Kass: Get Ready for the Fall
By Doug Kass 08/21/12 - 12:00 PM EDT
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This column originally appeared in two parts on Real Money Pro at 8:38 a.m. EDT and 9:30 a.m. EDT on Aug 21.
NEW YORK (Real Money) -- It is my view that we might now be approaching a crucial inflection point in the world's equity markets. As a result, today's column will be committed to delivering a more lengthy examination of the markets. Some of my content this morning will be transmitted from points I have previously made, and much will be new. As most are aware, I have been growing increasingly more cautious about the U.S. stock market. With the S&P 500 closing yesterday's session at about 1418, the benchmark index is near the upper end of my long-held expected trading range of 1300-1420 for the remainder of the year. It may now be time to take a variant and more negative market view. From my perch, the S&P 500 now has an asymmetric risk profile, offering more risk to the downside compared to upside reward and opportunity. My concerns are broad-based and utilize the entire pyramid of technical/sentiment, valuation and fundamental considerations. Most importantly, the Great Recession of 2008-2009 is turning out to be a life sentence of subpar economic growth.
Growing Complacency Could Lead to a Minsky Moment
There are times when the market gives the impression it is fading into nothingness. Volume becomes very low, trading ranges become very small, volatility becomes very low. Also, there is very little change in market levels, and day-to-day fluctuations are minimal. Looking back at history, when that happens, it is almost always a sign of a market high point. -- Dick ArmsThe market has risen against a backdrop of very low volume, leading the way for high-frequency trading strategies (tied to price momentum) having an exaggerated impact on stock prices. As stock prices have risen, investors have grown increasingly complacent, and many strategists and commentators have said that market participants should be ignoring the rotten volumes. Renowned economist Dr. Hyman Minsky wrote that "stability begets instability ... the more stable things appear, the more dangerous the ultimate outcome will be because people start to assume everything will be all right and end up doing stupid things." We may be at a mini-Minsky moment right now. My friend/buddy/pal Tom Lee, JPMorgan's (JPM) head strategist, was on CNBC yesterday, citing an improving market outlook based on negative investor sentiment, though he didn't expand upon his definition of negative sentiment. There are many ways to measure investment sentiment -- for instance, the AAII or the Investors Intelligence surveys and the level of retail inflows into domestic equity funds are some of the most popular measurements.