After spending much of the week in meetings, airports and rental cars, it is good to be back in the saddle this morning. While business travel can certainly be a chore at times [couldn't the folks at American Airlines (AAMRQ) have figured out that the plane needed scheduled maintenance BEFORE they boarded the entire flight?] it also allows one the opportunity to get away from the blinking screens, the phones, the tweets, and spend some time thinking about the big picture market environment.
Uh, It's a Bull Market
Although Thursday's algo-induced dive certainly wasn't any fun and definitely did some damage to the charts on a near-term basis, it is important to recognize that the S&P 500 is up 22.5 percent so far this year and that if calendar 2013 ended yesterday, the year's return would be one of the top results seen over the last fifteen years.
So, while the "ignition algos" may have created some fear yesterday and the bears could certainly spend some more time exploring the downside in the coming days, the key to this market continues to be that it's a bull market until proven otherwise.
Bears: The Top is In
The bear camp will argue that "all good things come to an end" and that since "no one rings a bell at market tops," investors should be ignoring all the chatter about new all-time highs and instead be focusing on the next big decline.
Those dressed in fur this morning also argue that Twitter's (TWTR) IPO marked an important emotional top for the market as many analysts feel that the firm's inflated value is an indication of a "bubbly" market environment. Therefore, there was no shortage of traders looking to "call the top" yesterday and make a name for themselves by moving to the short side after TWTR gained 73 percent on its first day of trading.
However, remember that the bears have been singing a similar tune all year. So, before one runs out and starts buying the inverse stock market ETFs that profit when stock prices fall (SH, SDS, SPXU come to mind) or start "buying volatility" via the VXX, VXZ, VIXY, etc., there are a couple of points worth considering.
The Public is Buying
As if the thirty-two record closes for the S&P 500 weren't a clue, the fact that the public appears to be going gaga for stock funds this year should remind investors that there is money coming into this stock market.
According to TrimTabs, the public has poured $277 billion into U.S.-listed stock mutual funds and ETFs so far this year. For those keeping score at home, that's the most for any calendar year since the $324 billion of inflows seen in 2000.
Further, the public appears to be emboldened by the market's recent new highs as about one-sixth of that cash has been placed into stock funds and ETFs in October alone. TrimTabs notes that the $45.5 billion in net inflows seen in October was the fifth-highest monthly total on record.
Remember, Strength Begets Strength
Yes Virginia, it is true that the public tends to come late to most stock market parties. And yes, it is also true that the last time the public appeared to be this excited about stocks was right about the time the tech bubble was bursting.
However, it is also worth noting that new highs in the stock market tend to beget more new highs before the bears ultimately gain control.
According to Ned Davis Research, the stock market tends to move higher - a lot higher - on average when the S&P 500 first moves to a new high after a bear market. NDR's data shows that since 1928, the S&P has gained an average of 40.3 percent over a period of 644 days AFTER the first new high following a bear market has been reached.
On a median basis, the S&P has gained 18.4 percent over 417 days following a new high.
Near-Term: It's All About the Fed
However, this morning the game appears to be all about the Fed. While the Jobs report showed the economy produced nearly double the number of new jobs last month than had been anticipated, traders appear to be selling the news.
The idea here is simple really. Traders assume that the report puts "the taper" back on the table at the December FOMC meeting. And since the majority of economists surveyed by the WSJ are currently looking for the taper to begin either in January or March, the good news on the economy may be bad for stocks as traders fret about the outlook for the "liquidity trade."
The bottom line is the bears have had lots of chances to get something going of late and have squandered nearly all of them. Thus, the question is if this time will be different.
Turning to This Morning ...
The jobs report was surprisingly strong and basically trumped all other inputs to this morning's trade. The bottom line is traders are concerned about the taper beginning sooner rather than later. So, unless the dip-buyers come in on this fine Friday morning, it looks like the bears may stay in control for a while longer.
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Japan: -0.99%
- Hong Kong: -0.60%
- Shanghai: -1.10%
- London: -0.36%
- Germany: -0.47%
- France: -1.05%
- Italy: -0.01%
- Spain: -0.23%
Crude Oil Futures: +$0.30 to $94.58
Gold: -$19.50 to $1289.00
Dollar: lower against the yen, higher vs. euro, and pound.
10-Year Bond Yield: Currently trading at 2.737%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +0.20
- Dow Jones Industrial Average: -4
- NASDAQ Composite: +13.99
Thought For The Day ... When in doubt, just take the next small step ...
Positions in stocks mentioned: none