Welcome
to this week’s edition of the Lewison Letter. In my last writing, I advised selling some positions which
have already produced big profits in anticipation for a “sell in May” hit on
the market. While I have been
wrong so far, I still caution people to not be greedy as a market pullback is
imminent. Instead of looking for a
move back down to 1525 on the S&P, I am looking for a pullback to 1597,
which is only 3.1% from Friday’s close and just under 6% from Wednesday’s
all-time highs.
This
was the first really volatile week since the middle of April and for the first
time all year long, the technicals AND fundamentals indicate markets are
overbought and are ripe for pullback. First the technicals; On Wednesday
morning, Fed Chairman, Ben Bernanke (who is truly the most influential factor
in the markets) indicated the Fed could reign in the buying of bonds and
mortgage-backed securities, but also warned that they are hesitant to do so to
soon. When Bernanke’s testimony
was released Wednesday morning, markets shot up, hitting a new all-time high on
the S&P of 1687.18, only to drop dramatically as Big Ben began taking
questions, and then drop even further upon the release of the minute’s from the
Fed’s last meeting. That led the
S&P dropping 39 points, to eventually close at 1655, putting in a huge
shooting star formation (occurs during a bull market when the market opens and
trades sharply higher, only to close lower than the open price) at all-time
highs, which indicates a tired market.
While Thursday and Friday turned out to be strong rallies off a sharply
lower open, they failed both times to break through Wednesday’s close, which
means there’s strong resistance at 1655. If you look at the weekly candlestick
formation of the S&P, this past week’s price action formed a spinning top,
which during a prolonged bull market, indicates the rally is running out of
steam. In this formation, the
market trades higher and lower than the weekly open, only to close slightly
lower than where the week began.
Both technical signs must not be ignored and I predict will lead to a
slight pullback, opening up a nice buying opportunity.
For
a long time now, the market fundamentals have been broken, but as happens
during a bull market, all bad news gets ignored. Looking across the world, China PMI and GDP continues to
show contraction, European GDP has been lower than expected, global unemployment
continues to remain too high and the Japanese Nikkei suffered its worst one day
drop (7.3%) in more than a decade, which since November, has been a good
indication of where the S&P trades.
Additionally, the US dollar continues to remain near multi-year highs
against most other currencies, making our goods more expensive, which will
decrease exports. But perhaps the
most important factor is that we got a real look at what will happen when the
Fed pulls back on the $85B in bonds and mortgage-backed securities it is
purchasing each month. Investors
were spooked Wednesday when members of the Fed showed differences in their bond
buying strategies for the future.
When word was out (eventhough this is nothing new) that the Fed might
slow down their stimulus, everything under the sun fell: stocks, bonds, gold,
oil, and currencies. Fed Chairman,
Ben Bernanke, continues to hold every financial market in his hands, and any
sign of a slowdown in purchases will result in a dramatic drop in the stock
market, as we saw on Wednesday.
What’s more concerning is that Bernanke didn’t say anything on Wednesday
that wasn’t already known at the beginning of the year. The fact that the market reacted that
way on Wednesday indicates to me that the bulls are re-thinking this rally and
are becoming more cautious.
Another
statistic that I am looking at is the amount of money invested in the market on
margin (borrowed against your brokerage account). Margin debt levels are at the highest they have ever been in
history, $384.4B, up 1.3% MoM and 29% YOY. When investors are most confident in the market, is when
margin debt levels get too inflated because they no longer fear losing
money. That’s the precise time I
want to be OUT of the market because that’s when investors start getting hurt
and panic selling sets in. The
last time margin levels were this high was back in 2007 when the market also
hit new all-time highs, only to drop into recession during the financial
crisis, falling from 1576 to 667 over the next 18 months. This is something that nobody seems to
be paying attention to, but I am and think you should as well. While I do NOT think the S&P will
drop like that, its good to take note and be cautious of a pullback.
While
I am short-term bearish, as mentioned earlier, looking for a pullback to 1600,
before buying again, I do want to reiterate my bullish predication for the
year. I am increasing my
prediction as I now see the S&P finishing the year at 1610 (15% gain), up
from my previous estimate of 1575.
With so much relying on what the Fed is going to do, pay extra special
attention of the Non-farm Payrolls number to be released at 7:30am CT on
Friday, June 7. Most likely the
number will be much better than expected, although in reality the number isn’t
good. For the US to bring
unemployment back to pre-recession levels, we need to create an average of
180,000 jobs/month for the next 5 years, and even then, our REAL unemployment
rate would be just slightly below 10% (the unemployment rate that gets reported
doesn’t include the under-employed or those who have stopped looking for
jobs). Be cautious going forward
until the market gives you a chance to buy at a level you feel comfortable
with.
Full disclosure: I currently hold no open positions
Jeff Lewison
