Thoughts from our recent podcast interview with Jonathan Krinsky, Chief Market Technician at MKM Partners, which can be listened to in full at Financial Sense Newshour here or on iTunes here.
The stock market is making fresh all-time highs, but conditions this time around are unique, as Jonathan Krinsky, chief market technician at MKM Partners explained to Financial Sense in our recent Technician podcast.
Multiple Unique Circumstances
Bond yields are flirting with all-time lows while stocks and gold have been rocketing higher, and the current state of bond markets around the world is surprising, Krinsky said.
“It’s really remarkable just how low yields have gone,” he said. “And it just goes to show you that in markets, nothing is impossible.”
Bond prices are in a bull market going back to 1981, he added, and a bull market of that length is unlikely to die quickly.
There has been a direct correlation between bonds and equities, Krinsky said. As bond yields have gone lower, the absolute and relative performance of these high-dividend sectors have been increasing as they become that much more attractive, he added.
What’s Doing Well Now
Krinsky has been focusing on what he calls the “STUBs,” which stands for staples, telecoms, utilities, and bonds. He’s suggested sticking with this trade since early February because their relative strength is showing market leadership.
These sectors have become outperformers, partly because they’re more defensive in nature and partly because they have high dividend yields, Krinsky noted.
As of mid-July, staples, telecoms, and utilities are the best-performing sectors, Krinsky said. However, he thinks there is a bit of froth in these sectors as investors are forced into them.
Those Seeking Return Are Chasing Dividends
Sectors that pay dividends are the only ones that have broken out, Krinsky noted.
“At some point, those sectors just aren’t big enough of a weighting to carry the market materially higher,” he said.
Based on the underlying breadth and internals of the market, he does not see conditions he would expect if we were in a bear market.
Though dividend and high-yielding sectors are leading recent stock market advances, there is some underlying strength in other areas, which is why he’s held his recommendation, he said.
“Now the question is, is that enough to propel us above this 2100 level for good?” he said. “There are definitely some underlying positive themes going on, but I think it’s premature to anticipate a sustained new uptrend for the market here.”
At some point, something has to give. Some of these sectors are getting as stretched above their 200-day moving averages as the have been in the last 10 or 15 years, Krinsky noted, so in the short-term, he expects a pause or pullback here.
“Interest rates are at levels that we’ve really never seen in our lifetimes, and in many cases in history,” he noted. “That is a bit of a wild card that we can’t really compare to any time in history.”
Financials Stand Out in This Bull Market
Markets have been showing signs of whiplash in recent months as we go from risk-on to risk-off trades, and current conditions are hard to read.
“It’s always difficult to anticipate what you would do when something that isn’t happening is going to happen,” Krinsky said. “Our sense is that the defensive trades are not going to be the area at this point that carries us to the new leg higher in the market if we were going to break out about 2100 for a sustained uptrend.”
The biggest issue facing markets is the condition of the financial sector, Krinsky stated.
“I think the big elephant in the room is financials,” he said.
Based on the trend, he can’t get behind financials yet, but he noted it’s the banks, and not REITs, that are in downtrends.
“The trends are extremely bearish, particularly in Europe,” he said. “The European banks are in really bad shape technically... We would await some better trends before looking to get involved with the banks.”
Listen to this full interview with Jonathan Krinsky, Chief Market Technician at MKM Partners, by clicking here. Subscribe to our weekly premium podcast by clicking here.
