The Conditions You’d Want Are Already Here

Have we corrected through time, rather than through price, enough to spark the next leg higher for the bull?

Consider: No new high since last May, a flat market over two years (three years for small caps), median declines for individual stocks of 30% – not enough? Or plenty, to set up a new rally?

That’s the question on everyone’s mind now as the averages approach re-approach their former highs. The bears say May has been a short-squeeze. They say you’re risking 20% to make 2% to the upside. The bulls (and there aren’t a lot of them) don’t have much to say to counter this, other than the possibility that economic growth picks up in the second half (what else is new) while the Fed becomes a well-telegraphed non-event.

Reading the morning note from Andrew Adams at Ray Jay, I came across this really interesting insight from a trade named Jesse Stine. In addition to pointing out that “Over the past three months (12 weeks), stock funds have lost $33 billion in assets while bond funds have gained $50 billion,” Stine talks about sentiment in the context of today’s actual conditions:

Jesse Stine’s Key Criteria for a Market Bottom

1. An IPO market that has dried up completely.

2. S&P earnings hitting a bottom and turning higher. (Dollar drop/rising oil stimulant)

3. A mass exodus from retail investors (dumb money) as they dump their funds.

4. Our “friends” at our investment banks tell us to sell stocks.

5. Zero market speculation in penny/microcap, Bio’s/speculative stocks.

6. Households at multi-decade lows in terms of stock ownership.

7. Retail investor bullishness under 24%.

8. A stretched bond market as investors seek the “safe haven” status of bonds.

9. Longer-term put/call ratios at extremes (investors seeking downside protection).

10. Warren Buffett buying stocks hand over fist after highest cash balance ever last year.

11. Widespread blogger bearishness (dumb money).

12. Speculative “high beta” stocks massively underperforming “safe” low betas.

13. Leading indicator semiconductors turning around first.

14. Retail investors (Mom, Pop, Joe 6 Pack, Uber driver, etc.) becoming experts on and actively touting “Death Crosses” and “Head and Shoulder” patterns.

15. The media promoting financial negativity.

Josh here  now of course it’s weird talking abut a stock market “bottom” when you’re within a trump’s hair of all-time highs for the Dow and S&P, but the conditions currently present truly look / feel bottom-esque. This would lend credence to the idea of a correction through time having taken place.

So is there a catalyst to punch through and keep running? Perhaps, but only one that will be recognizable after the fact, as per usual. Bulls would say that the chase by underinvested managers would serve as its own catalyst. I’ve never liked “cash on the sidelines” arguments, but that doesn’t mean they’re all stupid.


Morning Tack
Raymond James – May 6th 2016

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