As someone who steadfastly held onto a bullish outlook, I desperately hoped that volatility would remain contained as the various sentiment metrics that I track, such as TICK readings and open interest in the futures, pushed deeper into overbought territory. Trading ranges crept higher last week and have failed to narrow. Although the amount of skittishness is not excessive, it has moved to dangerous grounds to push many of those investors who have feasted on dips over the past five years to the sidelines. Consequently, I am officially switching to an intermediate term bearish outlook this morning.
I assess the fundamental environment as neutral. While extremely transparent monetary policy and estimated robust earnings growth are unambiguously favorable, the forward multiple on the S&P 500 still resides within spitting distance of its upper bound since 1990 save the era of the Dot Com Bubble. Hence, stocks bumped into a ceiling once the blue chip index began flirting with 2,000 as companies have little room for error when announcing their results.
Some macro data points have exhibited definitive signs that the economy has accelerated. However, weakness overseas and a disappointing miss of consensus by the Jobs Report throws into question the optimistic assumptions about the global recovery. Moreover, a relentless rally in the Dollar will crimp profits for multinational corporations. The strength in the Greenback is starting to garner attention from traders. With the Fed ambling toward a path of restrictive measures, this trend in the F/X markets is secular in nature. Nevertheless, the FOMC will almost assuredly delay any decision to pare its balance sheet passively via a cessation of the reinvestment of the proceeds of maturing assets until mid-2015 at the earliest such that any retracement that does arise will be cyclical in nature to offer a fortuitous buying opportunity at its terminus.
This post was published at Zero Hedge on 09/10/2014.
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