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 a bull market in complacency and a year-end prediction for 10-year U.S. note yield.
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Risks for an Early Fall
We are now five weeks into the rally from the August lows.
Cyclical stocks, housing and industrials (which rallied in 2013 when valuations seemed expensive and profits foundered) have begun to underperform (as valuations seem inexpensive and as profits outpace price gains). This is the nature of these groups (they tend to discount results in advance) and is also evidence of an aging bull market.
As mentioned last week, divergences have developed, mainly characterized by lagging breadth and new highs on the Nasdaq and in small-cap land. Thus far, this has not produced a marked trend change in the market, as the favoring of large-caps has been overcome by rotational moves.
Meanwhile, most gauges of investor sentiment (AAII bulls/bears, flows into long-only funds, etc.) have moved into the excessive bullish arena and have reached levels last seen in late 2013, before the January 2014 correction.
Strategists are nearly unanimously bullish, as evidence by Barron's' recent cover (see below) and cover story (subscription required).
Bottom line: We are in a bull market in complacency.
- Few are considering a correction in excess of a few percent.
- Investor expectations are elevated.
- Momentum is waning in the face of growing divergences.
- New IPOs are growing larger (e.g., Alibaba) and more numerous, sopping up potential demand.
- And the U.S. stock market is growing overbought.
While continued rotation and market selectivity might continue to buoy stocks, market risks are accumulating for the September-October period.
At the time of publication, the author was long QID and short QQQ.
10-Year Yield Watch
I began the year with the (minority) view that the yield on the 10-year U.S. note (at 3.03%) would range between 2.50% and 3.00% in 2014.
The yield "overshot" to the downside and bottomed at 2.33% in late August.
Despite protestations for lower interest rates (from many who saw higher rates eight months ago), the yield on the 10-year U.S. note is climbing further this morning and is approaching 2.60%.
As I suggested when I put ProShares Short 20+ Year Treasury (TBF) on the Best Ideas list at $27.21 two weeks ago (now trading at $28.32), I expect the 10-year U.S. note yield to approximate 2.75% at year's end.
I view my short bond position as a multiple year play.
At the time of publication, the author was long TBF.