A powerful reality check on the limits of Presidential power has deflated some of the euphoric bullish expectations of investors in recent months. After hitting a new all-time high on March 1st—the day of Trump's first speech to Congress—the S&P 500 has been steadily losing steam and many are wondering just how much upside is left for the 8-year bull market in US stocks.
Jonathan Krinsky, Chief Market Technician for MKM Partners, recently joined us on Financial Sense Newshour to discuss his market outlook and why, he believes, the backdrop is still positive.
Consolidation in Progress
Despite the weakness, Krinsky thinks what we’re seeing is a consolidation. We saw an amazing surge following the election, and markets still haven’t given up even half those gains.
“We’d need to see a lot more weakness before we would consider thinking there’s any type of serious top,” he said.
The Russell Mid-Cap and S&P 500 have also been trading sideways since December. Following the election, the small and mid-caps broke out of a multi-year base, pretty much in a straight line, Krinsky noted. Since early December, they haven’t done much.
“We know markets correct one of two ways: either through time or through price,” he said. “Even though they’ve been underperforming, we would say that the action since early December is really just a time consolidation.”
The case now is that the Russell has been in a very narrow range for the past 5 months, Krinsky added. If that resolves to the upside, which few people are discussing as a possibility, it might be a setup for a move higher later this year.
“Nobody feels great when small caps are underperforming,” he said. “Often times, at major tops we will see small cap stocks start to weaken ahead of large cap stocks, as investors seek out the safety of the mega caps. But I think at this point it’s premature to say that’s what’s happening.”
Interest Rates Headed Higher
We’ve seen the 10-year Treasury stuck in the 2.3 to 2.6 range, frustrating those looking for higher rates. Now that the 10-year is back below 2.30, Krinsky’s a little disappointed himself, but he doesn’t necessarily think this indicates issues ahead.
It’s important to keep in mind that when rates moved back up closer to 2.60, a lot of the market was short bonds and positioned for higher rates, he stated.
“A lot of people felt the secular low was in for rates, and bonds were just going to be the easiest short in the world,” he said. “Of course, when everyone’s thinking one way, it often goes the other way.”
It’s important to remember we may be seeing the transition phase from a 35-year bond bull market to a bond bear. The last time we saw such a transition in the 1930s to 1940s, Krinsky noted, it took 15 years of choppy sideways base-building before rates began to move sustainably higher.
“In the big scheme of things, if this is, in fact, a secular transition in rates, we shouldn’t be surprised to see a lot of choppy, back-and-forth movement,” he said.
The 2.60 to 2.65 level is the key level to watch this year, he stated. If we see rates move above that, that would make a good argument for rates heading well north of 3 percent.
Dollar Strength to Continue, US Stocks May Play Catch-up
Despite President Trump’s comments to the contrary, Krinsky thinks the dollar is still in a primary uptrend. The 100-level on the dollar index is obviously a key resistance level, and it’s acting as support here, he stated.
Ultimately, though we may see more consolidation, Krinsky believes the dollar will move higher from here. Other major currencies are weak and comparatively vulnerable.
Most international markets have been rising in tandem with the US, Krinsky added, with international stocks underperforming US stocks prior to this year for the last 8 years in a row. There tends to be an inflection point after 7 or 8 years, Krinsky added.
He thinks this outperformance will continue.
“We think international (stocks) play catch-up to the US on the upside, and maybe that’s where the convergence comes,” he said, adding that US stocks may not see a large pullback but, instead, move sideways while international stocks gain.
Bull to Continue
From a big-picture perspective, though it’s possible the bull is dead or dying, Krinsky doesn’t see it yet.
“Given that the primary trends are still up, the onus is on the bears at this point to prove that this is something more than just a consolidation,” he said.
Many assume the bull market is 8 years old now based on the March 2009 lows. However, from a secular perspective, a lot of people argue that the breakout in 2013 is the start of the new bull market, Krinsky stated.
“There are a lot of ways to look at it,” he said. “I think that when you take a step back and look at the big picture, some of the big-term moving averages, they’re still firmly rising, so it’s very difficult to make the case that we’re at any type of major top.”
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