Market Is Partying Like It's 1999

Includes: DIA, QQQ, SPY
by: Bob Lang

Some of you may remember those days. I certainly do. Prince (or, is it the Artist Formerly Known as Prince?) said it well about that year. Not to get too reminiscent, but the days of wild market moves (mostly higher), astronomical valuation and crazy price moves (some 15-20% in a day) seem to have come back...only a month removed from impending Armageddon. It's hard to believe that the Bear Stearns (NYSE:BSC) collapse was just a month ago, isn't it? Sentiment and momentum can shift gears on a dime, and with those shifts come a reallocation of capital - quickly. Cash doesn't stay in asset classes for too long before being moved into other performing classes. Call it hot money - and there's lots of it out there.

Bernanke Takes a Swig from the Punchbowl

Collapse of markets was on the horizon, but Chairman Bernanke would have none of it. Print more money, toss it out of helicopters, whatever is needed to shore up confidence. Of course, that takes time AND money. Sacrifice the future and risk higher inflation to get the economy back on track. In a recent Congressional Testimony, Dr. Bernanke all but threw in the towel about a recession, a fait accompli. He also mentioned later that he would do "whatever was necessary to avert a 30s depression-like situation." Bold and aggressive words, but not from a neophyte. He studied that time period extensively and understands the circumstances all too well. Even if the dollar is crushed and inflation reaches higher. For better or worse, it's what we have to deal with.

Earnings COULD be the Right Medicine

We don't expect to see great earnings this season. In fact, watered-down expectations may infer some companies will beat by a mile or more. Take Google (NASDAQ:GOOG) for one. On Friday the market celebrated their beating of their "estimate" by nearly 10%. Clearly more a sigh of relief than overjoy. Why? The company does NOT give guidance, so any estimate is obviously some analyst's best guess. Fact is, their numbers were LOW compared to previous quarters. But a 20% leap in price in one day? A bit wild, if you ask me.

What Happened to Risk?

Google aside, we have seen recently the abandonment of risk, or lack thereof. How do we know? Look at the steep rise in complacency. The VIX is hovering near four month lows after dropping 50% from the peak just a month ago (and from January).

While we don't expect fear to continue to permeate for too long, that's quite a drop. Looking to bonds, yields have risen quite higher of late, with the 10 year bond approaching 4% for the first time in months. Unloading bonds and buying stocks is definitely not risk averse.

Bottomline, we're still in a bear phase. For however long is anyone's guess, but until the big money comes back into the picture, we'll have only memories of previous market parties.