A Case Of Risk Exhaustion?
Cam Hui | Apr 15, 2014 02:12PM ET
Stock markets have been selling off for a couple of weeks, but there has been no apparent fundamental underpinnings to the decline. While I can point to technical reasons (see my last post Marketwatch ):
January to April: The “hard reversal” period has seen emerging markets, bonds and gold, the losers of last year, become the winners of this year. They’re replacing 2013′s stars — Japan, Nasdaq and the U.S. dollar. But that reversal period ends in April. He cites two reasons:
1. So-called “extreme positions” are being eliminated fast. Since BofA’s last March Fund Managers’ Survey in mid-March, emerging-market equities have outperformed the Nikkei by nearly 1,000 basis points (in dollar terms).
2. Policy makers will turn dovish again. He says watch Nasdaq 4000 [the index closed below that level Friday], $2.20 on the Brazilian real, 66 on the PHLX/KBW Bank Index and 2.5% on the U.S. 10-year Treasury yield. “The biggest risk is that markets lose trust in vacillating Fed, the only policy maker the market truly trusts,” said Hartnett.
He went on to forecast a 10-15% correction in the stock market, but not yet:
September, correction time: Hartnett says bull markets don’t usually end with such high cash and low leverage, and also rarely end with tobacco being the only subsector at an all-time high. Bears looking for that big 10%-15% correction should wait until September and then buy volatility and up cash levels as Fed QE ends and rate-hike expectations grow for the Fed’s Sept.17/Oct. 29th policy meetings.
I agree that a 10-15% correction is in the right ballpark (my own estimate is 10-20%, but it's close enough for government work), but I do not necessarily agree on Hartnett's timing for the downturn.
David Kostin of Goldman Sachs pointed out that the current risk unwind has a lot further to go, if history is any guide (via Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”
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