All three major indices set new yearly highs on Monday, which the financial media regards as particularly bullish. One reason is that the S&P 500 has been lagging the pack. With ‘confirmation’ from the S&P, some market technicians are breathing a sigh of relief. Hummmm.
Unfortunately, we do not concur with the rationale for the enthusiasm. As the market moves higher, we are getting more cautious, not more bullish. We have two technical resistance zones in mind, one is Dow 10,500 and the other is Dow 10,800. These levels operate like the orbits of electrons around an atomic nucleus. Electrons are stable at these orbit levels and don’t spend much time in transition. Markets act the same way. If the Dow can break through the 10,500 zone, we expect it to travel to 10,800 rather quickly. Time will tell.
Pundit commentary on this week’s earnings reports is largely bullish and optimistic. Writers believe that the improved results mean that the recovery is on track. There certainly are some green shoots. The New York Federal Reserve’s survey of manufacturing activity in the state rose sharply to a 5-year high, presumably due to inventory replenishment, but perhaps more. Full Article
Yesterday we wrote that we expect a benign pullback here. On Tuesday the Dow gave back 14 points. That qualifies as benign.
Earnings season is now upon us and we expect it to be positive. Companies have had 3-4 quarters to make emergency adjustments to their business models, reduce capital expenditures, refinance debt at lower rates, cull workers, roll back compensation, pressure suppliers, improve productivity, jettison marginal operations and refocus on higher margin opportunities. Full Article
After Goldman Sachs upgraded Wells Fargo and Capital One, the die was cast for a bank-led rally and the market obliged. The upgrade was the only catalyst on the day, but it was enough. Why? Because after Thursday’s sharp downdraft, traders became bearish and the short sellers became emboldened. That psychological condition provides sufficient fuel for a counter-trend bounce. Full Article
We had some continuation of the selling on Friday, but on declining volume. The Dow was down 46 points and is testing support at the August high. As we noted on Friday, however, a slightly deeper pullback would be normal at this stage of the game (see chart below). We also wrote, “We would not get overly bearish at this point.”
After all, markets don’t move in a straight line, they inhale and exhale, they zig and they zag, they advance and then they back and fill to consolidate gains and test support. So far, that normal process appears to be underway. Full Article
September stock options expired on Friday, creating a choppy, sideways market during the day. Most of the significant options- related activity occurs during the week before the actual expiration. This time, the bears were punished, which motivates owners of put options to buy the underlying equities to offset options losses. Accordingly, the major indices were up 2.5% last week on no particular news.
This leaves the market overbought and we expect a modest correction from here. Profit taking in the Chinese stocks has already begun. The Chinese names represent the animal spirits in the market at this time; if they correct, the entire market will pause to catch its breath. Full Article
Stocks closed flatish on Wednesday after the Fed reiterated its view that the economy is getting worse at a slower pace and inflation is still “not a problem.” Full Article
Monday was a real downer. Although we were expecting the decline to our target area of 886 in the S&P 500, we did not expect it to be quite as tough on the commodity sector. Full Article
The “credit crisis” caused banks to write down about $1.5 trillion, but that is the tip of the proverbial iceberg. The real consequence of the post-bubble deleveraging is the vaporizing of about $26 trillion in stock-market value worldwide, or about half of the valuation at the 2007 peak. Full Article
To review the discussion in yesterday's report, the market is correcting some speculative excess in the Nasdaq, in commodities and in the Chinese stocks. Even if the bear market lasts 8 years, we expect to see this type of frothy behavior over and over. We want to trade it, and then "fade it," that is, get out near the top as the excitement peaks. This is simply taking advantage of an aspect of human nature that won't change. Full Article
Post to Twitter