NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Last week, Kass wrote about July-through-August market tops and an expected gradual rise in interest rates.
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It Is Not Different This Time
Market tops are nearly always marked by slowing volume, a low in volatility, technical weakness, breadth divergences and a contraction in new highs. Also, July through August is a historically toppy period.
This time may be no different.
- Ever-weakening volume points to a sign of structural market weakness.
- Overall market volatility remains low, but the volatility in individual stocks is expanding -- historically the sign of a coming increase in general market volatility.
- Over time, strengthening breadth is a mainstay of support to markets, but breadth is now weakening. Since early July, the many new highs in the senior averages (DJIA, S&P 500 and Nasdaq) have not been accompanied by new highs in the advance/decline line -- a possible precursor to a lower U.S. stock market.
- Within competing indexes, the overall strength in larger-cap issues (S&P 500 and DJIA) has not been confirmed by the small- and midcap indexes (Russell 2000, etc.). The latter indexes are lagging and experiencing narrowing breadth. Maturing and late-cycle bull markets are often characterized by a rising emphasis on large-cap companies such as Microsoft (MSFT) and Intel (INTC).
- Despite the recent highs, since July, NYSE 52-week highs have steadily contracted, and the percentage of stocks under its 200-day moving averages now exceeds 30% (up from 16% four weeks ago). Again, late cycles are often characterized by narrowing interest and emphasis on large-cap blue chips.
- As mentioned in last week's column, the July-through-August period often represents cyclical market tops.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
The yield on the 10-year U.S. note is close to 2.50%, an out-of-consensus view seven months ago and now at the bottom end of the yield range for 2014 (2.50% to 3.00%) that I had forecast in my "15 Surprises for 2014."
I expect a gradual rise in interest rates over the next 12 to 18 months. (Note: A slow rise will not likely have an adverse impact on my closed-end municipal bond funds; if it does, I will add more.)
I expect 2.75% to 3.00% by year-end 2014 and 3.50% to 4.00% by year-end 2015.
It should be emphasized that the reasons why rates will not spike this year have little to do with the growth of the U.S. economy:
- China, Japan and European central banks are tactically trying to reduce the value of their currencies with U.S. dollar purchases.
- The relative yield spread in U.S. vs. Europe notes and bonds.
- Inflation remains subdued and is not likely to erupt over the next year.
- U.S. pension plans are likely to rebalance out of appreciated stocks into bonds in order to immunize their portfolios relative to their benefit requirements.
- The yield curve, on the heels of U.S. zero interest rate policy, is already steep.