Times, They Are a Changin'

Photo by Kunj Parekh on Unsplash

Well, that didn’t take long.

Yesterday, I wrote …

Several Republicans and a few Democrats are demanding Cheater be fired. But, like Biden, she refuses to step down … well, until she does in a few days (also like Biden) because pressure will keep growing.

And today she resigned.

The stock market has bad breadth

Moving right along (just like Cheatle just did) …

I want to look at Lance Roberts article asking whether the bull market could just be getting started.

His answer is not as optimistic as the title (see the headlines section) might lead you to believe.

He starts by pointing out that he has, for some time, been noting that breadth in the market is poor with only a few stocks taking and making the lead. Even though we’ve had a brief period when it looked like breadth was widening to embrace good-old standard-value stocks over the Magnificent 7, he notes and quotes that …

“Markets are strongest when broad, and weakest when narrow…”

but also adds that the Fed’s apparent acceleration toward cutting rates is changing the market’s problem of being too narrow like an underfed runway fashion model, inclining the market toward a little more robust health. However, many problems, he points out, still plague the market:

• First, nearly 40% of the Russell 2000 is unprofitable. Quoting a Goldman Sachs writer, he says, “I don’t get the fundamental argument for sustained outperformance of an index where 1-in-3 companies will be unprofitable this year.” [Yeah, that kinda doesn’t make sense to me either.]

• These companies are also heavily leveraged and dependent on debt issuance to stay afloat (a.k.a. zombies.) That means these companies are susceptible to actual changes in the underlying economy. [And most people, except Biden & Co., agree the economy doesn’t look all that hot right now, which is exactly why the Fed is implying it may cut rates in September.]

• With a slowing economy, these companies depend highly on the consumer to generate revenues. As consumption decreases, so does their profitability, which will weigh on share performance. [One would think.]

• Furthermore, the companies in the Russell 2000 (a good proxy for small- and mid-capitalization companies) do not have the financial capital to execute large-scale buybacks to support asset prices and offset slowing earnings growth by reducing share count. [Meaning, if the economy struggles, they’re more likely to get dusted and turn back down, rather than to perpetuate a broadening of the market.]

• Investors (both retail and professional) are exceptionally bullish. [When everyone is on the same side of the boat, beware of capsizing.]

Yes, the market could continue to rotate massively from large-cap to small and mid-capitalization companies. However, given the current levels of bullish sentiment and allocations against a backdrop of weakening economic data and widening spreads, this suggests the current rotation may be nothing more than a significant short-covering rally. Furthermore, the current technical overbought and extended conditions also suggest sustainability remains questionable….

We will remain in our portfolio management process’s “show me” phase until the market convinces us differently.

One other little point of note, Chairman Yellen (said like she runs the communist party in China), has long said that she has no concern about dedollarization. Recently, she changed her tune and now sounds more like it is keeping her up at night.

That didn’t take long either … relatively speaking.

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