The Great Rotation and a LinkFest for Readers

  • What is it about the 2,100 level for the SP 500 ? From LPL’s Ryan Detrick’s twitter feed too.
  • In mid-February ’16, Justin Lahart of the Wall Street Journal wrote an excellent article suggesting  a “recursive loop” was in effect, explaining the what-seems-to-be-never-ending “rinse and repeat” cycle between the Fed/FOMC, the US economy and the stock and bond markets. Readers know the drill by now: the economic data starts to improve, inflation ticks up a little, the Fed gov’s and the financial press start talking publicly about fed funds increases, there is much hand-wringing and gnashing of teeth, we get VERY close to a FOMC move, the markets get rattled, the 2-year Treasury spikes higher, and then something (dollar strength, China correction, weak economic data) takes the Fed / FOMC off the table, the stock market and short-end of the Treasury curve rallies, the rate hike is pushed out and the world settles back into the post-2008 aforementioned “recursive loop”. We saw it again Friday, June 3rd.
  • I’ll get worried about the US job market when weekly jobless claims climb over 300,000. Currently, the last two months, the weekly claims have been between 260,000 and roughly 290,000. Just from anecdotal observation, it does seems like weekly claims have become more volatile.
  • The large and noticeable divergence between the weak job creation of 38,000 in May ’16 and the sharp decline in the unemployment rate of 4.7% told two very different stories. One comment that was read noted the sharp drop in the work force was the reason for the sharp drop in the unemployment rate.
  • In his last big CNBC interview with Becky Quick around the time of the Berkshire Hathaway annual meeting, Mr. Buffett noted – on air – that if the Fed said they would keep rates at 0%, then the Dow Hones 30 would be at 100,000. I was surprised at that comment. Hasn’t worked too well in Japan or any other country with zero or near-zero rates. I’d never, ever say Mr. Buffett is wrong, but the evidence seems to point to the contrary.
  • Today is D-Day anniversary, June 6th, 1944. Still feel for the vets of Korea and Vietnam. They didn’t quite get the same appreciation and celebration, that others vet’s returning home did (to put it politely). Jeff Carter (@pointsnfigures), a former CME trader here in Chicago is heavily involved with the WW II museum in New Orleans. Cramer has mentioned the museum a few times too. Check out Jeff Carter’s twitter feed today for some great links to WW II and D-Day stories.
  • Good article by Josh Brown (@reformedbroker) on the US dollar. Note the bounce Friday in Emerging Market’s, metals and commodities, all weak dollar plays.
  • The 10-year returns on the EEM and VWO (two largest Emerging Markets ETF’s) were 2.41% and 2.96% respectively (source: Morningstar). Two posts from Charlie Bilello, CMT worth reading here and here on commodities and Emerging Markets. (lobg both EEM, VMO, but the question is, do I add to the ETF’s here ?)
  • Each week, I write the “SP 500 earnings update” on this blog, so hopefully readers find it of value. Josh Brown here talks about the earnings recession from an LPL research piece. Other than the horrid sentiment data, the one aspect that keeps me bullish for forward SP 500 returns over the next few years is SP 500 earnings have taken a beating over the last 4 – 5 quarters and yet overall damage to the SP 500 in terms of price has been minimal. The forecast for this year was that the SP 500 would return 10% – that n ow looks back-end loaded obviously, but I’m still confident we’ll get there by 12/31/16.
  • Jeff Miller, over at A Dash of Insight made good calls on his weekly blog recently on housing and energy. Jeff typically carries this blog every week, but – even if he didn’t – A Dash is one of the most comprehensive blogs written and should be a regular read for serious investors.
  • Amazon looks to be the new Apple. Watch a breakout of 2,135 – 2,150 for the SP 500. Amazon has already taken out its all-time-high from late December ’15. Apple has a long way to go. How Apple acts technically if and when the SP 500 trades to an all-time-high will speak volumes. Remember, every correction for the stock market, typically results in some form of leadership change. In the great debate about which stock gets to a $1 trillion market cap first, the fact that the US economy is a $15 – $17 trillion economy and consumption is 2/3rd’s of that GDP total, it seems a lock that the low-cost, ecommerce, retail merchant will get to a $1 trillion market cap. (Long both stocks).
  • Even if Brexit happens, it will take years to work out the logistics of Britain leaving the EU. Recent polls have Brexit polling slightly higher than “Bremaining”.
  • Summary: the big change in calendar, 2016 has been the rotation into commodities, Energy and the laggards of 2015 and the last few years. This “Great Rotation” is aided by a weaker dollar. Almost universally, investors think a Fed hike or rising rates means a stronger dollar. Universally held beliefs like that make me nervous although it is rooted in good logic. A trade in the dollar index (DXY) through 92 would be another plus for the SP 500 in my opinion. Roughly 47% of the SP 50 revenue today is non-US, and about 25% of the Russell 2000 is non-US, both stats per Bespoke.
  • Have a good week. I still think the SP 500 will be at an all-time-high by Labor Day.

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