March 14, 2016

This is a bear market rally

Like tennis star Maria Sharapova, there's less than meets the eye with the markets these days:

* Many investors and TV "talking heads" who saw us in a bear market a few weeks ago at S&P 500 1,812 have become bullish at roughly S&P 500 2,000 despite little change in expected fundamentals.

* Plenty of traders who think oil won't breach $45 a barrel to the upside any time soon are now long on crude and other commodities in spite of little change in supply and demand.

* Many players who despised the market's commodity and cyclical sectors in mid-February are now buying up energy and industrial stocks despite no change in profit projections.

If you worship at the altar of price and momentum, don't bother reading this column, nor yesterday's Why I'm 'All-In Short' or last week's Not-So-Super Tuesday. If you're chasing cyclical stocks because they've been moving higher while the market's previous leaders (i.e., the TFANGs) appear to be faltering amid a possible global economic slowdown or garden-variety recession, there's nothing for you here.

That's because if you buy high and sell low, you don't have to worry about the disproportionate role played by quant trading that's ruined the ability for the rest of us to utilize charts as a navigating tool. Forget gamma trading, risk-parity strategies and other high-frequency-trading strategies that exaggerate short-term market moves and are agnostic to income statements, balance sheets and private market value. All that you (and they) have to worry about is the next tick.

But for the rest of us, it's growing more and more clear that after years of monetary-policy largesse, central bankers can no longer create rising economic activity and burgeoning profits by simply printing money. Look at China, which is showing signs of a "hard landing" after figures released overnight showed that the Asian nation's export and import levels have crashed.

Stated simply, risk vs. reward has deteriorated markedly in the last several weeks. This "change in the air" has become especially apparent in the past month as:

* U.S. recession jitters have given way to expectations of a stronger economy.

* Projections of plunging commodity prices have yielded to forecasts of highercommodity prices.

* Interest rates expected to slide are now expected to rise.

* Deflationary fears have morphed into inflationary fears.

* "Talking heads" have revised $15-a-barrel oil forecasts to $50-a-barrel oil forecasts.

* Risk-off has been replaced by risk-on.

* Small-caps are now beating large-caps.

* Value is outpacing growth.

* Gold has gone from goat to hero.

Of course, none of us has a concession on the truth -- and that's particularly true when it comes to investment outlooks!

However, I believe that most of the above changes in view could prove artificially derived and merely temporary. At the minimum, their foundation is weak. The "green shoots" that many market participants seem to suddenly see could just represent the false promise of spring's blossoming flowers and growth.

It's my view that before the bear market runs its course, the TFANGs will become totally discredited and resurgent areas of the market that are now severely overbought could face a retest.

Personally, I think we've likely been seeing a "bear-market rally" rather than a new bull market. 

The S&P 500 closed at just under 2,000 yesterday, or roughly 7% above my fair-market-value calculation of 1,860. Given that fact, my advice to you is to stay skeptical.

Don't worship at the altar of price momentum. Instead, worship at the altar of fundamentals -- and the reality that we're likely facing slowing global economic growth and disappointing corporate profits relative to consensus expectations.