The cliché goes that “great minds think alike.” There is also the counterpart that “fools seldom differ.” Either way, regarding the latest market update from Nomura’s Bob Janjuah, I find it difficult to disagree with his ultimately bearish medium-term views.
This is the case even though, unlike Spreadbet Magazine’s founder Richard Jennings of Titan Investment Partners, I did not start 2014 in ultra bearish mode. He called one of the worst Januaries in recent history for the stock market absolutely on the money.
However, from my technical perspective January was a dip to buy into, and for the foreseeable future this may also be the case. The reason for saying this on a fundamental basis is I sense a considerable degree of dithering on the part of US and UK central banks in terms of delivering interest rates rises to temper the post financial crisis bubble.
Of course, in the Eurozone the ECB is moving in the other direction in terms of the prospect of QE coming on tap as soon as June, ostensibly to kill deflation. Getting the single currency well off the $1.40 level would also be helpful, not only to PIIGS exporters, but also to their respective stock markets.
But getting back to our man from Nomura. He, like myself, is looking for further near-term upside on the S&P, with 1,950 the target. This is of note given the way that at the same time as the forecast peak level, Janjuah’s fundamental bear argument is based on a litany of negatives from the obvious post QE wind down, earnings misses and inflation.
The key here may also be the way he suggests that even the world’s favourite QE beneficiary, real estate, could be losing the boost it has enjoyed from what was always an unfair (moral hazard) policy. It of course favoured central banks, eroding the value of sovereign debt, as well as the super rich and the financial consequences of failed casino bankers.
Janjuah’s nightmare scenario seems to centre around a combination of the asset bubble not being able to get any bigger – rather as it did in 2007, and his belief (which I share) that Yellen and friends will not be able to “flip flop” out of QE without a crash landing. This lack of a decent exit game from QE is from my perspective its worst aspect, and the reason it should never have been sanctioned. It was better to face the music from 2007, rather than have a combination of zombie banks / ripped off savers and everyone and their mother getting on an unsustainable house prices spike.
For instance, the buying climax in London real estate looks to be happening right now, going into the next General Election in mid 2015. For US stocks we appear due a final buying climax for the likes of the S&P, as high as 1,950, something which ties in with the top of a rising trend channel from August last year.
The floor of the channel runs through 1,850, with the resistance line projection heading as high as 1,950 – an implied destination to be hit over the early summer. Indeed, it makes sense that after such an extended bull run there is a final peak of enough ferocity to ensure that the bears get carted out of the arena just before the mega sell off they have been calling for so long materialises.
Such blow off peaks are well known to technical analysts, and are usually accompanied by charting gaps to the upside and ultra overbought RSI / oscillator readings. Therefore, the theory of 1,950 then 1,700 on the S&P which Janjuah is espousing could see a spike from 1,900 to 1,950 occur very quickly, say on some positive comment / tapering delay from the Federal Reserve. After that the big retreat could occur, with the present charting configuration implying that the big breakdown would be on tap in the wake of the loss of the main 2013 uptrend line at 1,850. While it may be tempting to try and pick the top even with the likely 1,950 level on offer, the lesson of recent years has been that those who have tried to go against the upward momentum here have had to time their entries and exits to perfection.