Thoughts {07.25.18}

Stocks have quietly bled higher over the past month.  Major indices are logging gains so far in July probably around 3-5%.  Stocks are close to testing their highs made back in January.   All of that takes nothing away from my belief that there is a higher probability that we could be in for a rougher patch over the next few months.  See the post directly below this for my reasoning on this.  

Even if we see a more volatile trading environment in the weeks or months ahead, that shouldn't be construed as a change in my longer term thinking.  I have laid out in previous letters why the technological and secular changing I am seeing makes me bullish on the economy and on stocks over the coming years.  Nothing right now is changing my assumption on that.  The US economy is hitting on all cylinders right now and ultimately positive economics, fundamentals and earnings are what will drive stocks in the long run.  Over the next few months, if we do see a more uncertain period, it should be taken only as a corrective period within the confines of a long duration secular bull market.

Stocks are not the only thing that is rising.  Interest rates have quietly over the past month moved higher as well.  A 10-year treasury right now will yield you 2.95%.  Certain money markets now yield around 1%.  At some point do higher yields become competitive versus stocks?  We don't seem to be there yet but this is something that bears paying attention to.

Speaking again of the markets I'd also like to point out that market breath stinks.  By that I mean the percentage of stocks participating in the rising market continues to narrow.  Here are a few tidbits about breadth that  Gluskin Sheff's chief economist and noted market commentator David Rosenberg shared with us recently: 

1.  22h22 hours ago
   

   Strip out the 17% ($4 tln of market cap!) of the market that is Facebook, Microsoft, Apple, Amazon, Netflix and Alphabet, and the market has barely budged this year. This is the most concentrated market since the dotcoms; before that the Nifty Fifty. Heed Rule #7.

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2.  23h23 hours ago
   

   Memo to the shills out there as the Nasdaq 100 hits a fresh high: Bob Farrell's Rule #7 – “Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.”

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3.  23h23 hours ago
   

   What a see-saw this year. Global MSCI flat. Median SPX stock flat. Half the S&P 500 down 10% or more below the peak. And volatility up 45%. The market is telling us something - as in, transitioning away from the long bull run.

Returns in the markets are being masked by a few strong sectors.  I am not in the same camp as Mr. Rosenberg about transitioning away from a long bull market but the narrowing breadth is worrisome to many and we will see how long this sort of affair can hold up.

Back Friday.