This note was originally published at 8am on December 20, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Nothing is more obstinate than a fashionable consensus.”
You’d think that some of the sell side’s finest would have learned something from being unanimously bullish on the US stock market in December 2007. Think again. It’s December of 2010 and, after a few minor bailouts and major bonus seasons, the bulls are back.
Don’t wince. Without a Fashionable Consensus, how else would we generate long term absolute returns? This weekend’s edition of Barron’s “Outlook For 2011” may be one of the finest gifts of Groupthink that we’ve been offered in years.
As Barron’s themselves reminds risk managers (not in the cover story article), the SP500 has only seen double-digit gains for 3 consecutive years twice since World War II (1951 and 1994). Looking at the bullish 2011 predictions for US stocks that way, maybe consensus is contrarian!
Will 2011 mark a 3rd year in a row of double-digit gains?
Well, let’s go through that…
Let’s start with a level. My immediate term TRADE zone of resistance for the SP500 into year-end is 1249-1256. Giving year-end bonus and mark-up season the bullish benefit of the doubt, let’s use the top end of that range and round the number up to 1256.
Since a +10% or better gain in the SP500 for 2011 (versus 1256) = 1382, let’s take a gander at who is more bullish than that:
- Deutsche Bank = 1550
- Goldman Sachs = 1450
- JP Morgan (formerly known as partly Bear Stearns) = 1425
- Barclays (formerly known as Lehman) = 1420
- Bank of America (formerly known as partly Merrill) = 1400
Now, to be fair, we’ll need to provide some disclosures (it’s a sell side thing)
*the aforementioned 2011 targets are from last week’s Bloomberg survey and subject to revision
**some of these estimates are the mid-point of Big Broker’s internal range (that’s a CYA thing)
***some estimates are from economists and bond strategists (yes, on Wall Street, cops are sometimes firefighters for commission)
The only person we can find who is more bullish than Binky Chada at Deutsche Bank isn’t a sell-sider, but he was equally as Bullish As Binky back in 2008. Don Luskin called for a +30% move in US stocks when I debated him on Kudlow on Friday night. Luskin’s made for YouTubing estimate implies a +377 point move in the SP500 to all-time highs in 2011 to 1633.
Now let’s not get caught up in what’s going on in the rest of the world this morning (Global Growth Slowing, Inflation Accelerating, and Interconnected Risk Compounding). Chinese stocks closed down for the 4th straight session to -13% for 2010 YTD and the CRB Commodities Index level of 320 is +25.5% inflated since the beginning of July.
Per the US stock market centric bulls, these interconnected global economic realities don’t matter, until they do.
Let’s get back to the US stock market’s 2011 Fashionable Consensus and dig a little deeper into its tapestry.
- Everyone loves Tech
- Everyone (except Doug Cliggott at CS) hates Healthcare
- Everyone has no short ideas
Most risk managers realize that doing what everyone else is doing isn’t a great idea (especially if you want to charge your clients 2 and 20). That’s why I’m short Tech (XLK) and Industrials (XLI) going into year-end. Both are reaching extreme levels of being intermediate-term TREND overbought.
I’m bearish on US Equities (SPY) and US Bonds (SHY). I’m bullish on the US Dollar (UUP). As a result, I’m bullish on building up a large cash position as we head into what I think is going to be at least a 7% correction in the next 3-6 months (SP500 downside target = 1168).
No, I’m not reckless enough to give you my “year-end target” for the SP500 (that’s what unaccountable Big Brokers do). But I will tell you what I think every day between now and then. I’ll tell you what my upside/downside probabilities are across my 3 investment durations (TRADE, TREND, and TAIL), and I’ll take a long or short position that I’m accountable to.
If I’m wrong on US Equities in the next 3-6 months, I think some combination of the scenario laid out by Jeff Knight at Putnam (buy side PM) and Doug Cliggott (ex buy-sider at Credit Suisse) has the highest probability. Upside in the SP500 to the 1325-1350 range with the two sectors that I think auger best to an environment of US style Jobless Stagflation (Energy and Healthcare) outperforming.
My immediate term TRADE lines of support and resistance lines for the SP500 are now 1236 and 1249, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer