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There's a bit of foreboding in the air as we round the halfway mark in the first quarter's run for the roses. Many analysts of the more fundamental sort are frustrated and flummoxed by a market that seems nearly bulletproof. Despite a run of economic news and corporate earnings releases that are modest at best and often lean towards the weaker end of the scale, the din of the rally seems to drown out all else, leaving a stream of pandering press articles and fawning comments in its wake. It seems the market has reached the defiant stage.

The professional community is divided. Without doing a roll call of the luminaria, it seems to me that there is a division into two camps, ironically with the common ground that neither expect the economy nor earnings to do particularly well this year. One group, prominently exampled by hedge fund manager Bridgewater, feels that the simple lack of alternatives will continue to force buyers into equities, and is moderately hopeful about growth.

The other group leans more to a 2007-type situation, with equities stuck in rally mode despite a weakening global economy. One representative, as cited in a story by fellow SA writer Economics Fanatic, is Marc Faber, who provided a persuasive and covering-all-bases outlook suggesting a spring top ("relatively soon") and a correction of 10% or more (though there has probably never been a time when Faber isn't calling for a 10% correction). Else, a correction followed by rally, with a top in late summer or early fall.

While much of the discussion revolves around how well the economy is doing, as I wrote last week, the first-quarter stock market is not being driven by the economy. The rally only needs the data to stay within a very broad range to keep itself going, and the boundaries of that range are more flexible than you may think. In the current environment, if we were told that GDP growth for the next two quarters would be zero, the markets would presumably start to rally immediately on the impending third-quarter rebound.

The data series that concerns me the most right now as an economist is imports. They may not be a useful timing device for the stock market, but for my money they are a very good indication of where the economy is going. I apologize that time considerations preclude me from building a graph for you right here of the last ten years, but imports have been a very strong cyclical signal. In the 2001-2008 cycle, annual import growth peaked in 2004 at 11.1% before falling steadily to 2.4% in 2007 and then turning negative in 2008.

In the current cycle, import growth peaked at 14.9% in 2010 and has fallen to 2.5% in 2012, nearly identical to 2007. 2012 may have been suppressed by the December port strike in southern California that dragged the quarterly figure to a loss of (-3.2%) annualized, but the third quarter was negative as well (-0.6%). This is a trend that bears serious watching, in my opinion. If import growth is weak again this quarter, it will be an ill omen indeed. Import prices did rise in January, but it was all petroleum-based and the year-on-year rate of (-1.3%) suggests weak demand.

The other data that does come out is usually recast into a flattering light. Much of it doesn't even need to be, since the 2008-2009 experience will keep first-quarter seasonal adjustments benevolent for another year or so to come. The latest weekly jobless claims report is an example of a data series emitting adjusted numbers pleasing to the eye, while the unadjusted numbers are saying something else.

The unadjusted number of weekly claims for the week ending February 9. 2013, was 359,428. Given the history of the series, the odds are that it will be revised slightly higher. The unadjusted number of weekly claims for the nearest equivalent week in 2012, ending February 11, was 365,014. It's a difference of about 6,000, or less than 2%. But the variance in seasonal adjustment factors means that the 2012 week was reported as 361,000, while the 2013 week was reported as 341,000, or about 6% lower. I don't see why. If anything, the latest week's data should have been suppressed by the Northeastern storm that clipped about a day off of the reporting week.

It's worth nothing that 2012 followed the same pattern. Seasonally adjusted claims made it seem as if the employment market was significantly improving in the first quarter, only to see claims explode back upward in April. But in 2012, the year-on-year improvement in lower claims was fairly steady around a central tendency of 10%. The last few months have seen a sizable shift downward in the rate of improvement. According to the latest BLS data, the percentage of actual jobs lost in January 2013 was higher than the percentage in 2012.

I heard January retail sales hailed on television as "the third month in a row" of improvement. I suppose that's some kind of victory, though the seasonally adjusted increase of 0.1% is below the inflation rate. The year-on-year increase in December-January actual sales combined fell to 4.2% in 2013 from 6.5% in 2012, though I read everywhere about the "growing US recovery."

In fact, you can read the paper one day about the "surprisingly strong" fourth quarter earnings, and another day in the same paper about why they weren't. The former perspective is based upon the beat rate of 75%, courtesy of analysts cutting estimates for fourth-quarter earnings growth from about 13% at the end of the third quarter to about 2%-3% as reporting season got underway. Now they're running at about 5%-7%, making it all wonderful.

As a number-cruncher, you may wonder about the wisdom of paying 17-18 times for (let's be generous) 7% earnings growth that appears to be decelerating. Small-business confidence barely budged in the latest results and remains at recessionary levels. As a stock market jockey, though, you need to understand that the market isn't trading on earnings. It's trading on the calendar, hope, and the conviction that bonds are going to lose value this year. Merger mania, a classic last-stage source of fuel, may add to price support.

I found myself in rare agreement with Maria Bartiromo Wednesday when she was doing a typical bull-bear standoff. When one of the guests talked about an impending 8% correction, she wearily wondered if anything could stop dip-buyers from rushing in well before that level was reached. It seemed to be borne out by Thursday's trading action, when the news that Europe's recession continues at a deeper pace than believed managed to push the S&P down all of fifty basis points before buyers rushed back in again. 'Tis the season.

Industrial growth was negative in January, but the New York Fed manufacturing survey this morning suggests some sort of rebound. Will it be enough to carry the rest of February? Normally options expiration week is a positive one for the markets, and as I go to press it looks my target from last week of 1525 on the S&P 500 is on track. Afterwards the latter half of February usually sees a pullback, making it a difficult month historically for stocks.

February of 2012, however, saw stocks barely pause before continuing on their way. You can be sure that traders haven't forgotten. The all-time closing high on the S&P 500 is tantalizingly close at 1565.15, less than 3% away. But the first week of March 2012 did see a mild pullback, and indeed prominent money manager John Taylor has already pulled out of equities in anticipation of an imminent correction.

Next week will bring housing starts, FOMC minutes and possibly another rebounding manufacturing survey from the Philly Fed. Housing data has been a big beneficiary of seasonal adjustments, but the weekly claims adjustment factor will fall back sharply.

The markets are very extended, but they were last February as well. The most extended sector is small caps, so if you want some defiance protection I would suggest March put options on the IWM. The March 90 strike is currently going for a song ($0.74 offered as I write), with implied volatility of only 14.84%. That's cheap, and may be worth the peace of mind. Even defiant markets have pullbacks.

Source: Trading A Defiant Market Against An Import Warning

Additional disclosure: I have hedged positions in the SPY and the IWM.