If It's Obvious... It's Obviously Wrong
In my Special Election Update, I discussed the three big events for the markets last week, the election, Fed announcement and jobs report. The market's reaction to the election could not have been more expected. As I mentioned, a Republican takeover of the House with at least 60 seats and headway in the Senate was fully baked in the cake. That's why stocks did almost nothing the next day.
Bernanke & Company also gave the markets exactly what they were looking for with another round of quantitative easing to the tune of $600B (whether that’s good medicine is a topic for a different piece). Say what you want about this Fed, but they have done an excellent job of telegraphing their moves well in advance and making sure not to disappoint the markets. In typical Fed day fashion, stocks were quiet in the morning and saw a brief surge in volatility before modestly rallying into the close.
The surprise of the week came on "no news" Thursday when most of the major markets surged higher with the Dow, S&P 500, S&P Mid Cap, Nasdaq and Dow Transports all scoring breakouts to new 2010 highs. Only the lonely Russell 2000 index of small caps remains below its April high.
Since mid October, I've been concerned that the rally from where we committed so much money at the July bottom was getting a bit ahead of itself. Not so much where we would pull the ripcord, but enough that should warrant a short-term pullback to digest those gains. With so many bears becoming bulls, a surge in call buying by option traders and sentiment surveys showing a bit too much excitement, taking some chips off the table seemed like a good plan.
So far, the market hasn't cared. After last week's price action and heavy news flow, it's pretty hard to find many folks negative on the stock market with most of the major indices at new 2010 highs and the Fed committed to pumping another $600B into the markets. If their first round of QE with $1.25T was any indication, the old adage of "don't fight the Fed" should be wise to follow.
But the skeptic in me still worries. It's getting too easy. No one is worried anymore. Just buy stocks, commodities and high yield bonds. Sell the dollar and treasuries. It's a layup! History (and Joe Granville) has taught me when it's obvious... it's obviously wrong.
That's why I started pounding the table to buy the dollar last week. There are NO bulls left. Everyone is bullish on the Euro and bearish the greenback. That's the exact opposite of what we saw in late May when I offered on CNBC that the Euro was so bad, it was actually good. You had to just hold your nose, close your eyes and buy it.
Everyone seems to be embracing this new world financial order. Quantitative easing is supposed to help the economy by flooding the system with more and more money, which in turn lowers interest rates and helps banks, corporations and consumers.
I don't know about you, but besides helping fuel the financial markets, I don't see the positive economic effects that QE is intended. Money in the system isn't the problem. Banks have more than a trillion dollars sitting at the Fed earning peanuts, while corporations are also sitting on more than a trillion in cash, unwilling to spend and invest.
Summing it all up, although the major stock indices, sectors and high yield bonds have all broken out to new 2010 highs and everyone is partying like it's 1999, I am not willing to imbibe any more beverages. We have plenty on the table, but less than the maximum we had during July, August, September and half of October.
The most bullish thing stocks could do right now would be a sideways digestion for at least a week to wind up for another move higher. I think it would be constructive to see an orderly pullback of 2-4%. Much more than that would indicate that the recent breakout was false and sharply lower prices could ensue. As I mentioned last week, I would be very surprised to see stock breakout and explode higher without a pause. I think that would be dangerous and perhaps even a terminal move.
Feel free to email me with any questions or comments at Paul@investfortomorrow.com.
Until next time…
Paul Schatz
Heritage Capital LLC
http://www.InvestForTomorrow.com
http://RetirementPlanningConnecticut.com/
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