Good Morning. Stocks finished with impressive gains last week and have now been higher in six of the last eight weeks. Don't look now, but the DJIA is less than 100 points from last spring's high water mark for the current bull cycle, which began on 3/9/09. The steady uptrend stands in stark contrast to the uber-violent, up-one-minute-down-the-next environment that had existed for the prior five months. And for those of you keeping score at home, the much-vaunted VIX has fallen 62% from its recent panic-induced highs. As such, the question of the day is if one can actually believe in the bull's latest joyride to the upside.
Perhaps the most striking change in the market since the bulls really took hold of the game on December 20th has been the disappearance of the extreme volatility. As you will likely recall, from August through late-December, stocks displayed a tendency of making huge moves - in a straight line - within a matter of days, only to reverse on any news out of any European leader, newspaper article, and/or rumor blog. But for the last month, the insanity has dissipated as stocks have moved in a not-so violent fashion and we've seen nary a single 3% plunge on rumors originating from across the pond. It's almost as if somebody pulled the 10 big players in HFT into a room around the holidays and said, "Enough!" So, after being bludgeoned by the HFT boys for months, one also has to wonder if the reduced volatility is to be believed.
While rumors abound regarding the reasons behind the change in the market's environment (for example, I received an email over the weekend from a colleague informing me that the Fed has been manipulating the U.S. futures market in the pre-market session), the bottom line is that markets change from time to time. And since no one ever rings a bell to signal the shift, I make it my business to diligently endeavor on a daily basis to stay on top of such things.
The simple fact of the matter is that while the bears can certainly argue that nothing in Europe has been "fixed," the fear relating to the macro view does appear to be moving lower. Why the improvement in sentiment, you ask? Although I run the risk of being chastised for even considering the bull case, it is important to recognize that the ECB's latest maneuver to lend a hand appears to be working. Rates in Europe did fall over the past two weeks and demand for the auctions hasn't been half bad. So, with European banks now stuffed to the gills with liquidity, the chances for a "Lehman moment" appear to be greatly reduced (at least for the moment, of course).
Looking around at other macro drivers, it appears that the Chinese have largely accomplished their bubble-piercing goals and are about ready to start stimulating their economy again. In short, this has proved to be a good thing for the global economy.
Closer to home, while our furry friends love to debate the details of each and every piece of data, the U.S. economic reports have been largely better than expected and expectations for Q4 GDP levels have actually been rising. Looking at the rest of the U.S. stock market fundamentals, valuations are fair, inflation is low, interest rates are very low and likely to stay that way for at least a year, and corporate profits are at record levels.
Yet, as the glass-is-half-empty crowd loves to remind me, Europe is still a mess and there is no way out of the problem without more income or less debt. As a result, the public appears to be fleeing the market as mutual funds have seen redemption. Heck, even the so-called smart money is apparently more than a little nervous as hedge funds are also seeing money leaving. And this, as the bears tell me, is a bad thing.
From my perch, it appears that after a five-week run in the stock market, we've entered the disbelief stage. I have seen this type of environment many times over the years. The bears focus on what has already happened and continue to tell anyone that will listen that the current move higher is lunacy, and can't possibly last.
Sure, stocks are clearly overbought. And yes, prices may have gotten ahead of themselves in front of this week's flood of quarterly earnings (one-quarter of the S&P 500 reports this week). And there may indeed be some trepidation in front of the upcoming GDP numbers. So, while I can most certainly agree that a pullback - perhaps even a scary one - would be natural about now, I will also remind everyone that the U.S. stock market remains a discounting mechanism. And more often than not, the market looks forward and not back.
So as a card-carrying member of the glass-is-at-least-half-full club, I choose to be a believer in the current market. But I also recognize that this environment could change quickly. And it is for this reason that I manage money based on a series of models and indicators instead of my gut feel, hunches, or intuition. Sure, there are times (like last fall) when the markets make me and my models look silly. But I prefer to play the odds in this business and to stay on the right side of the important trends. And in short, the models are designed to do help me do just that.
Turning to this morning ... All eyes continue to be on the debt swap talks in Greece. While there is no deal yet, the markets do expect one in the near term. So, with China closed for New Years and Europe higher, the U.S. futures are pointing to a flat open at this point.
- Major Foreign Markets:
- Australia: -0.36%
- Shanghai: Closed
- Hong Kong: Closed
- Japan: -0.01%
- France: +0.52%
- Germany: +0.49%
- Italy: +1.62%
- Spain: +0.63%
- London: +0.81%
- Crude Oil Futures: +$0.85 to $99.18
- Gold: +$7.40 to $1671.40
- Dollar: lower against the yen, higher vs. pound and euro
- 10-Year Bond Yield: Currently trading at 2.056%
- Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +0.56
- Dow Jones Industrial Average: +2
- NASDAQ Composite: +4.53