Buy Stocks Here, The Sell-Off Is Way Overdone - Bezek's Daily Briefing

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Includes: CVX, SPY, UVXY, VXX, XLE
by: Ian Bezek

Summary

The stocks reversed big gains, closing further down on Friday.

This sell-off continues to lack any great cause or reason.

I continue to expect new highs in 2016 - this isn't the time for panic.

Trump takes on Wall Street with new threats.

The markets put in another dreadful performance on Friday. After futures gained almost 2% on Thursday night following stability in the Chinese market, the S&P 500 (NYSEARCA:SPY) turned down as soon as trading began on Friday. By the end of the day, the big gains were totally gone - in fact, the market closed down another percent.

For the week, the market dropped from above 2,000 to just 1,922 - a 4% move lower, and a huge drop off the recent high near 2,100. The commentary this weekend has just been brutal - everyone is talking recessions, bear markets, and huge problems in China.

At the risk of sounding hopelessly optimistic (not a charge frequently levied against me), I remain convinced this will blow over fairly soon. This is turning into the huge stock market correction caused by absolutely nothing. (Counterpoint to my argument: Studies show that the 1987 crash had no proximate cause. Portfolio insurance is a commonly held excuse for that crash, but it doesn't make much sense as an instigating agent.)

This is the worst sell-off we've seen since August, and with another big down day or two, we might even surpass August in terms of magnitude. And yet, what's been the cause?

You can point to the latest issues with China, but surely they aren't any more pressing than the August surprise devaluation that started the whole China panic meme in the first place. You had North Korea testing a nuke, which made for some headlines, but in the grand scheme of things doesn't matter.

Oil continues to sink, as it's been doing pretty much non-stop since 2014. The oil sector (NYSEARCA:XLE) isn't dropping any more quickly than usual - stocks like Chevron (NYSE:CVX) remain stubbornly overvalued - so it's unclear why the latest move down in oil would scare the markets more than previous drops.

Are market participants saying: Oh hey, oil was down from $100 to $40, and we survived that okay, but this latest move from $40 to $32 - yeah now I'm scared, sell all my blue chips and buy gold with the proceeds? No, I don't think that's what people are thinking.

Finally, you have the Fed continuing to rattle the market with their obscenely hawkish commentary. Arguably, that was the cause of Friday's reversal, as the markets lost their bid and went careening lower the moment a positive jobs report came out showing a stronger-than-expected employment picture in the US.

While I doubt they'll actually do it, the Fed has convinced the markets that there is a real live threat of interest rates soaring in 2016 despite the rest of the world being stuck in a deepening economic morass. That leaves markets in a difficult situation - bad economic news causing selling. Good economic news is also causing selling, since it raises the possibility of more Fed hikes.

Even with the Fed actively taking steps to hinder international economic growth, I still argue this sell-off is overdone. The market is down almost 10% off the highs for reasons that have almost nothing to do with the US.

As long as the US remains the world's best safe-haven equity market, there will be plenty of bids for American stocks. None of the recent developments are particularly bad for the US's economic outlook, and a recession continues to appear at least a few quarters away.

You can argue, as many bears are doing this week, that stocks are selling off due to being overvalued. However, going by the Shiller P/E and other such ratios, stocks have been "overvalued" since at least 2013. Absolutely nothing has changed on that front. I can guarantee you that people didn't wake up after 8 or more quarters of persistent overvaluation and suddenly decide to sell off everything in a blind panic because they reworked their DCF models. The markets never operate like that.

At the risk of sounding crazy, let me reiterate that I expect the S&P 500 to make new highs in 2016 before a bigger correction. And that correction will come with a clear cause, not nebulous Chinese noise - sending stocks lower later on in the year.

I can't guarantee stocks will get bought today - as of this writing, futures are pancake flat after shaking off a 1% opening dip. As Friday showed, futures don't necessarily hold stable anyway.

However, at some point this week, I expect a giant rally. Bears are parading in the street, claiming victory despite having little fundamental reason to support this latest round of selling. I remain heavily short volatility (NYSEARCA:VXX) (NYSEARCA:UVXY) and hold this position with high conviction.

More Taxes For Wall Street?

Donald Trump, front-runner for the Republican nomination for president, has gone on the warpath. He declared that there's a "bubble" in the country's debt, and that Wall Street needs to pay more taxes. Bloomberg reported:

There's a bubble," Trump told his audience in southeastern Iowa, noting the nation's high level of debt. "You see the stock market is starting to, you know, see what's going on," he said. "It's starting to have some very bad weeks and some very bad numbers." [...]

Trump said his financial experience was right for such troubled times. "I'm really good at that stuff," he said in Iowa. "I know Wall Street. I know the people on Wall Street. We're going to have the greatest negotiators of the world, but at the same time I'm not going to let Wall Street get away with murder. Wall Street has caused tremendous problems for us. We're going to tax Wall Street."

Trump also highlighted his independence from campaign contributions. "I don't care about the Wall Street guys," he said. "I'm not taking any of their money."

The article compared Trump's rhetoric to that of Bernie Sanders. The big difference being that Trump, being an electable figure from the nation's ostensibly conservative party, has the potential to actually get some of these ideas enacted.

Back in November, I stated that I saw Trump's odds of winning the presidency as "above 50 percent". Nothing has changed on that front. If anything, things are improving for him. More Republicans are grudgingly accepting that he'll be their candidate, and Trump is earning a "strange new respect" from the media.

All that to say, Trump's policy ideas, including this latest hit on Wall Street, will be viewed with increasing seriousness throughout 2016. Unlike Bush, Obama, and presumably Hillary, Trump is willing to take an anti-Wall Street view.

This is definitely a developing story to watch as the year progresses. While the financial industry should have seen fewer bailouts and more criminal prosecutions during the 2008-09 bust, let's hope populist fervor doesn't take the pendulum too far in the other direction.

Disclosure: I am/we are short VXX, UVXY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.