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Doug Kass says Bull Riders may be in for some rough riding – but the big picture is positive.
“The consequences of worshipping at the altar of price momentum can be punitive to the recently converted. One has to look no further than the recent downturn in gold shares and in the metal commodities, both of which became overowned and overbought asset classes. “
Here is what Doug Kass thinks could whiplash recent converts:
* The McClellan oscillator is way overbought.
* RealMoney’s Harry Schiller pointed out that the downtrend line for the S&P from the November 2008 and January 2009 highs shows resistance at 850.
Importantly, my early March variant view is no longer so.
The consequences of worshipping at the altar of price momentum can be punitive to the recently converted. One has to look no further than the recent downturn in gold shares and in the metal commodities, both of which became overowned and overbought asset classes.
Several other fundamental and technical factors could conspire to contribute to a period of market uncertainty and a healthy several months of backing and filling.
* First-quarter earnings reports will be poor and guidance mixed to bad.
* The success of the Federal Reserve programs, which seek to ring-fence toxic bank assets, will not be known for a few months.
* A still levered and “tapped out” consumer could pause in its spending (after demonstrating sequential improvement in the first three months of 2009), even despite the benefits of lower interest rates and massive fiscal stimulation. This could jeopardize GDP growth forecasts, delay the domestic economy’s recovery and result in even lower-than-expected corporate profits in 2009.
* Capital raises (especially of a financial kind) may lie ahead. Already, the REIT industry has embarked upon an industrywide recapitalization.
* Interest rates are starting to rise, providing some competition to stocks.
* The always-present fear of an exogenous event.
* Volatility remains elevated.
Weighing against the near-term consolidation argument is the historically significant improvement in the market’s internals and breadth of the rally, with six 90% up days in four weeks, reflecting an abrupt change from the fear of being in to the fear of being out and left behind.
Regardless of whether a near-term consolidation is in the offing, volatility will remain heightened, and my formerly implausible S&P forecast now seems plausible.
Similar to The Little Engine That Could, the U.S. stock market appears positioned for further progress, and my mid- to late-summer destination of S&P 1,050 remains on target.
