A cycle nears its end. Will it be different this time...?
Promotion (Dictionary.com): something devised to publicize or advertise a product, cause, institution, etc.
OUR TITLE implies a bear writer about to write bearish things, writes Gary Tanashian in his Notes from the Rabbit Hole.
I get it. I guess I am a bear writer now because I can no longer be a bull writer. That is because my b/s detector is calibrated to its most sensitive setting and usually begins sounding early. The b/s detector went off early last May and the bullish analysis had to endure through a very volatile summer. Now it is the same, in reverse.
But 1550-or-more on the S&P500 index is our plan, not that of most come-lately bulls. We staked it out months ago and it appears to be coming about. Further, it is coming about with signs – like the 'boots on the ground' evidence of the semiconductor equipment upturn, creeping 'jobs' stabilization and generally good corporate results during earnings season. That is the reality.
What is also a reality is a Federal Reserve doing its best to backstop and promote all of this, as normal inflation indicators have not yet registered. They literally have free license to print money and try to promote bubbles. The "Great Rotation" story is being manufactured in the media and it is the perfect accompaniment to the current sentiment-fueled rally toward very important targets. It also raises an interesting question.
If low interest rates have been a key to what lame economic recovery is in play now, what would the rising interest rates implied by the "Great Rotation" out of bonds and into stocks bring about?
We'll follow up that question with more questions; with a defection by the public would the Fed then begin to buy bonds of all types and durations? Shorter-term Treasuries, investment grade corporates, junk and municiples to go along with its stated operation in MBS and long-term Treasuries?
Basically that is a Fed out of control and on steroids, bloating itself up until one day it just bursts. Perhaps the tin foil hat brigade will find the answer in the $trillions in buying power of US retirement accounts. There is chatter about the government overseeing these accounts for the benefit of its citizens.
More likely, bond revulsion to the benefit of stocks would serve to expedite the end of the now 4-year-old bull market. The story seems to fit nicely with the big picture technicals and the idea that a bull market will use the weirdest stories to suck in the final holdouts prior to termination.
This is a cyclical bull market, so it does not need to flame out with the grand idiocy of the dot.com-style promotions ('who needs revenue?') of the secular bull ended 2000. It is a cyclical bull that has already run for 20% of the time of its secular predecessor, and a silly story about a great rotation from bonds to stocks goes well with the dynamics currently in play. It is more in line with the garden variety insanity that the inflation-fueled cyclical bull (2003-2007) promoted: 'house prices will always go up'.
The kinds of people who chase late-stage bull markets need paint-by-numbers direction. After all, to these people there are only "stocks and bonds" per the most basic, fundamental and ongoing financial industry promotion.
The chart above shows an epic setup in the making. The first part of the big play will be to either preserve capital or for those willing to risk the short side, to capitalize on the next down cycle. The best opportunity however, would probably be to buy assets for pennies on the Dollar at the next cycle bottom.
Meanwhile, it appears bull heroes are being made, as the trend-following media celebrate the brave contrarians that called the bull when everyone was bearish in 2009. Where was the media last summer? The end of the world is what it was promoting then.
Bring on SPX 1550+ and the potential for a profound transition sometime in mid-late 2013 or early 2014.