Sell Your Stocks In September, or Get Dismembered?

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I issued a warning recently about the market's direction in autumn, writing:

"Nearly to a soul (with the exception of the perma-bull cabal), my bearish, neutral and mildly bullish friends are all frustrated by the absence of natural price discovery in the bond and stock markets.

And based on the last few trading days, the 'invisible hand' might be here for a while longer. At least, until it isn't.

Besides the fundamental and economic risks, the suppression in interest rates and volatility are leading to the loss of ever more market participants -- something not in the Fed's textbooks.

Sell in September or get dismembered?"

-- Doug's Daily Diary, Sell In September or Get Dismembered? (Aug. 23, 2016)

I'll have more to say about my "Sell in September" mantra next week, but here are some additional observations for now:

* The 10-year U.S. Treasury yield is unnaturally low and has been moving in its narrowest range in a decade.

* Stocks' volatility and volumes have been artificially suppressed. The S&P 500 has seen just six daily moves of more than 0.5% up or down over the past 30 trading days. That's the lowest number since late 1995. The VIX is also just slightly above its July 2014 record low.

* The only thing that's really moving are earnings ... which are heading lower. That is, GAAP earnings before taking into account bad things like stock-based compensation, depreciation, reserves, etc. And according to FactSet, even non-GAAP earnings are declining on a trailing-twelve-month basis since peaking in November 2014.

* The Fed's policies are politically vulnerable, economically ineffective and distorting to markets. (Check out this Wall Street Journal op/ed from former Fed Gov. Kevin Warsh.)

* Traders and investors are increasingly accepting of the interest-rate distortions that have led markets to revalue stocks upward. But distortions are rarely healthy -- and if history is any guide, this will all end badly.

* Fears of possible stock-and bond-market downturns have all but disappeared. I call this the Bull Market in Complacency.

Add it all up and I see a materially unfavorable risk vs. reward for both stocks and bonds right now.

Of course, the timing of a correction and return to natural price discovery remains unknown. However, the potential downside's magnitude seems to me to justify making anticipatory moves now instead of staying reaction-oriented and waiting for a downturn.

 

Doug Kass is president of Seabreeze Partners Management Inc. 

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