Paris Won't Sink Stocks, but Technicals May
"We are going to wage a war that will be pitiless."
-- French President François Hollande, following Friday's Paris terrorist attacks
I shared my views over the weekend about the terrible events in Paris, writing:
"The horrific events of the past 24 hours speak for themselves. Terrorism -- like the horror we experienced 14 years ago on Sept. 11 -- cannot be measured or quantified in market or economic reactions; it is simply a troubling reminder of a constant risk to a civilized society.
"Unfortunately, this is the 'new normal.' There is a sense of hopelessness that has descended over Paris and the rest of the free world.
"On a more personal level, Friday's horrible events opened wounds that I have shared with all of you before (and that many others have suffered, too) in the loss of Chuck 'Brown Bear' Zion to al-Qaeda in 2001. It makes me sick beyond measure."
-- Doug's Daily Diary,The Constant Risk of Terror(Nov. 14, 2015)
Without being disrespectful to those the Paris attacks impacted, I'll be sharing my take this morning on what the incident will likely mean for investors. To begin with:
- The horror in Paris complicates the picture for Wall Street.
- I don't expect a meaningfully adverse response by global equity markets to the awful terrorist attack. Indeed, it's not entirely out of the question for stocks to trade higher over the next few days in response to the attacks, which could galvanize the world's resolve against terrorism.
- I am back to market neutral.
Factually, 2015 has been a year in which:
- Large-cap stocks have outperformed small-cap ones.
- Growth stocks have outperformed the cyclical sectors.
- Developed markets have outperformed emerging ones.
- Investment-grade debt has outperformed the high-yield market (i.e., "junk" bonds).
Most importantly, I remain of the view that Wall Street established an important market top back in May, and that most equities are transitioning from a six-year bull market into either a bear market or a meaningful, extended correction.
But unlike market bottoms, market tops usually involve a process -- with tests to both the upside and downside, as we've witnessed so far this year. And in the late stages, the topping process usually sees the market's "generals" holding up (like the TFANGs), while the "soldiers" are wounded (or worse). That's been the case so far this year.
Alphabet (GOOG) - Get Report (GOOGL) - Get Report , Amazon (AMZN) - Get Report and Facebook (FB) - Get Report have all been the standouts, but even they began to show signs of some wear and tear late last week. If you look closely at the three stocks' charts, the recent price action appears to look more like "exhaustion gaps" than the beginning of a new up leg. (And if the recent gaps get filled, I'll be even more confident of that.)
Amazon's rally recently moved founder Jeff Bezos up to the No. 4 slot among the world's richest people. Such headlines -- like the ones we saw in 1999 when a Microsoft (MSFT) - Get Report rally made Bill Gates the world's richest person --- usually occur at major market tops.
As for the "apple of everyone's eye," Apple (AAPL) - Get Report has continued to underperform its growth brethren since hitting a May high. While it briefly experienced strength in the October rally, that proved short-lived.
Finally, the number of large-cap leaders is narrowing vs. what we saw in previous 2015 rallies. For example, leadership in health care has fizzled.
On the other hand, we've been seeing weakness in industrial stocks and basic materials (which involve depressed commodities). However, this group has begun to experience improving relative performance, with most stocks trading above their late-August lows. And in the case of the energy sector, stocks are trading far better than the underlying commodity (oil prices hit another new low on Friday).
Turning to the fixed-income markets, the high-yield markets continue to look "junky." This sector remains in a well-defined downtrend and is now threatening its September lows. But as I've written previously, a weak high-yield market has historically led to equity-market declines.
In summary, the technical conditions are pointing to market weakness ahead.
Editor's Note: This commentary originally appeared on Real Money Pro at 8:59 a.m. on Monday, Nov. 16. Click here to learn about this dynamic market information service for active traders.
At the time of publication, Kass and/or his funds had long or short positions in AAPL, FB, NFLX and TSLA, although holdings can change at any time.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.