For the past 5½ years, no one has been as steadfastly bullish as Craig Johnson.
In August 2012, the chief market technician for Piper Jaffray called a new, long-term bull market for the stock market in which he said the S&P 500 SPX, +0.30% then trading around 1,400, could hit 2,000.
It was an outlandish prediction. Many of today’s most bullish investors were then on the sidelines, grumbling about government debt and the “phony” rally engineered by the Federal Reserve.
But the S&P has almost doubled since then. Whenever I checked in with Johnson over the years, he remained bullish, and recently predicted the S&P would hit 2,850 by the end of 2018.
But on Wednesday, this perennial bull put out a note to clients called “Entering the Danger Zone” in which he wrote: “We are raising cash in the model portfolio as 10-year bond yields are entering the danger-zone (2.60%-2.70% range)… We are concerned that the reversal of a 31-year downtrend in 10-year bond yields in the U.S… may spill over into stocks.”
“We believe this secular bull market will likely endure a healthy correction over the near-to-intermediate term.”
How “healthy”? Perhaps 20%, Johnson told me when I caught up with him late Wednesday.
“We think that, while the secular bull market is still going to be there, a potential setback or a very meaningful correction is starting to unfold,” he told MarketWatch.
Johnson explained that the S&P would have to correct between 3% and 4% to get back to its 50-day moving average and close to 10% to return to its 200-day moving average, two key indicators technicians use to measure short- and intermediate-term support for stock prices. “If you were to come back and retouch the highs of where you were back in 2015, you could be close to 20%,” he explained. That would drive the S&P down to around 2200, a painful 500-point-plus decline.
What’s causing his jitters is the rise in yields (and decline in price) of the benchmark 10-year Treasury note TMUBMUSD10Y, +0.25% That has also gotten the attention of Bill Gross, now of Janus Henderson, who on Tuesday declared a new bear market in bonds had been confirmed.
“Gross is correct,” Johnson told me. “Just drawing that down trend resistance line off that 1981 high gets you right to about a 2.60%, 2.70% level.” A sustained move above that yield would break the 36-year down trend line (the 10-year note’s yield peaked at 15.8% in July 1981 and bottomed at 1.37% in July 2016) and thus the generational bull market in bonds—and low interest rates.
“You think about all the things that have changed in this financial market since 1981, and everything has been basically geared toward lower rates,” Johnson said. If it’s truly unwinding—and we’ve seen some spikes in 10-year yields in the past that have ultimately reversed themselves—that would be, Johnson said, “a big deal.”
Investors certainly haven’t priced in a big move up in interest rates. Complacency is high and volatility surreally subdued. Investors are taking one new high after another for granted.
“One out of every four trading sessions in 2017 was an all-time new high,” Johnson said.
That’s a jaw-dropping statistic.
Johnson thinks we’re just moving into the market’s euphoric stage. “There is euphoria, but it’s not off the charts,” he told me.
He still believes stocks will recover nicely after any selloff and go on to hit new highs.
But he thinks the rise in bond yields is so important that he’s advising clients to reduce exposure in their equity portfolios to 85% from 95%. That still sounds like a lot, but “this is the first time I’ve had this much cash in the model probably since 2008,” he told me.
This column was prematurely bearish as stocks soared throughout 2017 and into the new year. But I think caution is warranted in view of the frothy sentiment and the absence of any meaningful correction since February 2016.
Such a correction is long overdue, and if Johnson is right, it could be a doozy.
Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers exclusive market commentary and simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.