Publishing Note: I am traveling next week and am unsure of my schedule at this time. Thus, my "Daily State" reports will be published as my schedule permits.
Good Morning. Like children feeling trapped in the backseat of a car, underinvested fund managers have apparently been asking the one question that parents universally dread, "Are we there yet?" (To the correction, that is.) Given that we haven't seen a four-day decline in stocks for more than four months and have only seen one other three-day drop this year (and that one didn't amount to much), I guess we can't really blame those who get paid relative to their performance to the S&P 500 for getting a little fidgety while waiting for an opportunity to get in this market.
While the evidence I will present this morning is clearly anecdotal, I do believe that the discussion I had with a sales rep for an institutional research firm yesterday says it all about the current market environment. After the usual pleasantries on the phone, we got to talking strategy and indicators, which is always fun for a market geek like me. But she then mentioned that in her meetings with clients, she keeps getting the same question over and over again ... something akin to "Are we there yet?"
After giving me several examples of big clients asking the same type of question (and remember, these are very large money managers asking the questions) she said that her take away is that although her firm has been bullish since October 3rd ("Okay, we were a little early," she added) her clients are underinvested and still looking for a way to get money put to work in the stock market.
We laughed about the "tough problems" the big boys have in getting billions invested in stocks and I acknowledged that it is infinitely easier for me to navigate in and out of the market in my little motor boat than in the battleships some of her clients have to work with. And then we finally got to the question at hand - have we finally arrived at a meaningful correction?
To be sure, most everybody in the game will admit that the pace of the current run for the roses is unsustainable. And even the most ardent supporters of the glass-is-always-full camp will admit that a pullback to test support would be constructive. My sales rep added that even a modest 3% - 5% consolidation phase might go a long way toward working off some of the extreme optimism seen in the sentiment indicators these days and allow for some additional upside down the road.
But despite the overbought condition, the overzealous sentiment readings, and the fact that the S&P is quickly approaching levels many analysts had pegged as year-end destinations, neither one of us was willing to say, "yep, the correction has arrived" (trend followers are annoying that way). Sure, I understand that all good things come to an end. And yes, I saw the "flash" PMI numbers from Europe and China. But the bottom line is that a 78-point drop on the Dow and a -0.39% fall over in four-letterland doesn't exactly strike fear in my heart.
However, a quick look at history shows that a consolidation phase may indeed lie ahead. If one studies the "waterfall declines" seen in history - such as the short, yet violent bear market we saw last summer - you will find that the type of rebound we've seen over the past five months has been pretty typical relative to historical tendencies. But, there are two key points I'd like to make this morning. First, most of these markets went on to further gains. But ... most of these markets also experienced what I will call a "sloppy period" for a few months in the process. Therefore, we need to be on the lookout for something that might give the bulls a reason to take a break.
However, if that bearish trigger doesn't materialize soon, and if this gal's institutional clients (think mutual funds, pension managers, and hedge funds) are indeed underinvested, and if the hedgies are still underperforming the S&P (tough to charge your 2-and-20 that way!) then the answer to the question is likely to be no. Well, for now at least.
Turning to this morning ... Stocks fell in Asia overnight and are down in Europe at the present time on widening debt and yield spreads. U.S. futures are pointing to a flat open.
On the Economic front ... There is no news scheduled for release before the opening bell but we will get the report on New Home Sales at 10:00 am eastern.
Major Foreign Markets:
- Australia: -0.10%
- Shanghai: -1.10%
- Hong Kong: -1.11%
- Japan: -1.14%
- France: -0.89%
- Germany: -0.69%
- Italy: -0.97%
- Spain: -1.48%
- London: -0.52%
- Crude Oil Futures: $0.24 to $105.59
- Gold: +$4.70 to $1647.20
- Dollar: higher against the yen, lower vs. pound and euro
- 10-Year Bond Yield: Currently trading at 2.251%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -0.02
- Dow Jones Industrial Average: +2
- NASDAQ Composite: +4.15