Tops, tops and more tops. If you had to ask me the most unnerving phrase in the English language when it comes to stock market, it's that we are at a top.
So in the interest of pleasing all of the top callers I am going to give you ten potential tops and how I see them playing out so you are ready and prepared when you hear them articulated in a much more emphatic, if not hysterical way by pundits and portfolio managers who cater to the media.
In other words, I am NOT talking about my calling my top. I am giving you solid reasons that people could seize on to call one. I am doing this because we have rallied so hard for so long that it's perfectly rational that we could be at an inflection point. I just don't think we are.
Slowing Growth
Number one? Slowing growth. Today the IMF downgraded its forecast for worldwide growth. I totally get this idea as a reason for a top as many people tend to look at stocks as correlating with worldwide growth. But as someone who has chronicled stocks for years, the correlation just, well, doesn't correlate. There have been multiple periods where growth had peaked around the globe. I care about the Fed and whether it is tightening because of worldwide growth. The Fed is certainly less likely to tighten when growth is easing. So, let's recognize that what the media may characterize as bearish is actually bullish.
China Trade Deal
Second major top call? China. Will there be a deal? Here I am firmly in the top-calling camp if talks break down. There have been many an international stock that has rallied decisively because people expected an imminent trade deal. My fear here is that there might not be a trade deal unless both sides need one badly. We won't need one as long as the stock market is flying. The Chinese might need one to keep the momentum going for their economy. The Chinese might insist that we roll back our tariffs as a gesture of good will. I think we believe if we do roll them back we will not be able to enforce the deal. It's a big mess.
What you need to care about, though, isn't whether there is going to be a deal but when there will be a deal and will the deal be big or small. If it is just a deal for the Chinese to buy goods and not a true opening if their economy we get a selloff. But a substantive deal that allows U.S. companies to make money without joint venture partners and we fly.
S&P Oscillator
Three is that we are at last very overbought. Close observers know that I care passionately about not buying in a truly overbought environment as measured by the S&P oscillator that I pay to get. Monday night's reading was plus six. Anything north of five means you should not be buying. The closer you get to ten the more you should liquidate or if you were at my old hedge fund you would go short.
Plus six for me, as someone who runs a charitable trust, trust, Action Alerts PLUS, means that all buying is on hold and we are doing some selling of stocks that have run, which is exactly what we told club members to do today.
On a scale of one to ten, this one is the most worrisome of the top calls and if we keep getting more overbought then I will become very concerned.
Yield Curve Inversion
Fourth is the inverted yield curve. I know I should be more frightened about this traditional harbinger of recessions. But I can't be because we got inverted out of a misread by the Fed of the weakness in the economy. The last rate hike was delivered when almost every indicator I follow had turned down.
You sell stocks because we have an inverted yield curve and Fed Chief Jay Powell decides that he's worried about a slowing economy and a possible recession, he will cut rates and then you will lose your whole argument about why the heck you sold to begin with.
Earnings
Fifth top call: Earnings. Lots of people are concerned that earnings are going to be weaker than expected. As I pointed out last night, so far a weak quarter has produced a couple of down days and then a decisive rally. I don't think it will be any different going forward so I do not fear earnings weakness as much as others. I do, however, like these kinds of days going into earnings because we don't want stocks too high as reports come in.
Stocks do best when they are beaten down and numbers aren't super horrendous. Tuesday took a lot of the froth out and one more day like this ahead of the bank earnings on Friday would be a godsend. We were coming into this session with an 8-day win streak. We needed that snapped but good.
Oil
Sixth topper? Oil. The perception here is that when oil goes higher stocks should go lower. If only this were right. Stocks and oil have been going up for ages together.
So, oil can keep going higher for a while and I am not sweating the program. Plus, let's not forget that cars use a lot less oil these days so don't start freaking out about gasoline-led inflation.
Boeing the Leader
Seven, Boeing's (BA) been the market leader for months. Now it is under assault from pretty much every corner. What if we lose Boeing as a leader? I would say we find new leaders. Boeing is a special situation not easily replicated. It is, as we say in law school, sui generis. Stop worrying.
Valuation
Eight, overvaluation. I hear people bemoaning the runs in Ulta Beauty (ULTA) , Chipotle (CMG) , as well as the cloud kings and princes. I say, "give me a break."
At any given moment there will always be market darlings and when you find them, respect them for what they are, overvalued stocks for the near-term that might be cheap in the outyears. I refused to get worried about a time-honored concept of overvaluation that's been with us for ages and ages.
Autos and Housing
Nine, autos and housing are weak. The former is just plain true. Legitimate worry. Again, though, there are some structural issues bedeviling autos. The ride-sharing companies make owning a car a less attractive proposition. Auto loans have gotten prohibitive. Cars last longer than they used to.
Housing? We don't have enough houses. They are getting harder and harder to build.
While I can see selling auto-related stocks here they are so cheap I want to take the other side of the trade. I mean do you really want to sell Ford F here? I don't.
FAANG
Finally, there's FAANG. The most hated stocks in the universe have acquitted themselves fairly well this year. That's of endless consternation to those who have been consternated by then for almost a decade.
I have seen the remarkable rise of Apple (AAPL) , one that reversed Tuesday, and been content to say it's just not that expensive. Facebook (FB) never lost the customers, just the press who write about Facebook. Amazon (AMZN) is crushing it in Web Services and Advertising. Every Netflix (NFLX) survey tells of further growth. Lastly, Alphabet (GOOGL) ? I still hear nothing good. But it's awfully cheap versus the consumer packaged goods stocks with a better balance and much faster growth.
So, there you have it. On one of the worst days of the year I have given you ten reasons to sell even as I don't believe in most of them. But I respect the media's ability to scare you out of your paints. So at least you will be ready.
