If you’re having a hard time staying awake trading stocks these days, I can’t blame you. The broad market averages are the most range-bound I’ve ever seen.
It’s not just anecdotal, either. Bloomberg recently reported that the S&P 500 Index is trading in the tightest range in 20 years. Specifically, the S&P’s 2015 low is less than 7% below its year-to-date high.
Not only that, but we also haven’t seen a correction of at least 10% in almost four years. That’s the longest stretch since a 55-month run that ended in October 2007.
Goldman Sachs jumped on the bandwagon a few days ago, too. The firm said the S&P will finish 2015 at 2,100, right around where it traded this week. It cited lackluster earnings and economic growth, investor withdrawals from domestic ETFs and mutual funds, and the lack of compelling stock market values.
Forgive me for being blunt. But I think that’s a crock of you-know-what! If anything, I believe the market could be on the verge of a very large break … and my suspicion is that it’ll be to the downside.
|Many investors are having a hard time staying awake these days. But this range-bound market could be on the verge of a very large break.|
Why? Take your pick of reasons:
1) The resilience of the U.S. economy is coming into question. I don’t want to make too much of one report like the Empire State Manufacturing Index. But as I wrote on Monday, it could very well be a harbinger of worse news coming down the pike – especially when the Federal Reserve’s own research suggests GDP is decelerating again this quarter.
2) Our broad averages may be flat-lining. But that sure as heck isn’t the case overseas. Emerging-market currencies, stocks and bonds are outright crashing in many corners of the world, while commodities are sinking to virtually unimaginable depths.
I’m not just talking about smaller countries like Greece, either. China is now devaluing its currency at a record rate, and throwing everything but the kitchen sink at its markets and economy. Would it be doing that if things were just hunky dory over there? Of course not!
Considering China is the second-largest economy in the world, you have to take notice. That’s especially true when you consider the third-largest world economy, Japan, just shrank 1.6% in the second quarter. That puts a potential recession there on the table as well.
3) Look behind the S&P 500 and you see deterioration everywhere. Energy has been sinking for more than a year. Materials stocks joined them in the doghouse a while ago. The transportation sector has been deteriorating since last November, and now the benchmark iShares PHLX Semiconductor ETF (SOXX) has dropped to a nine-month low.
4) The bond market is sending out very worrisome signals — the kind that you typically see before “blow ups” in equities. Paying attention to those signals in 1997-98, or 2007-09, helped protect you from large corrections or outright disasters in equities. Ignoring them now seems short-sighted to me.
Long story short, I’ve been trimming exposure all summer long. A few weeks ago, I made it clear that I’m more cautious now than I have been in several years.
Nothing I have seen since then in domestic or foreign stock, bond, currency and commodity markets has gotten more encouraging. If anything, things look even more dangerous now because we haven’t seen a surge in volatility yet and because everyone on Wall Street seems convinced we never will.
That’s dangerous groupthink, and I recommend you don’t fall victim to it. Or in plain English: Raise more cash … soon. The worst case is you give up some potential upside, while the best case is you ride out a potentially severe downturn in much better shape.
Until next time,