S&P 500 at 14% Above the 200-Day M.A.

A 1-in-14 event!

Highlights

• Complacency, greed and momentum describe the current manic backdrop

• Market outlook is reminiscent of 2007 and 2000

• The dot-plots almost always get it wrong

• A primer on GDP revisions ahead of Thursday’s release

While We Were Sleeping

Well, the rally hit a wall yesterday, and the picture below may be the reason why. The definition of a stretched market is one when the S&P 500 gaps 14% or more above the 200-day trendline. That is extreme. Beyond extreme, in fact — back to 1928, the S&P 500 has only drifted this far above the moving average 7% of the time!! A VIX, at 13, represents an investor base with no fear, just complacency (closing below 16 for 102 consecutive trading days, the longest such streak since 2018). But the time to buy downside protection is when it is priced dirt cheap. The CNN Fear-Greed Index is well into Greed terrain.

And fundamentally, the S&P 500 has rallied +9.4% so far this year with no accompanying earnings support as both Q1 and 2024 EPS estimates have not budged since early January. Nor has there been any justification for this sort of multiple expansion from interest rates, given that the 10-year T-note yield is +30 basis points higher now compared to when 2024 began. The math just does not add up, and while the refrain “better to be lucky than good” works now in this manic backdrop, I am still not comfortable chasing momentum into the top 10% valuations of all time.

Even the once-beleaguered U.S. banks are back trading at pre-SVB average multiples of nearly 12x (surging +3.3% last week) despite punishingly high deposit rates, negative loan growth, rising credit default risks and an elongated inverted yield curve (very limited upside to the sector at this juncture).

Meanwhile, the retailing stocks chose to hit all-time highs just as retail sales volumes have contracted -1.6% on a YoY basis. Another sign that it doesn’t always have to make sense when momentum trading takes over the market.

For the first time since November 2020, the year-over-year trend in core capex orders has dipped below the zero line. But this recessionary statistic hasn’t stopped the S&P 500 Industrials from attaining record highs. The best way to succeed in today’s marketplace is to completely ignore what’s happening in the economy!

And, the homebuilding stocks are surging to record heights even as the February data showed the building community massively discounted their product to maintain their sales volumes — the housing inflation theme just took a step backwards because median prices fell -3.5% MoM in February, the third straight month of decline, and are down -7.6% on a YoY basis (sales are up less than +6%).

Based on all the pushback I am receiving, all I can say is that it is all reminiscent of former Citigroup CEO Chuck Prince back in July 2007, three months ahead of the peak (and the stock market then wasn’t even nearly as bubbly as it is today), who famously said: “But as long as the music is playing, you’ve got to get up and dance.” From the time of that comment to the October highs, the S&P 500 rallied the grand total of +1%.

But the popular delusions and maddening crowds of the day were adamant that we were into a new secular bull market as it came to the housing market, a world dominated by double-digit economic growth in China, a Fed assuring the public that there were no imbalances and a widespread no-recession “soft landing” view. It was a +1% ride to the highs after that Chuck Prince comment, and believe me, I was widely dismissed as being out-of-touch (I was told the same at the 2000 bubble highs too) — and then a -57% ride down to the March 2009 lows.

We had a few Fed officials yesterday push back on any rate cuts over the near-term. Fair enough. Not everyone has two or three “dots” for this year. So, the 10-year T-note yield failed to break below the 100-day and 200-day moving averages and popped +5 basis points to 4.25%.

But on a day when oil spiked again, I am impressed that all we get out of it is 10-year TIPS breakeven levels barely higher than 2.3% — where they were in mid-January when WTI was hovering at $72.60 per barrel or around -10% below today’s $82 per barrel level (reflecting heightened geopolitical risks, nothing related to global demand). So outside of oil, the bond market seems to be sniffing out disinflation elsewhere (maybe, as we mentioned yesterday, China’s manufacturing overcapacity is set to export deflation across the globe).

As far as the overnight trade is concerned, we have U.S. equity futures slightly in the green column. Europe is mixed but also up a smidge overall. Asia was all over the map — Japan’s Nikkei 225 was flat and markets in Taiwan (-0.3%) and India (also -0.3%) were lower. But we did see advances in Singapore (+1.0%), Hong Kong (+0.9%), Korea (+0.7%), Thailand (+0.3%) and China’s Shanghai Composite (+0.2%). The DXY dollar index is off a tad to 104.2 — the Chinese yuan has firmed for a second straight day on the back of PBOC reinforcement and the yen moved back and forth before settling a little higher against the greenback at ¥151.3.

Bonds are bid for the most part — just a little (though they sold off in Australia and New Zealand; even with a -1.8% pullback in the Westpac consumer confidence index for Australia in March). Spot gold is little changed, as is the oil price while Bitcoin has dipped back -0.9% to $70,324 (see Bitcoin’s Surge Lures Venture Capitalists on page B5 of the WSJ — perhaps this is a signal to the Fed that there still is too much liquidity swishing around), reversing just a small fraction of yesterday’s power surge (all market quotes are time-stamped to 4:00 a.m. EDT).

The data docket was sparse — just Japan’s service-sector PPI which came in light in February at +0.2% MoM (after tumbling -0.5% in January) and that held the YoY trend at +2.1%. The trimmed-mean measure of underlying inflation also moderated to +2.3% from +2.6% in January and one can only imagine the smiling faces over at the BoJ — the only central bank that did not hyperventilate this cycle and one reason why the Nikkei 225 is up +20.7% for the year (vs +9.4% for the S&P 500).