Thursday, September 10, 2009

Of Resistance And Reactions

Markets look like they want to extend. Albeit in a very fractured manner and on very low volume. I had expected quite an expansion in volume this week. It hasn't arrived.

Many bearish commentators are looking for a 'catalyst' in order to get stocks moving lower again. This is backward. There are catalysts every day. Yesterday's consumer credit numbers were terrible (good for consumers, but bad for a credit based economy.) International capital requirement standards have been making the rounds as well - in conjunction with IASB and FASB accounting changes for banks. Trade tensions have been heating up between China and western nations.

The difference between these 'catalysts' and the ones being talked about by "the bears" is nothing more than market reaction. A catalyst is only catalytic if the market reacts to it. Otherwise it is ignored. Hence it is not the catalysts we need to be watching for. Only the reactions.

Nobody in their right mind would even attempt to justify weighting a 10,000 person difference in weekly unemployment claims higher on a scale of importance than a $20 Billion dollar drop in monthly consumer credit figures. But if the market is higher after the release of such information, you can bet your bottom dollar that the financial news media will credit the former as cause for the rally.

Social mood is at euphoric highs if one were solely focused on the financial world. But pessimism abounds on Main Street. This can be seen in presidential approval ratings, assessments of the current job market, and consumer confidence. Bulls will point to this as fuel for a continuation rally, as they claim these retail investors are "underinvested" in equities. Such claims are, of course, way off base. They are made simply by looking at historical participation rates, noticing that they are below the upward trend of the past 30 years and suggesting they must move higher. This does not take into account that perhaps retail investors are not buying stocks because they've decided their rate of saving has been way too low for over a decade. Perhaps they've decided that paying over 10% of their incomes for debt servicing costs is too much for them, and they'd rather pay back the debt than attempt to outpace it with gains in the stock market. Perhaps these retail investors see the growing federal debt and sensing a higher future rate of taxation, they are setting aside cash for such an inevitability.

Optimism may reign on Wall Street, but I don't think Main Street will play "catch up" anytime soon - as most analysts are expecting. But I would warn readers not to underestimate the potential of Wall Street euphoria to continue even longer than most would rationally expect. Remember back to the late 90s. Most respected market analysts had correctly identified the Nasdaq bubble as such in the lead up to the Asian Financial Crisis. The Naz managed to double from those levels. China did the same between the spring and autumn of '07. Most of those who were correct about the '07 US market top were also those who had called the entire advance from '03 "illegitimate." It took them 4 years to be proven correct. How many would have told you that there was even the slightest possibility of a multi-year rally if asked in early '03?

That said, this market looks toppy, sloppy and choppy. A perfect recipe for a top - or a failed retest of resistance leading to new highs. Is the mood ready to shift on Wall St?

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless yet be determined to make them otherwise." -- F. Scott Fitzgerald

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Anonymous said...

Maybe it was a US thing in 2003 - I read of a lot of people who were short then. I was in Canada and was bullish, though also, the TSX far out-performed the DOW/S&P-500.

I pulled out of stocks in the fall of 07. I knew I was 'early' but saw no point chasing what would turn out to be another 0.5% and thus avoided losing 40% in the process.

I foresaw the Nasdaq bubble bursting with in six months of its initial plunge.

The momentum of this rally, however, has me flabbergasted. I know it will blow up again, but I don't know when. My guess is some time between the week after this triple-witching and July of next year. So no point in trying to short for me.

There's an ideological war going on that I won't get into here but the latest income stats show that the claim that 'a rising tide lifts all boats' is a crock and these bailouts have disproportionately preserved the status quo for the uber-wealthy at the expense of pretty much everyone else. They can't afford to lose. But as every former 'economic miracle' whether it be Ireland, the Baltic Tigers or Iceland or elsewhere have shown, it can't go on forever.

Occdude said...

Thats my feeling Anon. This market has "jumped the shark" as far as a mere technical bounce, yet has NO fundamentals to justify more upside. I think we go sideways here, hit a few inflection points ie.Dow 10000 gold wimply above 1000. Then we see whats, what.

The problem is at some point you will see a big rally before the crash due to the fact that the "sideline money" will have to be compelled to jump in with both feet. That may require a change on main street from pessimisim to optimism. Usually the retail investers are the last to the party before a major move down.

The only thing that would change the publics mood would be decreasing unemployment and rising home prices, which appears to be happening in baby step type fashion.

We need to watch this market. A sideways move with a moderate correction would actually set the stage for a pretty decent end of the year rally. However, continued euphoric rise without a breather would indicate "bad things this way do come".

mike.montchalin said...

Debt is debt.
Losses are losses.
Taxes are taxes.

I can't belief depressing facts can produce euphoria beyond the end of the third quarter.

Anonymous said...

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Mike said...

I like how you present both the bullish and bearish views. But because of the govt money printing and intervention I feel it's going to be more difficult than before to make money on the short side going forward. I think the better opportunity remains in gold and gold mining companies, particularly some of the junior miners who are more highly leveraged to the gold price.

So in my opinion, one of the few ways for those of us who understand the severity of the problems to protect themselves from the risks still remaining is to invest in gold related assets, because gold should continue to benefit from the Fed's Keynesian efforts to prevent any type of deflation from occurring. I recently read some good articles on these topics at that I think are useful for investors to read. They go into detail discussing the inflationary consequences of all the money printing, as well as the potential effects on the dollar, on gold, and on the prospects for the world economy.

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