Daily State Of The Markets: It's Just Silliness, Right?

Includes: DIA, SPY
by: David Moenning

Good Morning. The tone out of the bear camp sounds like it is becoming a little desperate these days. For example, Jeff Kilbourg, one of the "market pros" on CNBC Thursday called the market's rally since the beginning of the year "silliness." Mr. Kilbourg had that nervous twitch about him as he attempted to stand firm in his conviction. But he smiled big for the camera and attempted to tell the viewers that the gains they have in their accounts so far this year are nonsensical. Kilbourg repeated his "silliness" theme three times in less than a minute. His point: "I think it's just silliness, Mandy, we are seeing just a flood of money coming out of the BOJ right now."

Silliness? As of Thursday's close the S&P 500 is up +11.7% for the year. The DJIA - with all of those consumer staples, telecom, and utility names that pay the big dividends - sports a gain of +13.4%. And even the recently beleaguered NASDAQ can claim a return of more than 9% so far this year.

Since last Friday's open, when we were assured by the bear camp that the sky was about to fall and stocks flushed lower at the open, the S&P has rebounded +3.44%. Since the debacle in Cypus, which was sure to cause a disaster in the global banking system, the venerable index has moved to an all-time high. Since the election in Italy, which, if you will recall, was going to be the trigger that finally caused the eurozone to crumble, stocks are up +7.1%. And since the depths of "sequester" sell-off, which was supposed to send the economy tumbling into recession, the S&P has popped +13.6%. Silliness indeed, right?

Another report I saw yesterday from a renowned bear called this the "upside-down world," and suggested that the current market environment has gotten "just crazy." And yet another report cited short-covering as the primary cause of the stock market's recent run for the roses.

The source of the bearish hysteria appears to stem from the idea that stocks are only going up because central bankers around the world have a gun to investor's heads and are forcing hedge funds, mutual funds, pensions, banks, insurance companies, and good 'ol mom and pop to buy stocks. As my bearish buddy opined yesterday, "Welcome to 'Upside-Down World' brought to you by Federal Reserve chairman Ben Bernanke, European Central Bank president Mario Draghi and Bank of Japan governor Haruhiko Kuroda."

Don't get me wrong. I don't have any problem with people voicing their opinions about the stock market. Heck, I can be accused of doing just that on a daily basis. But the difference is my goal each and every morning is to identify the drivers of the stock market - not tell you what I think the stock market "should" be doing. As I may have mentioned a time or two, I just don't think I'm smart enough to look at the myriad of inputs and make a judgment call on what ought to happen next. No, my job is to first figure out what "is" happening and then to try and stay on the right side of whatever that may be.

Call me a simple trend-follower if you must. (Well actually, I'm more of a "market environmentalist" than a pure trend-follower as our Market Environment Model guides our market exposure the vast majority of the time.) But I ask you, even if I was a full-time trend-follower, what's wrong with that? Why is making money during a rally considered silliness? Isn't the goal of this game to produce risk-adjusted returns that are pleasing to you? Isn't the idea to run with the bulls and then run far away when the bears come to call? Or is that concept just too silly to consider?

I know I've touched on this topic in the past, but I just don't understand the burning "need to be right" that so many people have in the market these days. Sure, it is exciting to "make a call" and then see it come to fruition. And yes, it would be great if Mr. Kilbourg is able to come back on CNBC in a couple months and gloat about being right about this rally being "silly." But what about the task of making money in the market? Isn't that the goal?

In my humble opinion, the real key to this game is to find a way to produce solid returns in the stock market - and to do so on a consistent basis, if possible. As Ned Davis has so famously said, "It's not about being right. It's about making money." The idea isn't to "call" the market and then to make a killing on your call once a decade. No, the idea is to make money in the market you have in front of you, not the one you'd like to have.

So, is the QE that the BOJ (Bank of Japan), the ECB, and Gentle Ben are providing a factor here? Sure it is. Is the stock market breaking from the "reality" of the current (key word) economic situation? Yes, probably. (But as a quick aside on that note, keep in mind that the current state of the economy rarely drives stock prices and that this game is usually all about expectations for the future.) And with the yield on the U.S. 10-year under 1.8% and expectations for rates to rise in the future, are stocks being favored over bonds right now? Again, the answer is yes.

But the key point this morning is that unless you make a good part of your living being a media mogul and "making calls" on CNBC, it is probably best to leave the labels out of the game and focus your energies instead on profiting from the current joyride to the upside. Remember, almost no one expects it to last because, after all, it's just silliness, right?

Turning to This Morning ...

After the eurphoria of the last couple days in the market, traders may be taking a harder look at the macro picture this morning. European data was weak, Cyprus is back (the country need more money than previously thought), JPM's earnings were a bit of a disappointment, and word is that the IMF is about to cut its growth forecast for the U.S. Thus, stock futures are following Europe lower at this time.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell ...

Major Foreign Markets:

- Shanghai: -0.57%

- Hong Kong: -0.06%

- Japan: -0.47%

- France: -0.97%

- Germany: -1.41%

- Italy: -1.29%

- Spain: -1.37%

- London: -0.41%

Crude Oil Futures: -$1.11 to $92.40

Gold: -$19.30 to $1545.60

Dollar: higher against the yen, euro and pound

10-Year Bond Yield: Currently trading at 1.763%

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: -4.63

- Dow Jones Industrial Average: -39

- NASDAQ Composite: -11.17

Thought For The Day ...

Life isn't about how to survive the storm, but how to dance in the rain -- unknown

Positions in stocks mentioned: none