Good Morning. I will need to apologize upfront for this morning's missive, because I feel a rant coming on and try as I might, I don't think I'm going to be able to avoid it. To be honest, I had every intention of penning (er, typing) a well-documented piece on the state of the market. In short, since yesterday's joyride to the upside came out of the blue and there wasn't any obvious catalyst associated with the buying binge, I figured some "esplainin" might be in order. But that was before I saw the headlines on MarketWatch.
At about 6:30pm eastern time last night, the main headline on MarketWatch.com read "Stocks Close their Best Day in 6 Weeks At All-Time High." Granted, I wasn't enamored with the word choices as I thought they could have done better. After all, Wednesday's blast was impressive on many fronts and may have deserved something with a little more flair. But that's not the point. No, what got my attention was the sub-header, which read, "S&P Chart Points To Correction." Wait, what?
Take a peek at the chart of below, which just happens to be the S&P 500 on a daily basis since mid-November 2012:
Now, I ask you; does anybody see ANYTHING bad on that chart? If I'm not mistaken, the security in question here is moving at a steady pace from the lower left to the upper right. And as famed chart-watcher Dennis Gartman likes to say, this is a good thing. Sure, stocks are once again overbought. Yes, the rally has been going on for a while. But do you note the big "pop" up on the upper right? This, dear friends, is called a breakout. And unless the bears can find a way to turn things around in a great big hurry, the technical analysis textbooks suggest that there is likely more gains ahead.
I know what you're thinking. Dave, you are a simpleton when it comes to technical analysis and maybe you should look at a longer-term chart to see what MarketWatch is referring to. Okay, so let's do that.
Below is a weekly chart of the S&P 500 from the end of 2008 through yesterday's close:
Hmmm ... there it is again. I'll be darned if this chart, which encompasses about four and one-half years, doesn't have that same pattern as the S&P has clearly been moving from the lower left to the upper right. And what does Mr. Gartman say about that type of chart again? Oh, that's right; it's a good thing.
Yes, I'll give you the fact that the slope of the weekly S&P chart is indeed starting to get a little steep. And if you do some measuring, it does look like it might be getting time for the annual Q2 sell-off. But other than that, this chart would appear to be fairly positive.
Then I thought I might need to back up a bit more, so I pulled up a monthly chart of the S&P 500 since 1997. I figured if I couldn't find something that "points" to a correction over sixteen years, I might just be missing something.
Okay ... The monthly chart doesn't exactly display that pattern Mr. Gartman likes. Although if you look closely, it does start at the lower left and end at the upper right - it's just that there's a fair amount of misery in between.
But if you will look closely at the upper right of the chart, you will see that the S&P has broken above the horizontal line I inserted in the chart to illustrate where the previous highs had been. While some might contend that price will need to break above the 2007 high by 3% or so (at 1611) to be considered a confirmed breakout, that sure looks like a breakout to me right now.
After looking at the 1-minute chart (which over the last 2 days also moves steadily up from the lower left to the upper right), the daily chart, the weekly chart, and the monthly chart, I failed to see what this headline was talking about. So, I decided that unless the headline was placed there purely for shock value, I'd best find out what the heck they were talking about. And yes, I broke down and read the article.
Below is the chart that the author was referencing in the headline along with the first sentence of the article:
"Under the category, history repeats itself, here is a chart that's rather painful on the eyes. To the bears (and maybe the bulls) this chart shows the S&P is on the path to crash, stacking up its present run to the run/crash of 2003-2009."
Good grief, now I want to throw something. The author wants us to believe that the 2009-13 period is going to play out the same way the 2003-09 period did? Seriously?
MarketWatch then quoted Steen Jakobsen, the chief economist at Saxo Bank, who called the graph a "classic overlay." Mr. Jakobsen went on to say, "It's not a scientific or even credible way to analyse markets, but as you know: if enough believe in it, it becomes confirmed."
So, we should forget the fact that the 2008-09 crash in the market was caused by a credit crisis, the likes of which we had never seen before. We shouldn't ask any questions, we should just expect the market to crash again because the charts line up and lots of people are going to do what they did in 2008. Wow.
Frankly, I've seen lots and lots of chart overlays over the years and yes, sometimes history does repeat - or at least it can rhyme very nicely. And frankly, I have seen an overlay of this year and the beginning of 1987 that looks interesting. But come on, does anybody really think that there is something brewing right now that is the size of the mortgage bubble? Does anybody really think that a crisis similar to what we saw in 2008-09 is about to play out?
Actually, I do know some people who think that way. These folks come to work each day dressed in fur and are constantly looking for someone to refill their water glass.
But for those of you who aren't permabears, please do yourself a favor - wake up and smell the breakout already! Yes it is true that a correction could start at any time. And if the situation is right, it might just be a doozie. But given that the U.S. economy is improving, Europe is stabilizing, and the central banks around the world appear to be hell-bent on stimulating their respective economies, I'm not sure this is the time to be looking for the sky to fall.
To be fair, the article did go on to suggest that expecting the market to follow the 2008-09 path was folly. But why then, did they publish the headline? Oh that's right; to get me to read it. Darn it, they've won!
What if I'm wrong you ask? What if things in Europe get worse and some country is forced to leave the eurozone? What if China's economy doesn't regain its momentum soon? What if the budget battle causes another debt downgrade and the U.S. consumer gets spooked? Actually these are great questions, because any investor who isn't wondering how they could be wrong on a daily basis isn't likely to last long in this game. If I'm wrong and the stock market does enter a corrective phase, I will simply follow my models and hope that they tell me to get out of the way - they usually do.
Turning to This Morning ...
The early mood of the markets is fairly upbeat as European markets are higher again this morning. However, the NASDAQ futures are weak on the back of negative comments on Mr. Softie out of Goldman. On the economic front, all eyes will be on the jobless claims report this morning, which could help clarify the Fed's next move. And finally, after yesterday's big move, some backing and filling wouldn't be surprising.
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: -0.28%
- Hong Kong: +0.30%
- Japan: +1.96%
- France: +0.57%
- Germany: +0.52%
- Italy: +0.35%
- Spain: +0.11%
- London: +0.34%
Crude Oil Futures: -$0.21 to $94.43
Gold: +$1.40 to $1560.20
Dollar: higher against the yen, lower vs euro and pound
10-Year Bond Yield: Currently trading at 1.810%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +0.97
- Dow Jones Industrial Average: +12
- NASDAQ Composite: -6.16
Positions in stocks mentioned: none