By David Nelson, CFA
Despite a Washington backdrop that continues to drag on investor sentiment, markets around the world powered higher following a brief reset after the leak of former FBI Director James Comey’s memo.
Leadership continues to narrow into a handful of names not that dissimilar to the 1970’s Nifty Fifty considered to be the only stocks you’ll ever need to own. In 1972 McDonald’s (MCD) traded at 71x earnings while Sears (S) a bargain changed hands at 29x. Of course also on the list were a few no longer with us like Polaroid (PLD) and Eastman Kodak (EK).
There’s still a long runway of growth ahead for some of today’s favorites so the ride can last for some time. However, crowded trades often end badly just around the time you are convinced there is a new paradigm.
Given the deteriorating technical outlook I describe below the best outcome would be a pause in the high momentum trade giving FANG (FB),(AMZN), (NFLX) & (GOOGL) a rest while the rest of the market narrows the gap. Without it, expect something more violent later in the year.
The Good News
We’ve just come through one of the best earnings seasons in some time and unlike other years it wasn’t just driven by financial engineering. Not only did we see earnings growth and strong guidance but real revenue growth. You can do a lot to fudge the numbers on the bottom line but little you can do with revenue unless you are cooking the books.
Concerns
Corporate America is still looking to Washington before they put CAPEX plans into full gear. Some CEOs want a sense of certainty regarding tax reform and regulatory relief to understand just how to deploy capital. Given the pending investigations and a summer of hearings any tax reform legislation is likely 2018 business. While there’s strong support on both sides of the aisle for a revamp of the code there’s little consensus on just what to do.
The current code encourages corporations to off shore their manufacturing and cash flow and for some even their domicile. A good portion of the post-election rally was based on addressing these issues so the delay is a concern.
NYSE Bullish Percent Index
The NYSE bullish percent index reversed to the downside in March and continues to weaken. The index is a measure of the percentage of stocks on a point and figure buy signal. It’s been falling for months indicating the market is being supported on fewer and fewer stocks.
S&P 500 vs % of stocks above 200 day moving average
Add the fact that the percentage of stocks above their 200 day moving have been falling steadily since the February high, it becomes clear the glass of water is morphing from half full to half empty.
*At the time of this article some funds managed by David Nelson were long SPY
