Rosie's market commentary from today is quite colorful, taking on both Barton Biggs (why bother) and Richard Russell as inflection point contrarians (we fully expect Barton Biggs who has now generated enough commissions for his broker to kill his entire P&L for the decade, to go bearish in about two weeks in keeping with his latest standing wave oscillation from one extreme to another). Rosie discusses a topic near and dear, namely that bonds continue to not buy the equity rally, and that the market is really not only stupid and inefficient, but wrong and overshooting most of the time. The only question is for how long can it remain wrong. And courtesy of the Fed, the answer is long, long, long. Not surprisingly David ridicules the constant lack of volume to the upside, and concludes that the rally should be faded, and that "this market is completely unprepared for 500k claims and sub-50 ISM." Obviously, he expects both to occur shortly (and just in time for Shiller to say he believe the chance of a double dip is more than 50%).
MARKET COMMENT ... WE'RE ALL CHARTISTS NOW
We’re 142 trading days into the year – 52 days (37%) have seen 1% or greater moves. And the S&P 500 is now flat as a beaver’s tail on the year. I call this the meat-grinder market. Again, a huge rally into yesterday’s close – and now the S&P 500 is sitting right at the 200-day moving average. This is starting to get interesting. Again, the lack of ratification from Mr. Bond as the 10-year note yield came back and closed the day a smidgen below 3%.
Today is a critical day. The interim peaks since the April 23rd peak have been progressively lower but a three-point rally in the S&P 500 today would break that pattern:
April 23rd: 1217.3
May 12th: 1171.7
June 18th: 1117.5
July 26th: 1115.0
We should add that we are at a new post-April high in the Dow and the NYSE (the latter is not yet at the 200-day m.a.). We're not there yet on the S&P 500 or the Nasdaq (13 points off) but we are getting close. While everyone is fixated on the 200-day moving average, we add a note of caution: the S&P 500 breached that technical threshold for a good week back in April and those who dipped their toes into the risk pool got burned pretty badly (at least for the next two months).
Now Bernanke may not be the world's best forecaster – I don't know who is. But he has the deepest rolodex, more than any CEO. And when he deliberately says "unusually uncertain" to describe the economic outlook, I find it irrational to ascribe anything fundamental to this rally. I know where you are coming from but the market gets it wrong as often as it gets it right – it was wrong to forecast a recession in the fall of 1987, again in the summer of 1998 and again in the winter of 2003. It was wrong to forecast sustained growth in the summer of 2000, a recovery in the winter of 2002, an avoidance of recession in the fall of 2007 and the end of the downturn in the spring of 2008. It may be a discounting mechanism, but the stock market has a spotty record – let's remind ourselves of that.
There is no denying that the technical picture has improved. In particular, 1040 has proven to have been major support for the S&P 500. The new high list continues to grow rapidly while the new low list is fading fast. The 200-day moving average, which looked to be faltering two months ago, is back to an up-slope for all the major averages, including the transports and small caps.
At the same time, over the past two months, yield-sensitive stocks have outperformed – which makes sense in an environment of a 3% 10-year note yield and a sub-2% yield on the 5-year note. So from what I can tell, from a sheer stockpicking standpoint, is that it probably makes sense to focus longs on companies whose stock looks well supported technically and has a decent yield (3%-plus).
I think claims above 500k and ISM below 50 will be surprises for consumer cyclicals and industrials in the next few months.
To repeat, the technical picture has improved. The data have really been unimpressive even if not horrendous. And I think we have the potential for a lot of disappointments in earnings to come as the plays on "domestic demand" are in the offing.
Some things to note. First, at the lows, perma bulls like Barton Biggs turned bearish. Now at the highs, perma bears like Richard Russell appears to have turned bullish. To be sure, the market downdraft in June was never confirmed by the transports, but did they confirm the move in the industrials to recovery highs in April.
After closing at or near the daily highs for three days in a row, you know something funky is happening in that last 30 minutes of trade. Volume is still wanting and is necessary to validate the new uptrend. The market is also hugely overbought right now. Strangely, while the breakout in industrial metal prices of late would seem to offer some ratification, the fact that the 10-year T-note refuses to break above 3% suggests that there are still some investors placing bets on a deep slowdown ahead.
It's getting interesting but I'm wondering about the efficacy of maintaining a bullish stance now after a 10% rally that is possibly about to meet resistance and a rally that was devoid of volume, which is any equity market rally's vital backstop, and devoid of validation from the bond market. If this test of the 200-day m.a. fails, and I'd give it a few days since that would be prudent, I would be tempted to get more defensive – this market is completely unprepared for 500k claims and sub-50 ISM.