Daily State of the Markets

Will Slow and Steady Win the Race?

Good Morning. Up until just recently, the bulls' battle cry had been three simple words: "Better than expected!" In short, for the better part of the last month, the economic data for the good ol' USofA had been coming in above consensus expectations. To anyone paying attention to such things, this steady stream of strong reports suggested that the country's economy might actually be better than the bears had led everyone to believe. And as a result, stock prices have been adjusted to higher levels.

Publishing Note: I am traveling early Friday and Monday and will not publish a morning report. Daily State of the Markets reports will return on Tuesday.

My Crystal Ball Rant

With stocks having effectively moved sideways for the past eight sessions, the question of the day is which way we go from here. The bulls will argue vehemently that the bears have had ample time and opportunity to get something started to the downside - and have simply failed to do so. Yet on the other sideline, our furry friends are quick to counter with the argument that yesterday's economic reports poke a big fat hole in the bull camp's thesis.

While we could spend the rest of our time together this morning sifting through the tea leaves and trying to come up with some sort of prognostication that I might later find a way to hang my hat on (remember, if you are going to play the prediction game in this business you can predict what or when, but definitely not both!), long-time readers know that I simply don't make predictions.

What Price Confidence?

I wrote last week that, in my humble opinion, the Fed's intention to keep rates at "exceptionally low levels" for a length of time that surprised just about everyone, was aimed primarily at helping to build confidence in the American economy. Bernanke appears to have learned that when consumers are confident, they buy more stuff. And when more stuff gets bought, companies tend to hire more people. And when companies hire more people, everybody is happy.

Although there are those that fear Bernanke & Co. see something in the economic data the rest of us don't, I'm of the mind that the Fed chairman's fear of a deflationary spiral is another big part of the equation here. So, another thing the FOMC has learned is that if you push rates down far enough, the prices of things like oil, gold, steel, and just about all other commodities for that matter, tend to rise. As do stock prices. And since higher stock prices tend to lead to higher confidence, well, you get the idea.

Is There a Hole In The Thesis?

Good Morning. Investors dressed in fur these days have likely been both surprised and dismayed by the S&P 500's recent 6-week joyride to the upside. For those keeping score at home, the venerable stock market index has now finished higher in 7 of the last 9 weeks. Since the most recent uptrend began on December 20th, the S&P 500 is up 9.2%. And since the crisis low of October 3rd, the market is up an impressive +19.75% as of Friday's close. Not bad for a market where the sky was supposed to be falling!

In speaking with a colleague recently, a colleague who is most definitely not a supporter of the bull camp these days, I was challenged to produce the drivers of the bulls' recent run for the roses. And as my friend quickly pointed out, "just because" is not an answer. I responded that since the primary objective of my Daily State of the Markets report is to identify the drivers of the market action, he might want to read this morning's missive.

Let's Get Sentimental

Good Morning. Anyone who takes the study of the stock market seriously undoubtedly spends at least some of their time with sentiment indicators. For example, sentiment models and indicators account for 15% of our daily risk management work and 10% of our weekly work. So, while market sentiment is obviously not nearly as important as trend, momentum, breadth, or fundamental indicators, it is something to pay attention to - especially when the mood of the market reaches an extreme.

It is said that the public is always wrong at market turns and that it often pays to go the opposite of what the public is doing. The thinking here is that by the time the investing public is really feeling good (or bad) about the stock market, the majority of the move has already occurred. As such, there are those that love to invest in a "contrary" manner to whatever the prevailing sentiment is at the time. However this is really a misnomer as it is important to recognize that the public is always "right" during the middle of trends. It is only at important turns that the majority are left behind fighting the last war.

It's Really About Confidence

Good Morning. Anyone holding short-term interest-bearing investments over the past few years knows all too well that cash has been trash as far as trying to generate any kind of income or growth goes. With interest rates at historic lows, the incentive has been to borrow money as opposed to saving money in traditional vehicles. However in all fairness, the Fed has felt that trying to avoid a global depression probably outweighed the fact that savers and folks living off of interest-bearing investments have had a tough time lately.

Yesterday's much anticipated FOMC meeting and accompanying news conference was considered important to investors of all sorts as Mr. Bernanke was expected to tell the world how long ZIRP (zero interest rate policy) was going to stick around. After reading the report and listening to the news conference, perhaps the biggest message to be taken from the Fed's newfangled targets and communication tools is that cash is going to continue to be trash for quite some time yet.

Barrier To Entry

Good Morning. It is safe to say that investors of all shapes and sizes found 2011 to be a very frustrating year. It didn't matter whether you employed a buy-and-hope approach or an active trading strategy; the bottom line is it was a rough ride. And although the action in 2012 appears to be diametrically opposed to that seen during the last six months of 2011, there is a certain contingency of investors that remain frustrated all the same.

With the market off to one its best starts in years, you might expect stock investors to be a happy lot these days. And truth be told, I did sense that CNBC's guests in the last hour of yesterday's trading did seem to sport an almost giddy attitude as suddenly there is something for analysts and fund managers to talk about besides whether or not the Eurozone is going to go down in flames. But for many investors, particularly professional money managers, the newfound uptrend presents its own set of problems.

A Costume Change?

Good Morning. Although the stock market is overbought and due for a pullback, my current working thesis involves the idea that the market made a costume change on December 20th. Suddenly and without warning, the uber-violent environment in which intraday moves of 3% were common stopped. And then starting on December 21st, something that investors hadn't seen in nine months returned to the corner of Broad and Wall - some sanity.

Thus, it appears that the Dr. Jekyll and Mr. Hyde market that ran amuck for the better part of 2011 has morphed into a good old fashioned, non-news-induced, non-HFT, fund-buying-driven uptrend.

To Believe Or Not To Believe?

Good Morning. Stocks finished with impressive gains last week and have now been higher in six of the last eight weeks. Don't look now, but the DJIA is less than 100 points from last spring's high water mark for the current bull cycle, which began on 3/9/09. The steady uptrend stands in stark contrast to the uber-violent, up-one-minute-down-the-next environment that had existed for the prior five months. And for those of you keeping score at home, the much-vaunted VIX has fallen 62% from its recent panic-induced highs. As such, the question of the day is if one can actually believe in the bull's latest joyride to the upside.

Perhaps the most striking change in the market since the bulls really took hold of the game on December 20th has been the disappearance of the extreme volatility. As you will likely recall, from August through late-December, stocks displayed a tendency of making huge moves - in a straight line - within a matter of days, only to reverse on any news out of any European leader, newspaper article, and/or rumor blog. But for the last month, the insanity has dissipated as stocks have moved in a not-so violent fashion and we've seen nary a single 3% plunge on rumors originating from across the pond. It's almost as if somebody pulled the 10 big players in HFT into a room around the holidays and said, "Enough!" So, after being bludgeoned by the HFT boys for months, one also has to wonder if the reduced volatility is to be believed.

A Different Kind of Decoupling

Good Morning. There seems to be some confusion about the idea of the U.S. "decoupling" from the European debt crisis. The bears argue that there is simply no way in this globally connected world, for the U.S. economy to effectively decouple from the rest of the world should a global recession rear its ugly head again. But on the other side of the aisle, the bulls contend that their counterparts are focusing on the wrong issue.

Publishing Note: I am traveling the rest of the week and will publish Daily State reports as time permits.

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