The action last Friday, both in stocks and in gold, suggested for the first time in months that the short-dollar/long-risk trade that everyone’s been loving may finally be coming to an end.
Even if few believe a Fed rate hike is imminent, one will likely come at some point, and thus the market needs to be prepared.
With this new mentality, the market would seem to be on shaky ground, unless laggard money managers can give us one more catch-up rally. A pause or dip of a couple days would seem to give them one last chance to get even for the year, regardless if the rally is getting long in the tooth.
Raymond James strategist Jeff Saut — who believes that with credit spreads hitting pre-Lehman levels, there’s nothing stopping stocks from hitting pre-Lehman levels — has been sounding the alarm on this phenomenon for a while
Indeed, despite the “bad mouthing,” all stocks have done over the past month is consolidate their July – September rally by moving sideways. Moreover, that sideways consolidation has seen the equity markets work off their overbought condition into one of being pretty oversold. Ladies and gentlemen, to an underinvested portfolio manager the current environment is a nightmare, especially if you believe as we do that we are going to see an upside celebration into year-end. Manifestly, we have argued that with credit spreads below their pre-Lehman bankruptcy levels there should be no reason why the equity markets can’t “fill up” the downside vacuum created in the charts by said bankruptcy. As can be seen in the following chart, that gives the S&P 500 an upside target of 1200 – 1250. If correct, it implies that the cash rich, underinvested portfolio managers (PMs) will once again be forced to chase stocks higher. Our guess is the PMs will chase the “winners” since the March lows rather than buying the laggards. That suggests investments in emerging and frontier markets, technology, financials, base/precious metals, etc. should trade higher if the aforementioned scenario plays.
If you’re a bull, then hope that holds true for at least a few more weeks.