Changes

by Jeffrey Saut of Raymond James, 10/8/18

Ch-ch-ch-ch-changes
(Turn and face the strange)
Ch-ch-changes
Don't want to be a richer man
Ch-ch-ch-ch-changes
(Turn and face the strange)
Ch-ch-changes
Just gonna have to be a different man
Time may change me
But I can't trace time
. . . David Bowie, Hunky Dorey Album 1971 (Changes)

John Maynard Keynes, the British economist whose ideas fundamentally changed the theory and practice of economics, once said, “When the facts change, I change my mind - what do you do, sir?” So on a short-term trading basis, we came into last week believing the S&P 500 (SPX/2885.57) was going to grind higher into our envisioned mid-November’s “energy peak.” The models were set up for that and the timing seemed about right. However, Monday’s failed rally attempt was followed by the same on Tuesday. We actually expected the indices to vault higher the first part of last week, but alas they do not run the markets for our benefit. Accordingly, our short-term timing model flashed a “soft” cautionary signal after Tuesday’s closing bell. We told some of our callers about this on Wednesday, but being on the West Coast, we were unable to write about it in Andrew Adam’s “Charts of the Week” last Wednesday. We did, however, write this in Thursday’s Morning Tack:

As often stated, the long-term proprietary model flipped positive in October 2008 and has NEVER turned negative since then. Currently, the intermediate model remains constructive, but the short-term model has registered a “soft” cautionary signal. That is likely due to the number of new lows swamping new highs, the RUT underperformance, and the lack of short-term energy. To that point, according to our models the past two sessions were pretty critical in that they should have vaulted to the upside and that just has not happened. This lack of direction, and subsequent failure to foster an upside breakout, makes us have to consider that on a trading basis, the mid-November energy peak, instead of being an upside inflection point, may just mark the end of a downside reaction low. Accordingly, we are recommending selling some trading positions, yet we are undeterred on our secular bull market theme that has years left to run. We are writing this Wednesday night without the use of the preopening futures, but our sense is the S&P 500 registered an “inside day” on Tuesday and it was not resolved yesterday, because the SPX was unable to hang on to its morning gains. If Tuesday’s intraday low of 2919.37 is violated to the downside, sellers should materialize, because there will have been three failed rally attempts this week and bonds are nipping at our heels.

Speaking to bonds nipping at our heels, the recent yield-yelp has led to an overflow of emails with questions about bond fund liquidations, the high yield complex, what to do with fixed income asset allocations, etc. It appears that the Treasury complex is off about 2-3% YTD, while corporate bonds are down maybe 6-7%. Our sense is that the backup in rates, on a short-term basis, is a bit overdone, and we would expect the yield on the 10-T’note to stop its rise at the 3.25-3.50% level. That feeling is reinforced by the extraordinary negative sentiment in the bond futures complex, as on Thursday, more than 1.5 MILLION put options were traded on the 10-year T’note and the 30-year T’bond (read: panic)! Then there was this this email from Monaco Capital’s astute Joe Monaco Ph.D., who writes:

The news is that this market decline is due to higher interest rates and fear that they will continue to go higher. However, have you noticed that the utility sector is rallying in the face of this market decline? If it is all about interest rates, utilities should be feeling the brunt of this decline, but the opposite is occurring. Do you think something else is going on? I do.