As we mentioned back here in our post on the direction of the stock market over the upcoming months, it is important to track the indicators. Long story short, they have turned a bit ugly. To paraphrase one of the true brightest and best:
“Put your ears to the railroad tracks. Prices move first, and fundamentals come second.”
This tells you that though reports are confirming that fundamentals are sound …
- M&A, Capex, share buybacks, dividend increases have been running at historically low levels and are just beginning to rise
- Corporates are lean, and richer in cash than they have been in decades
- Profit margins are approaching all time highs, only a year after the “Great Recession”
… the market is sending a different signal:
- Dr Copper and Dr Crude are both down about 17% (through today, May 18)
- S&P was spooked into its largest intra day loss since 1987, and is now down about 7% from April 26
- Yield curve (10s / 3Ms) has flattened by about 50 bps from nearly 380 bps to 330.
Where to from here? The Greek drama reflects a broader sovereign crisis that took us by surprise with respect to how quickly it cascaded into a crisis. Greece was one of the weaker guys in the pack, but its amazing to us how Ireland has a deficit of -14.7%, compared with Greece’s deficit of -12.2% and little mention is made in the press of their situation. True, the total indebtedness of Greece is higher, at 124.9% of GDP compared with Ireland’s 82.9%.
And thats not all. A massive oil spill, looming uncertainty over financial reform, civil lawsuits against the investment banks, etc.
Difficult times indeed. However we think the market is going to trade lower over the next few months. This is not to say the rally has been officially delayed, but these are major headwinds that have reminded the market that volatility is always around the corner. It is very easy to say that this has spooked a bunch of investors who have been cautiously adding to their exposure and are now reminded of the awful 2nd half of 2008.
Sincerely,
The Covert Analytics Team
