Patrick Nipper of Renaissance Macro Research joined the Financial Sense Newshour as the weekend technician (click here for podcast), and said that risk indicators and seasonal trends warrant caution; however, credit markets aren’t showing any danger signs and still support the market’s current levels.
Over the past month, the market has weakened slightly with investors pulling back on speculative areas of the market—IPO’s and small cap stocks—and rotating slightly more towards safer large-cap issues and undervalued sectors.
Patrick Nipper believes we are seeing a "tactical consolidation and not a major top" with credit markets still showing signs of strength.
One major indicator his team uses for assessing the health of the market is corporate bond spreads relative to Treasuries. Once you start to see this measure break down, that’s when you know there’s potential problems ahead. Right now, Patrick notes, it’s still supportive of the market’s underlying structure and not flashing any warning signs as it has in prior market tops like 2007 (see chart below - credit spread in red, S&P in black).
In addition to credit market health, Patrick said he’d be more concerned if gold was showing more strength in a broader move towards risk-off, which hasn’t occurred, calling gold’s recent move more of a “technical bounce” from oversold levels.
When asked how the market may react if economic data starts to pick up into spring and summer, Patrick commented that “sell in May and go away” is actually “extremely effective,” and may put pressure on the market until later in the year towards fall, which is when the market traditionally starts to do well.
Overall, Patrick summarized his outlook by saying:
“As long as we see BBB spreads holding up and as long as we see, essentially, credit giving us a supportive indication for the market, then I’m pretty comfortable with the viewpoint that the market is just churning itself around a little.”
