Market Messages from the Outer Fringe
Setting the Stage for Epic Disappointment in 2010(?)
As the bullish headlines continue to sway the masses that hope springs eternal, and that global economic recovery lies directly ahead, the outlook in our view for 2010 remains highly uncertain. In the weeks and months ahead, while it will be key to track a number of tried and true leading economic indicators, we also like to look below the surface as some of the lesser follow economically sensitive gauges. Call them - indicators of the outer fringe.
With the S&P 500 up more roughly 50% from the March lows and sporting a price-to-earnings (P/E) ratio of 18.37, the market is clearly no longer cheap as the low hanging fruit has been plucked by Mr. Market.
While 2009 is the year of the Ox according to the Chinese calendar, it would seem that renaming it to the “year of fat tails” would be more appropriate. We have witnessed many events this year that one does not typically see on a day to day basis. For example, how many times does one witness the S&P 500 losing more than half its market cap? There have been times in the past where the S&P 500 will lose 50% of its value, though a decline of that magnitude typically takes place over years. The sell off that occurred in 2008 and into 2009 was truly a generational decline, not only in terms of its magnitude but also its ferocity.
The quiet interludes, the ones without the heavy drama of wide swinging market days, these can often be just as nerve wracking as the fast trending markets. To some degree, from an analytical point of view, the one benefit that we find when volatility is high is that normally markets are trending strongly in one direction. At times like that, the trend is always your friend, and experienced traders know to basically use counter trend movements to initiate new positions in the direction of the basic trend.
The above quote comes from Mark Twain, the pen name for American author and humorist Samuel Clemens. While it is true that no point in time is exactly the same as another, there can be some uncanny resemblances that, as Mr. Twain pointed out, appear to mimic the past.
Dollar Breakdown
Are you diversified?
It should not come as a huge surprise to investors to see the US Dollar break down. Over the last few months, the Bernanke Fed has been creating new dollars at a rate that would rival the Central Bank of Zimbabwe. While many in the Deflation camp point out that these Dollars are not being lent out, the increase in Dollar supply has been unprecedented, and to that end, I’m not surprised to see the greenback breaking down.
Yes, we know, could the title of today’s article be any more provocative? Surely we have lost sight of the fact that stocks have already enjoyed a huge advance with the S&P up nearly 56% from the March lows at the recent high near 1040. Surely, we recognize the huge swing to bullishness that has taken place within the recent sentiment polls, a development that always suggests the imminent death of a major rally. Or does it?
Having been out of town on vacation last week, we return to Los Angeles to find the markets at a most interesting juncture. As it happens, we see a number of potentially major turning points shaping up in the days just ahead. In today’s somewhat abbreviated update, we walk investors thru our take on some of the key capital markets.
Early last week, Gary Dorsch wrote a timely article titled: "Chinese Red-Chips Show Signs of Fatigue." In his article, Gary pointed out the parabolic move in the Shanghai stock market and signs of a possible reversal. I especially liked one of his charts (below) that discussed the psychological underpinnings to the reversal because that's what charting is—the sum of mass psychology.
The rally off the March lows has been something to behold with the S&P 500 up more than 45%. The market has climbed a wall of worry as many financial pundits were repeatedly looking for a market top for the bear trend to continue or a significant pullback to at least offer them a chance to reenter the market.
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