One week ago we were surprised to read that, in Tom Lee's 2017 market outlook, Wall Street's formerly most vocal cheerleader and its most prominent permabull had unexpectedly turned into one of the most skeptical bears. As a reminder, at a time when virtually every other Wall Street strategist, even the quasi skeptics, are convinced the market is going nowhere but higher, Lee now expects that the S&P 500 will finish the year virtually unchanged at 2,275, and roughly 3% lower than the median sellside forecast. His caution is the result of concerns about policy risk and a yield curve adjustment, which he sees translating into an S&P 500 decline to 2,150 by mid-year before a modest second half rebound.
"The bond market is signaling inflation confusion and a flattening long-term yield curve" Lee said, adding that this generally leads to a 5 to 7% selloff. He warned, however, that while "the bond market is less enthusiastic about the reflation trade than equities - since 1977, a flattening of the long-term yield curve sees equities weak over next 6 months— given the potential for a large rotation into stocks, equities could rally throughout 1H."
However, the main reason for Lee's skepticism is not so much fundamental as technical.
In a slide in his latest market report, Lee notes that traders and market participants have been "lulled" into complacency by the near collapse in drawdowns, as 2016 was the year with the fewest number of days that saw the S&P drift more than 3% away from 52-week highs. From Lee's observations:
- 2016 (we do 2016 after 2/11/2016, since early part was a continuation of 2015 selling) saw only 7 days - that is the lowest ever.
- And as noted below, the 4 years (2013, 2014, 2015, 2016) saw the S&P 500 trading so consistently close to 52-week highs - in fact, this is even more calm than the 1994-1999 period and at the time, the S&P was enjoying one of its best return periods ever.
To be sure, with VIX nearing a 10 handle again, and on the verge of record low single-digits, one wonders how much more complacency can this market take, especially if, as we showed on Friday, Dow 20,000 has become a virtually impenetrable resistance level, and it has now been one month since Bob Pisani said Dow 20K is "inevitable."