Trias:]

In addition to equity prices and the TED, I would only suggest adding some analysis on the yield curve (which is, ah..... ahem, suggesting a rather "V" shaped recovery). Look, man, I feel like Nouriel Roubini is correct, and I really, really don't see a fundamental case for a V shaped recovery, but data is data. Thanks to the author for the reminder to look at facts rather than bias.

Jun 02 10:29 PM

[Speedspirit:]

The Fed does not want to spook the world into thinking that it can't push long term rates down, so it says it is not trying. But if rates continue to climb, a panic out of Treasury securities is a very likely scenario. And Bernanke has only one play to force long rates back down, buy every long bond in sight, which of course is highly inflationary and puts upward pressure on rates. This so called "V" shaped recovery will become history quicker then the recent Swine flu epidemic. There is just too much Treasury debt that needs to be raised. An international panic out of Treasury securities, even a slow controlled panic, means the Fed will be the major buyer.Since the dollar is the reserve currency of most of the world, a panic out of the dollar means more dollars will return to the U.S. shores than any country has ever experienced.
One hell of a possibility! Gold and Silver look very good now compared to stocks ehh.
Lately you gotta think who the smart money investing in these precious metals. DONT MISS THE BOAT.

Jun 02 10:50 PM

[Fighting Yoda:]

If unprecedented liquidity is injected and the system is backstopped by the Fed, and the credit demand is low- TED spreads have to come down - that is like the law of Physics.

But concluding that recovery is underway because TED spreads have come down is too much of a stretch.

Jun 02 11:25 PM

[Jasper M:]

Speedspirit,
While I can't dispute that the scenario you lay out is not on the Fed's plate, I think you are assuming it can succeed, re rates. I think this is unsupported, and unlikely. There are too many bonds out there.

I believe that, if and when the Fed begins the policy you outline, for every $ of bonds the Fed buys, 2+ times that many other holders will sell. Whatever the artificial auction prices in that situation, the Aggregate market rate will go higher and higher, as each extra bond bought by the Fed will make it ever clearer just how illiquid Treasuries are becoming.

Jun 02 11:32 PM

[cynewulf:]

If stagflation does come to our shores, eventually, then what should we be holding at that time? Everything is happening faster and faster. Certainly Government Motors won't work. (I know, I changed the subject, so I'll go back). We could have STAGFLATION in a few months, with no easy fix, from printing more money. Stock picking will become important. Hard assets to be weighed against other considerations in the picking. Question. Would you buy a forty thousand dollar Chevrolet volt? Drive one first and then decide.

Jun 02 11:50 PM

[Divergence:]

With the government insuring the interbank loans, the risk is removed and the rates will fall drastically at least until the 'insurer' is deemed unworthy. Thus due to the new dynamic, the TED spread seems to be of little importance in terms of historical norms as we have all new rules. I say ignore it. As far as yield curves go, you can read a steep curve as a sign of growth induced inflation, or 'decline in credit worthiness' inflation. I say we are firmly in the latter camp as well as a supply/demand imbalance. Current Weekly/Monthly debt auctions are several multiples in size of just a year back. We are flooding the market with new debt and competing with every major corporation and country raising cash right now. Why are we seeing record levels of new corporate debt issues and stock dilution with secondaries? Corporate leaders are not seeing a true sustainable improvement in credit markets and are jumping at the chance to raise cash for survivability. Not to mention the same thing happening in all the developed world's governments and markets. This dilution will further impact earnings, which will continue to be pressured by falling margins. Consumers are saving and not spending as unemployment is still running rampant. Housing is about to get hit with the largest wave of recasts in history later this year. Without a much stronger push from the government than the miniscule $50 billion thrown at loan modifications. (read:more bailouts in our future). Our government has spend an inordinate amount of money to induce inflation, to try and support housing prices and inflate their way out of debt. Great, but this drives up the long end of the yield curve and buying our own bonds is desperation. All the talk about China and Japan holding our bonds, but the Federal Reserve may end up above both of them on the largest holders of our debt. (See the list www.treas.gov/tic/mfh.txt ) with their purchases.
I say don't read more into the rally then you should. Bear market rallies run just like this. Also many recessions actually get a positive quarter of GDP, before slipping back negative. I suspect that major issues with all levels of municipal bonds will soon be hitting the market as well. Not to mention the coming issues with commercial real estate. I also do not think we are out of the woods with consumer debt as bankruptcies are already up 40% yoy.
So to compare the market message with two specific indicators makes little sense to me. So ride the rally for what it is, but for longer term look a little further for reasonable proof.

Jun 03 02:13 AM

[calvino:]

You are going to call a bull without looking at the dollar and crude?
Any reason why?

Jun 03 02:17 AM

[Donald Ingram:]

Too mi optic of a view. The field of view you take in is too restrictive.
The financial fundamentals are in rotten shape. The manufacturing base has been obliterated. The housing crises with mortgages is just in the middle innings. No. I could go on... and on... but its to depressing. Good luck with "your bull" market. Keep your shorts up!

Jun 03 02:53 AM

[Alphameister:]

I think the author has misread the situation. The market rally has been steep and swift because stocks had discounted Armageddon at their lows and Armageddon has been (at the least) postponed. This has been a huge relief rally, not a forecast of a v-shaped economic recovery. Any economic recovery will be very labored and vulnerable. If you missed this rally, you've missed the best part (by far) of the bull market.

Jun 03 06:40 PM