After what appears to be the call of the decade (although he was a few weeks early) with his S&P 666 is a "generational low," Doug Kass remained bullish for a good long time. But late last fall he began pulling in his reins, obviously in the market with no quit that was in error. Happens to the best; no dishonor there. Unlike most celebrated pundits he actually admits his errors. As I've said of late, the more experience you've had with historical patterns and markets, I think the more it hurts you in this sort of market that's acting different.
That said, I've been a long time follower of Mr. Kass and am always interested in his musings. He prefers to call turning points, whereas I am more of a trend follower. I'll let someone else grab the credit for calling turns because if you are wrong you take pain.
Today he has 20 points to watch out for that could signal a market top. Please note, for item #1, that bonds continue to be weak after yesterday's hammering and sit at important support. (Click to enlarge)
While I am sure interest rates account for something in HAL9000's array of programs, I am not sure which of the others will. With human emotion becoming less of a factor in the new paradigm market (which led to the normal ebb and flow of the old days), I think it's more important to figure out what could mess with the algorithms, because outside of events that cause human stress & hence selling (i.e. when Greece first flared up) this market feels like it's on some sort of computerized auto pilot. Only when human stress jumps and actual selling pressure (volume!) overwhelms the program do we change direction for more than a day or two. That seems to be the new blueprint, at least from this point of view. Doug is still looking at some of the old road marks - for his sake, and most of our sanity - I hope some of those markers still supersede silicon microchips.
Now, nearly 13 months later and with the S&P 500 almost 500 points higher, it is time to focus on a new checklist of some potential adverse developments that could contribute to a market top and a reversal of investors' good fortunes since March 2009.
- Interest Rates: The yield on the 10-year U.S. note might climb to over 4% (now at 3.85%). A 4.00% to 4.25% yield would likely provide a tipping point for increased competition to equities and produce an interest (mortgage) rate headwind to the nascent housing recovery at a time when stock dividend yields have nearly halved and when a large phantom inventory of unsold homes is about to begin to enter the residential for-sale market.
- Jobs / Economy: A more sluggish-than-expected expansion in new jobs and the weight of higher taxes in 2011 might translate to a downturn in consumer confidence, reduced business fixed investment and a more shallow domestic economic recovery in the second half of this year.
- Retail: Cautious forward comp guidance in retail could reverse the February-March strength.
- Europe: There could be growing signs of weakness in the European economies.
- Credit: Over there, we might witness evidence of more sovereign (Spain?) crises, and, over here, we could see more U.S. municipal -- the universe is large! -- financial woes. Forced austerity measures would likely produce lower growth.
- Credit (Part Deux): Credit spreads might widen.
- Geopolitical: We could see a possible rise in geopolitical tensions or even another terrorist act on our shore.
- Monetary Policy: We might have a less dovish Fed in words (jawboning) and in action (through an increase in the federal funds rate).
- Tightening Abroad: It is likely that central banks around the world will begin to clench their monetary fist, especially in China.
- Protectionism, Trade and Currency Wars: Things might get ugly, especially on the U.S. / China front.
- Housing: A renewed leg down in home prices is possible as the spring selling season could fail to appear. (It hasn't gotten off to a great start.)
- Sentiment: We could witness the birth of a 5x to 10x levered bullish ETF, a burst in bullish investor sentiment, an expansion in hedge fund net long positions, a further drawdown in mutual fund cash positions, a meaningful increase in retail mutual fund equity inflows and massive outflows out of Rydex bear funds.
- Technical: Stocks could fail to respond to good news, suggesting that the sharp corporate profit recovery has been baked into prices. A breakdown in financials and/or transports could occur. Overseas markets might fail to make new highs, or we could see a further contraction in NYSE / Nasdaq exchange volume.
- Deflation: Industrial commodity prices could weaken.
- Speculation: We might see an increasingly speculative market for low-price issues.
- Underwritings: The emergence of a record syndicate calendar is possible.
- Wall Street: A substantial increase in Wall Street industry hirings could be announced.
- Dr. Doom vs. the Sunshine Boys: Dr. Nouriel Roubini could see green shoots, causing bullish strategists and money managers to demonstrate even more swagger. Reminiscent of late 1998, a sell-side analyst (perhaps the new Henry Blodgett) might raise his 12-month Apple (AAPL) price target to $375 a share, leading another analyst to top that target and move to $400 a share a week later.
- The Media: CNBC could throw another celebratory party. Time magazine might declare the death of the bear market on its cover or run a cover story offering a new bullish economic and/or stock market paradigm. Sir Larry Kudlow could have trouble finding a single bear to appear on CNBC's "The Kudlow Report." Record ratings might induce the management of CNBC to expand "Squawk Box" from three hours to four hours (6:00 a.m. to 10:00 a.m.) and add an additional anchor to join Joe, Becky and Carl.
- Dougie: Maybe I turn bullish.