The markets have corrected since peaking in the middle of October and there appears to be a decisive rift in the financial community between the bulls and the bears, with the bears calling for an end to the rally off the March lows while the bulls maintain that we remain in a cyclical bull market.
Much was made in June about the Dow non-confirmation as the Dow Jones Industrial Average exceeded its May high while the Dow Jones Transportation Average did not. The non-confirmation was not an early warning sign that the market rally was finished, but rather warned of a short-term correction that ended with the Dow non-confirmation later resolved in late July as both averages exceeded their June highs.
With the S&P closing lower on Tuesday, "the market" is now down five of the last six days, and has struggled to form a sustainable short term low. This is the kind of tape action I feared several weeks ago when I wrote the column, "Rolling Defensive" and expressed the idea of bringing down beta (i.e. volatility levels) in the portfolio.
With the major league baseball series now in the championship playoffs, and the World Series dead ahead, this week seemed like a good time for a stock market article with a baseball theme. Of course, baseball games can often last close to three hours, so fans of the sport have to be relatively patient in watching a game, as there is a reasonable investment in time. Just the other day, the Yankee/Angel game went into extra innings extending to 13 innings. What a marathon that was!
It’s been a year since the fallout from the Lehman Brothers collapse that rocked the markets, pushing market volatility to an extreme. The market volatility that was witnessed last fall is not something many of today’s current market participants have ever experienced, a generational type collapse that one would have to turn back the clock to the Great Depression to find a similar environment.
In each cycle, the sequence of events where tops and bottoms are concerned rarely, in fact, never unfolds the same way. Yet in each cycle there is always a certain method to the madness, and where tops are concerned the slow, elongated process is the norm. It is the drawn out nature of tops that actually make them so hard to spot because tops and the act of ‘topping’ is always a process, usually described by the collective market action over a period of weeks and months, not days.
This week’s economic releases and earnings results should steer our course for the next month. There are a number of key indicators sitting at key support and resistance. It’s time for investors and portfolio managers to plot their course and make your bets. Many already have, liquidating portfolios last week near the September highs. Was this a mistake? We’ll find out soon enough.
As we entered this year after the collapse in the markets in the fall of 2008, who would have thought it possible that the S&P 500 would put in a major low and then go on to advance by more than 50%? Granted the S&P 500 underwent a mini bear market (20% + correction) within the mamma bear that began in 2007 as it plunged roughly 25% from the start of the year into the March lows, but a 50% rally in just six months is quite the feat.
Equities started Tuesday and ended Tuesday on a strong note with the DJIA finishing the day up 131.50 index points or 1.37% at 9,731.25, the S&P up 14.26 index points or 1.37% at 1054.72, and the NASDAQ 100 up 29.61 index points or 1.77% at 1705.25. Clearly, a lot of bearish position traders encouraged by the recent bout of stock market weakness found themselves on the wrong side of the surging stock indices, with panicked short covering the end result.
As I step back and view the investment landscape I can’t help but be reminded of two things. The first being John Maynard Keynes famous quote, “The market can stay irrational longer than you can stay solvent,” and the second being the dichotomy between the stock market and the consumer that eerily looks familiar with what I saw in 2007, and why I felt the market would peak and that we would enter a recession.