While it’s wet and chilly in New York today, it got up to almost 100 degrees Fahrenheit in Bangkok. Still, there was a cold, dark cloud over Christopher Wood’s head as he sized up the state of financial markets from the Thai city.
The recent rotation from momentum to value stocks is probably not just a routine shuffling of portfolios, according to Wood, the Hong Kong-based chief equity strategist at CLSA Asia-Pacific Markets. His “base case” is that the rest of the U.S. market follows the dip in Internet stocks.
“You could be getting your biggest correction in the S&P since 2011,” Wood told Rishaad Salamat on Bloomberg Television’s “On the Move.”
So far, the weakness in momentum stocks hasn’t caused much alarm for Wood’s peers on Wall Street. The average forecast of 19 strategists tracked by Bloomberg calls for the S&P 500 to rise 6.3 percent to finish the year at 1,965. The figure hasn’t moved much since the start of 2014, when it was 1,955.
In 2011, the index dipped as much as 19 percent from late April through early October, the closest the market’s come to ending the bull market that began in 2009. The S&P 500 ended the 12 months flat, marking the only year the index hasn’t risen since the bottom of the bear market.
The clouds are even darker in credit markets, according to Wood.
“The real excesses aren’t in equities, they’re in the credit markets where you’re getting money lent in very imprudent ways,” he said. Easy monetary policy from central banks has “led to a revival of the same dodgy lending practices that caused the 2008 financial crisis,” he said.
Those “distorted monetary policies which ultimately will fail” in developed nations make emerging markets the best place to own stocks now, he said.
Much of Wood’s concern about U.S. stocks centers on the study of charts by CLSA’s technical analysts and the use of borrowed money to buy shares.
Data on gross margin debt is hard to come by. One publicly available tally shows margin balances at New York Stock Exchange firms slipped in March after reaching a record of $465.7 billion in February. That should not be too alarming considering the S&P 500 was setting a record that month.
However, Wood points out that margin debt is high as a percentage of total U.S. market capitalization. Using the NYSE member figures, the loans reached 0.2 percent of total U.S. market cap in January, the highest end-of-month ratio since a record in September 2008, the month of Lehman Brothers Holdings Inc.’s bankruptcy.
Another source of concern for his chart-watchers is the breadth of the market’s rally, Wood said. Looking at stocks setting new highs shows why. Only 7.2 percent of S&P 500 stocks set new 52 week highs yesterday and only 10 percent did so on April 2, the last time the index closed at a record. That compares with a high of 39 percent reached about a year ago.
The comedian Stephen Wright used to joke that he’s not afraid of heights, he’s afraid of widths. Perhaps it’s time to start being afraid of breadth?
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