Will the Market 'Melt Up'? 27 comments
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You can't watch a clip on CNBC or Bloomberg or read an article on numerous websites without somebody talking about a correction in September. Even SeekingAlpha has a focus on buying gold to protect from the 'inevitable' downside. Guess the market got that start it wanted on the 1st day with the SP500 down over 2% and then over 0.5% soon after the bell on the 2nd day. Every poll I see the pollsters expect a much larger chance of a large drop rather then a large gain in September. The action on the first just seems overly convenient to suck in the shorts that have been expecting a huge sell off and Monday there was confirmation to dive in headfirst. But is that what will actually play out?
Watching Fast Money Tuesday night I was appalled and then delighted to see that they featured the PermaBear trio of David Rosenberg, Peter Schiff, and Roubini. One decent down day and they pull all the stops on the negative side. Though I do agree with Schiff in that investing outside the US will see better returns, he doesn't come off as a bullish investor since he spends so much time hating on the US. Wish he would spend more TV time focusing on the investments he likes outside the US. It almost seems as if everybody on the show has dismissed the possibility of a positive market. That seems almost absurd considering that the average loss of 0.9% in September is much better then the 2.2% loss on the first day. The average September would suggest investing now gives you an 1.3% gain the rest of the month.
As we reported back on July 28th in our Chart of the Day [Inverted Head and Shoulders], the huge drop back in September of last year is perfectly set up for a rally back to those levels above 1,200 or 12,000 on the DOW. Very few people expect a rally in this the worst trading month in the history of the markets, but isn't that exactly when it happens - when nobody expects it (or at least very few)?
The economic news of late has been extremely bullish whether it was Intel (INTC) boosting revenue guidance (wasn't everybody just saying that we can't recover without revenue growth?), or the ISM Manufacturing blowing out estimates to show growth for the first time in 19 months, or more good signs that housing has truly bottomed. Yet the market has sold off for a whopping 3 days and the first question out of every host is whether this is the start of the correction. How about is this a buying opportunity? It is concerning that the market hasn't jumped on this positive data, but it's not like the market is down anything material since we're still higher then the August lows around 980. Since the losses so far can be counted as no more then mild, healthy profit taking why is everybody so bearish?
To us it adds more fuel to the argument that the market could 'Melt Up' as easily as it melted down last year. Other then a few random thoughts on this subject, it's very under followed even though the graphs suggest that if the market holds the 980 to 1,000 level it doesn't have much resistance until back in the 1,200 level.
Just as I was wrapping up this report, CNBC had the Trader Talk with Art Cashin and it's amazing how the tone was so negative. Rumors about this bank raising capital, or this financial collapse, or some huge commercial real estate mega default. What a coniencidence for that to happen in September. Where there is smoke there can be an eventual fire, but I just don't buy it. The market is usually too cruel to accomondate such a foregone conclusion. The selloff was likely weak hands selling on fear showing that the market is still too pessimistic. If it keeps up it might become self fulfilling and that is the biggest threat at this point.
All economic indicators suggest the rally will continue along with a vastly improving economy. All the leading indicators continue to soar while lagging indicators continue to well lag. Anybody find it ironic that the bears focus solely on unemployment? Don't they sound desperate hanging onto a known fact that unemployment sometimes doesn't turn until months after the economy bottoms. First Trust had a research report that it's usually not until GDP grows at 3% that unemployment perks up. What will the bears do when history repeats?
We'll continue to support the idea that the markets will melt up as the fear of the horrible Sept/Oct period subsides and the bears run out of ammunition. As that happens the technicals will take over and markets could easily rally 20-30% with little resistance until 1,200+. The following table from CNBC has a good summary of the values for an assortment of markets and economic data over the last year. For everybody talking about the SP500 soaring some 50% from the bottom, people need to understand that it now stands some 22% below levels just a year ago (and that level was already down 20% from the highs). Does the rally seem that big when considering the bigger picture?
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This article has 27 comments:
I guess all I can say is if your so sure we go hire from here you will be 100% invested, if so please provide verification or go home.
I think the market would be in the same place it is right now with the only difference being instead of being up 50% we'd be up more like 25-30%. So what IS the difference in your mind between whether or not we knew then what we know now? I think the important thing for market valuation RIGHT NOW is what we know RIGHT NOW, not what we did or didn't know then.
On Sep 03 11:38 AM enigmaman wrote:
> a 50% move up since March, based on nothing more then the "relief
> is wasnt worse" could be considered a melt up, When I think about
> this rally and its ever moving rational for being, I recall Road
> Runner cartoons, when the Wiley Coyote is running after the Road
> Runner and not paying attention runs off a cliff, running for a while
> on nothing but air, until he stops, look down and realizes there
> is nothing beneath him and when that happens reality takes over and
> down he goes until he hits bottom and all we see is a puff of smoke.
>
> I guess all I can say is if your so sure we go hire from here you
> will be 100% invested, if so please provide verification or go home.
Fear is still high and therefore if the market breaks down it will be a steep break. But with light volume the manipulation will take it up. So its a guessing game when to get on and when to get off.
How much real estate owned (REO) does the banking system own while foreclosures are still rising? Where is support for the $25,000,000,000,000.00+ of toxic assets and worthless derivatives, carried on the books at cost, from an FDIC who is leveraged 50:1? When will policy makers decide to face our growing deficits that are already unmanageable, both private and public? Answer please, not simple cliches.
What would a slight increase in interest rates do to the black-box trader's, who monopolize equity markets, paradigm? 1987 redux!
On Sep 03 11:57 AM Prudent Man CFA wrote:
> "Extremely bullish news lately"? Where? Yes the talking heads who
> need advertising dollars are talking up economies world wide but
> we just had a revision of July's unemployment and original report
> of 240,000 was revised to 360,000 a 50% miss that was hardly mentioned.
> Quite a "lagging" indicator!
If the market didnt think it could ever have been the worst case we would not have seen the destruction of value as we had seen, I agree the sell off would have been less severe and the rebound less robust.
If we knew then what we knew now the market would not have fallen off the cliff, credit markets would not have frozen up, or we all would have gone all in at the bottom and not having this discussion right now, obvious conclusion so I wonder why you bothered to ask.
As far as as what we know right now, Im listening " What do we know right now about the market ?" enlighten me because there is very little consensus, every statement of confidence or lack there of is followed by " Unless something material changes", or "all things being equal", " things are looking up, but we are not out of the woods yet", " housing appears to have bottomed but we wont know for sure without several more months of data",
So you tell me what do we really about about the health of our economy right NOW!
On Sep 03 11:52 AM thiazole wrote:
> So my question to you is, what would the market have done if we KNEW
> all along that it wasn't going to be the worst case scenario? How
> far would the market have fallen and how much would it be up from
> there?
> I think the market would be in the same place it is right now with
> the only difference being instead of being up 50% we'd be up more
> like 25-30%. So what IS the difference in your mind between whether
> or not we knew then what we know now? I think the important thing
> for market valuation RIGHT NOW is what we know RIGHT NOW, not what
> we did or didn't know then.
On Sep 03 12:08 PM thiazole wrote:
> I don't understand why bears are always making up data (and why I'm
> the only one who catches it). I correct at least one piece of incorrect
> data every day (and usually the person who posted it gets a bunch
> of thumbs up because that false data agrees with their distorted
> viewpoint). Anyway, the ADP employment (which I'm sure you are talking
> about) was actually revised DOWN from 371,000 to 360,000.
The author appears to think that 1200 on the S&P and 12,000 on the Dow are within reach. At what P/E would the market be trading at if he is right, and is that a reasonable valuation...?
So what else do we know? Reported GDP (which is looking in the rear view mirror at a timespan from 2-5 months ago) is already almost back to zero. We know that industrial production is growing again. We know that durable goods orders are growing again. We know that factory orders are growing again. We know that retail sales are above the bottom (even if they aren't rebounding by leaps and bounds, they aren't falling anymore either). We know that manufacturing is growing again. We know that the services sector is only barely contracting. We also know that business inventories are shrinking by about $10 billion a month (ie, consumers are buying $10 billion more in goods than is being produced) which means that just to STOP inventory contraction that we need to ramp up production by $10 billion a month. If we want to rebuild inventories in 1 year, we need to ramp up production by $20 billion a month. That ALONE would contribute more than 2% to the GDP over the next year (consider that the cash for clunkers that everyone is saying did so much to boost last month's data was only caused by about $6.5 billion being actually spent on American cars (and that number is probably very generous). But these numbers I'm providing also assume consumption stays at the current depressed levels. Maybe it will, but maybe they won't. If it doesn't we'll need to ramp up production even more.
So that is what we know and that is why the market has been bullish. Are there negatives? Absolutely, and they will turn what could have been a strong V shaped recovery into something that is much less impressive. But this idea that the market has been rallying on nothing is completely ludicrous.
On Sep 03 12:34 PM enigmaman wrote:
> I didnt say anything about "Worst case scenario" you did, I said
> the market was relieved "it wasnt worse" if you recall when things
> were looking bleak the Admin was painting an end of days scenario,
> so when it wasnt we experience a substantial relief rally based on
> it wasnt as bad as it could have been.
>
> If the market didnt think it could ever have been the worst case
> we would not have seen the destruction of value as we had seen, I
> agree the sell off would have been less severe and the rebound less
> robust.
>
> If we knew then what we knew now the market would not have fallen
> off the cliff, credit markets would not have frozen up, or we all
> would have gone all in at the bottom and not having this discussion
> right now, obvious conclusion so I wonder why you bothered to ask.
>
>
> As far as as what we know right now, Im listening " What do we know
> right now about the market ?" enlighten me because there is very
> little consensus, every statement of confidence or lack there of
> is followed by " Unless something material changes", or "all things
> being equal", " things are looking up, but we are not out of the
> woods yet", " housing appears to have bottomed but we wont know
> for sure without several more months of data",
>
> So you tell me what do we really about about the health of our economy
> right NOW!
Be fearful when others are greedy.
It sems I must be looking at a different bigger picture?
1) The Debt to GDP ratio is heading north quickly, to 100% and beyond.
2) Consumers have taken a massive hit, via falling housing equity, lower share values & reduced access to credit.
3) The economy is deleveraging and will do so, for some time to come. Derivatives is the other Elephant in the living room!
4) Two of the three major growth drivers (Oil & Population), have Peaked and are heading south.
5) Unemployment and Taxes are both rising.
6) Business Earnings are falling dramatically and bankruptcies are rising.
7) Tax revenues and consumption are both down.
8) Massive increases in Health and Social Security Costs, are on the way, again expanding government deficits.
9) Problems arising from Climate Change and Food Production are also set to interfere with future plans.
10) Share Markets first fell some 50% and have since increased some 50%, still leaving a massive reduction in total wealth.
11) P/E ratio's moving into orbit, based on likely future earnings.
"You can't watch a clip on CNBC or Bloomberg or read an article on numerous websites without somebody talking about a correction in September."
I just sent an email to my clientele this week after seeing 5 or 6 identical articles on CNBC about:
The Dow will hit 12,000 by year end
The rally has another 10-15%: Stragegist
Rally is just in beginning stages
Over and over and over, that is all you see.
I wonder if the author has a vested interest in the market moving higher. Hmm.....
Maybe he should research up on the bullish indicators showing highs not seen since the October 2007 highs.
Shame on him.
books.google.com/books...#
OR:
Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve search.barnesandnoble....
OR: www.thebigmoney.com/ar...
On Sep 03 11:30 AM Larry House wrote:
> I don't understand why you find negative talk "amazing." Do you
> understand the magnitude of what we are currently going through?
> Do you realize the obstacles we face and the time it will take to
> work them out? I find boundless bullishness to be blind and dangerous--and
> I am long stocks! This is no time to say things always work out and
> the markets will go higher. Better to be prepared for the worst
> than the best.
On Sep 03 11:57 AM Prudent Man CFA wrote:
> "Extremely bullish news lately"? Where? Yes the talking heads who
> need advertising dollars are talking up economies world wide but
> we just had a revision of July's unemployment and original report
> of 240,000 was revised to 360,000 a 50% miss that was hardly mentioned.
> Quite a "lagging" indicator!
>
> How much real estate owned (seekingalpha.com/symbo...) does
> the banking system own while foreclosures are still rising? Where
> is support for the $25,000,000,000,000.00+ of toxic assets and worthless
> derivatives, carried on the books at cost, from an FDIC who is leveraged
> 50:1? When will policy makers decide to face our growing deficits
> that are already unmanageable, both private and public? Answer please,
> not simple cliches.
>
> What would a slight increase in interest rates do to the black-box
> trader's, who monopolize equity markets, paradigm? 1987 redux!
On Sep 03 02:12 PM fjd10595 wrote:
> This guy is nuts. "vastly improving economy". Where? This is what
> I see around me, people being put out of work or having their pay
> cut, homes that don't sell, businesses closing, and stores with few
> customers. Add to this that consumer credit has contracted.
By the way, the market is up 2% since I wrote this article and its showing signs of breaking out. It could still turn around and Stone Fox could even change its bullish stance, but for now the upside seems the path of least resistance until this board gets alot more positive.
12. Some day a meteor will strike the earth decimating life as we know it.
13. The sun won't keep burning forever. What will we do then?
14. God will smite us soon.
15. Isn't there a volcano in Wyoming that will wipe out half the country when it erupts?
16. North Korea is going to nuke us.
Many of the items on you list are just as ridiculous.
On Sep 03 08:51 PM perceptions_now wrote:
> "Does the rally seem that big when considering the bigger picture?"
>
>
> It sems I must be looking at a different bigger picture?
> 1) The Debt to GDP ratio is heading north quickly, to 100% and beyond.
>
> 2) Consumers have taken a massive hit, via falling housing equity,
> lower share values & reduced access to credit.
> 3) The economy is deleveraging and will do so, for some time to come.
> Derivatives is the other Elephant in the living room!
> 4) Two of the three major growth drivers (Oil & Population),
> have Peaked and are heading south.
> 5) Unemployment and Taxes are both rising.
> 6) Business Earnings are falling dramatically and bankruptcies are
> rising.
> 7) Tax revenues and consumption are both down.
> 8) Massive increases in Health and Social Security Costs, are on
> the way, again expanding government deficits.
> 9) Problems arising from Climate Change and Food Production are also
> set to interfere with future plans.
> 10) Share Markets first fell some 50% and have since increased some
> 50%, still leaving a massive reduction in total wealth.
> 11) P/E ratio's moving into orbit, based on likely future earnings.
www.cnbc.com/id/32740744
The herd will keep following each other right over the cliff. The market has been going up on low volume and pure speculation (AIG, AXL, C, FNM - all practically insolvent companies). Wait until October. The storm clouds are already brewing, Insider selling at all-time high since September, Gold spiking to levels affecting credibility of the dollar, followed by a counter-response to a flight to US Dollar futures today(volume on UUP up 4x).
If we didn't have a second wave of foreclosures of more massive scale than subprime (Alt A Option resets) and a Commercial Real Estate default rate increasing 2x every month and the housing recovery based strictly on banks lowering the supply by holding foreclosures instead of selling, and if our unemployment was reasonable, and if consumer spending wasn't at all time lows, I might agree with you...
There's a big pinch between the downward pressure being put on the dollar and lack of eroding faith in the US currency against the pressure to keep the market high. Low volume shows the market being manipulated up for political reasons and exit purposes of insiders who are now exiting at a fastest rate since last September. When push comes to shove, and serious dollar devaluation is looming as it is now, the Fed will have to protect the dollar, which means trouble for the equities market in the longer-term. Interest rates rise will need to rise, and banks will have to become accountable for government money being used to basically hide trillion in toxic asset losses hiding in the books that can't be inflated away. China and Russia are beginning to call the bluff that we have an economy built on a ponzi money scheme and if they threaten to change out of US currency, it will bring the stock market back into reality where the P/E ratios are justified.
Unemployment is historically only a lagging indicator in the market, when it is moderate. When it is over 10% as even Bernanke admits it is going to, it generally leads to a second dip down.
I don't know when it is coming, but this market doesn't have much more left, and we are headed for correction and stagnation for several years to come as we become relatively weaker compared to other world economies. The only hope for our economy is to have a GDP that is based on real production of goods, not one that 20% of it is based on financial services which provides no benefit to anybody other than wall street.
On Sep 09 11:40 AM Stone Fox Capital wrote:
> Looks like both Cramer and Fitzpatrick agree with us. Market is up
> 4% already since this call.
>
> www.cnbc.com/id/32740744