Unapologetically Bearish

SPCFD:SPX   S&P 500 Index
A series of events took place causing me sit back and contemplate market participants (in)sanity. First, it is known that I've was one of the first to stick my neck out and tell it how it is – the U.S. Is facing a recession in 2016 – last April. Soon after, various investment banks flirted with the potential but gave the very realistic situation very low probability of happening.

Needless to say, critics (unfortunately those that “manage” money) have come out to chastise the recession call, which is not backed up hard data but backed subjectively by a rally in equity prices. They repeat the mantra “don't fight the Fed.” Unfortunately, we've already witnessed the carnage bred from the same ignorant complacency as equity markets halve themselves twice in less than 15 years.

Secondarily, last Friday, I watched Mark Zandi, Moody's chief economist, in conjunction with CNBC reporter Steve Liesman, say that the data depicting the sad state of economic affairs was wrong and that we should simply follow the non-farm payroll numbers.

Whoa! This is a classic case of narrative over fact. But, lets look at key economic data points that have already hit cycle highs and rolled over:

Key Data Point Post-Great Recession Peak, YoY %
Non-Farm Payrolls First Quarter, 2015
ISM Non-Manufacturing PMI Third Quarter, 2015
Real Consumption First Quarter, 2015
Agg . Private Sector Wages & Income Fourth Quarter, 2014
Retail Sales and Food Servicess Third Quarter, 2011
Business Sales Second Quarter, 2010
Business Inventory-to-Sales Ratio First Quarter, 2016 (Cycle High)
ISM Manufacturing PMI Fourth Quarter, 2009

Additionally, all is not well in the corporate sector. Last month, market participants saw corporate profits drop 8.4%, nearly 3x more than expected and the third quarter in a row. Furthermore, profits for all of 2015 fell 5.1 percent - the largest drop since 2008. This is much higher then the .6 percent decline the year before.

Mainstream economists don't forecast a looming recession, but when have they ever? Every recession since the early 1980's began with growth above one percent. In 2007, growth expansion was at 1.87 percent, only .13 percent lower than it was in 2015.

When one steps back from market nuances and models for potential of all risks, not only does the picture become more clearer but the ability to adjust when needed becomes more simpler.

In "SPX Pullbacks Are Volumeless, Stay the Course," I pointed out the lackluster conviction of the equity rally. This still remains the case. Those that "don't fight the Fed" will be sorely disappointed when the only volume swarms in on the elevator drop .

Notice that price action and accumulation on SPY hit a wall and appears to be pealing back:

In April 2015, I issued a 2016 recession call between Q2-Q3 for the U.S. (following my January call for 1,810 on the SPX ). After being laughed at, I wonder who will have the last laugh as Atlanta Fed's GDPNow is modeling a mere .4% (with a potential to go negative) for Q1.

At 22.87x trailing 12-months earnings , equities remains extremely expensive and only have been at these levels prior to market crashes, including the market panic of 1893/96, flash crash of 1962, early 1990's recession, the Dot Com bubble and the Great Recession.

Do you feel lucky?

.... I remain unapologetically bearish .

Reiterating my 1,546 SPX target for 2017.

Please feel free to comment and share charts! And follow me @Lemieux_26

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Agreed 100%. That said, I am very angry as Central Banks shattered the free market. It's a rigged, CB driven game; investing has never been so risky and markets have become super volatile
+1 Reply
More of a reason to focus on opportunities that can be capitalized on with proper risk controls!
Persil CommoditiesTrader
Chris, what do you think about Oil? I believe that the Doha meeting will be a flop. Do you advice to stay neutral until this charade ends? Thanks!
Hi, I have always been a "believe it when I see it" when it comes to freezes. Remember, the key factor last year was production cuts, but Saudi, Russia and key players refused to cut. Then it got to "freezes" where production would be held steady.

We already know Saudi won't cut unless Iran cuts, which has already said is not happening. Russia has said to hell with everything and oil out put is at soviet highs. If we start seeing significant production cuts, we'll see higher oil. Technically, my line in the said is $42.50 for WTI, then I think $50 is in sight.

In regards to positioning, I do have slight exposure to equities because I think they are overvalued on a valuation basis. I'll probably build in futures once I see the broader US market continue downward. There is a lot of bullish speculation heading into the summer driving season, but we're already seeing miles driven begin to turn over. I expect the season to be weak.