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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