1.) Short, sharp, corrections, usually 5% – 7% in severity. The last big correction bottomed last October ’14 and it was roughly 7.7% peak-to-trough, and it seemed pretty nasty. The last 20% S&P 500 correction was 2011’s recession scare (so many thought the decline was due to the potential ratings downgrade of the USA’s AAA credit rating, but I suspect it was due more to the ECRI recession call, quickly debunked by Jeff Miller and Doug Short, that occurred in the summer of 2011.
2.) Stock market bullishness evaporates quickly and becomes rampant bearishness, as judged by American Association of Individual Investors (AAII) data, and the Bespoke Market Poll Results. Bespoke noted in last week’s (week of 3/27) Weekly Letter that even with a spike in bullishness last week, the AAII bullish sentiment level remained below the bull market average of 38.8%, coming in at 38.4%.
3.) Although somewhat unrelated to the S&P 500, there has been a persistent level of bearishness around Treasury yields and prices since 2009 – 2010, with a constant cacophony of voices expecting higher interest rates. 2013 saw some relief for those in cash or short Treasuries, but how many (me included) were leaning the wrong way in 2014 when the U.S. 10-Year Treasury yield rallied from 3% to 2%?
4.) Finally, and the position I am the closest to, given the weekly blog work, is that Street and financial media expectations every quarter entering earnings season are typically downright depressing, (note last October ’14) and yet actual S&P 500 earnings growth each quarter has been at least mid-to-high-single-digits, i.e. Q4 ’14’s +9% ex-Energy, despite the roundly pessimistic outlooks. Let’s face it, there have been many doubters around earnings for the last few years, and it has been consistent every quarter, with the latest meme being earnings growth is mostly due to large stock repurchase plans in Corporate America, which UKarlewitz or Urban Carmel, a thoughtful and popular blogger the last few years, has somewhat debunked.
So what is the point of all this? Monday April 6's equity market open will be ugly. The S&P 500 really has not made a substantial new high since late December’s peak of 2,093. The March 2nd, 2013 peak of 2,117 and then the March 23rd peak of 2,115, on the S&P 500 could possibly be a double-top in hindsight.
This week will likely start ugly.
A.) Watch the level of bearishness via the put-call ratio and the AAII data later in the week – if the pattern is true to form, stock market bearishness will rise quickly.
B.) Alcoa (NYSE:AA) reports Wednesday night, and Bed, Bath & Beyond (NASDAQ:BBBY) and Walgreens (NASDAQ:WBA) report Wednesday and Thursday. I do think Q1 ’15 S&P 500 earnings growth will be fine once again, mid-single-digit growth, since with the dollar strength in calendar Q1 ’15, there has been an extra level of anxiety added to expectations. Expect S&P 500 managements to guide for Q2 ’15 and the rest of 2015 conservatively too – what reason is there to do otherwise?
C.) Could the Treasury story be finally changing? Could the S&P 500 struggle and Treasury yields actually rise? Expect a sharp Treasury rally overnight on Sunday, April 5th, 2015 and then Monday morning, April 6th. Readers should realize that the 10-year Treasury yield has NOT made a new low in yield since late July 2012, when it traded down to 1.38% – 1.39%. The 10-year Treasury yield could be forming a long bottoming pattern.
Personally, I think we are long overdue for a deeper correction, but I thought it would come with a rise in Fed Funds, similar to 1994, and I am thinking the next 2008-type event will be in the bond markets since there is so much money packed into the short end of the yield curve, particularly the credit markets looking for yield. Bond market liquidity seems to dry up quickly, a la 2013, and it isn’t easily subject to prediction or analysis. It just happens.