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Beware of Overpriced Market. Declines May Take Out Recent Lows

03/07/2018 2:15 pm EST


Gene Inger

Editor, The Inger Letter

New market angina surrounding Gary Cohn’s resignation is emblematic of the turmoil since late January’s call for a serious S&P breakdown followed by a possible Spring rally. In our view it’s not a time for investment-grade commitment, says Gene Inger of  The Inger Letter.

Essentially I warned that the market was low on fresh liquidity, growing increasingly dependent on leverage (or margin) to buoy stocks, and that aside trading moves (such as off of the twin-bottoms in the S&P futures we believed were tradeable with ensuing rallies to be sold into).

There was no realistic justification for investment entry in the leading big stocks as they were and are overpriced.

chart 1

Sure some pundits were bullish Monday and Tuesday morning shouting at investors about how they need to get in. And then Tuesday night they did in a rinse & repeat fashion, warn about how everyone knew the markets were high and that if Cohn resigned the prospects of calm diminish. Or something like that.

It amazes me because as we suggested upside this morning from the first sell-off, there were others trying to short it. 

The S&P 500 (SPX) rallied. I agree about the market’s overvaluation but the swings are too violent to press the downside or the upside.

That’s why intraday calls on Tuesday suggested the rebound (it took more than an hour to get going this time) but also suggested it would not penetrate resistance that developed. And there was a shot at developing what technically is called a head & shoulders formation as relates only to the post-crash rebounds over recent weeks.

chart 2

We sort of have that now.

I rather clearly suggested any day-traders who bought the morning dip ideally should close those longs now and go home flat.

Along of course the same theme, I have persistently argued the futility of chasing rallies lately because there is so little potential and a heck of a lot of risk (trap-door style) underlying this market.

Now that’s not to say stocks won’t yet-again try to rebound from an implosion (sure they probably will). There’s a case to be made that if they couldn’t get Trump to back off his trade tariff ideas (Plan A) that there might be a Cohn resignation to break markets and sway Trump (it might be called Plan B).

Hard to say and probably not. Trump tends to be influenced by the market and he should not be after such a big run we anticipated for the last year.

chart 3

In-sum: traders scrambled to reverse excess short-term bearishness early in Tuesday trading as if the trade war risk had returned after seemingly being banished a day earlier as unlikely.

Trump acknowledges possible adjustments of exceptions (of course, the real goal is to push for a better NAFTA agreement). And it’s a bit obvious when he pushes just before a trade conference is scheduled to wrap-up apparently without a sufficiently-broad deal is made. There isn’t an indication that he intends to back-off in general, nor should he from a strategy perspective. I believed this before Cohn’s resignation. 

A renaissance of American industry is not simply old smokestack firms but all part of the repatriation of capital and jobs to the United States. It’s very hard, given how many decades of decay were allowed.

Unlike in oil where the forces (some in this country) were opposed to self-sufficiency in oil and gas for years, there is less OPEC can do to us now, whereas it is more challenging when dealing with the EU or China.

Of course, those in the EU have also been dealt tough blows from Asian competition, but allowed those economic victors to invest too heavily in Europe. I think extrication of the linkage becomes more difficult. The U.S. can learn from this and ease-up on the trend before it’s irreversible. 

chart 4

And I can’t say if the Qualcomm (QCOM) Broadcom (AVGO) deal really threatens in this manner,  because of Broadcom's pledge to become an American firm as things evolve.

However, the CFIUS letter Tuesday opposing it (and that’s a ruling that is not necessarily arguable in courts) does symbolize concern about preserving our semiconductor industry for national security. That may be a part of today’s market that is under-appreciated, as a security battening-down-the-hatches era may be underway. Mostly, it’s trade. 

Bottom line: no change in my view of these unsustainable rallies, and a suspicion one of the declines is going to take out recent lows and trigger exactly what the institutions and hedgers have tried to prevent: a break that works its way to more than a 10% decline. That is something not so easily absorbed based on the leverage out there. 

That is the key to what follows: because trade deals or not, (as it’s likely we'll get some, neurotic markets or not) .. this is an overpriced market. A series of pundits and other talking heads, or outrageous upside market calls by some established analysts, is not that different from what we’ve seen at important distribution zones in the past. They will generally be comforting investors even if behind the scenes they’re worried.

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