Good morning. With the DJIA at fresh new all-time highs, all the major indices sporting new 52-week highs, and the S&P having finished in the green 8 of the last 9 sessions (and the last 6 in a row), it is obvious to anyone with an open mind that the bulls are large and in charge at the present time. In short, I'm not sure what more I can say. The trend is up, there is a wall of worry to climb, and there doesn't seem to be any new crises brewing.
On that last point, I should probably let you know that my working thesis for 2013 is that no new crisis means no severe correction. Yep, for me anyway, it's that simple.
Before you start accusing me of being naive or something worse, note that I included the word "severe" as part of my working thesis. Note that I am NOT saying that stocks won't experience a couple of "normal" corrections this year. It is important to understand that regardless of how strong a bull market may be, the market almost always sees a handful of 3% - 5% pullbacks during any given year. And the bottom line is a garden variety type of correction can occur at any time, for any reason.
No, I'm talking about a "severe" correction - something on the order of 10% - 19% (technically anything over 20% is considered a bear market by most people). I'm talking about the type of violent decline that has earmarked the last three years. I'm talking about the headline-driven misery that has caused the vast majority of investors to believe that this remains a lousy stock market. Go ahead - go ask 10 people what they think of the stock market. Before this week's new all-time highs, my guess is that 8 of them would have told you how tough it is out there and that the market is fraught with risk. And in my humble opinion, despite the fact that the market has more than doubled since the end of the Credit Crisis, the simple fact is the market HAS been fraught with risk since the beginning of 2010.
Lest we forget, the European debt mess was the primary trigger to the big dive of -16% that occurred during the "sell in May and go away" period of 2010. Back then it was worry about Greece, rate contagion, the state of the global banking system, and the fear that the eurozone was about to implode (something that would purportedly send the global economy into a tailspin, the likes of which we've never seen) that reminded investors of the dark days of 2008-early 2009. Then in 2011, it was a combination of Greece and the U.S. budget battle that caused the market to dive nearly 20% in something like 14 days. And then last year, worry over Europe once again sent the sell algos into high gear, causing investors to yet again equate the month of May with market misery (i.e. a decline of 10%).
So, with a clearly developed pattern now in place, every trader worth their keyboard knows to be on the lookout for the return of the European debt mess and/or the budget battle in Washington - especially with the market in an overbought condition and the month of May starting to creep closer. Thus, I can certainly understand why many investors remain skeptical of this rally and are worried about getting smacked around again sometime soon.
While history shows that "severe" corrections of between 10% and 19% have happened once a year on average, my belief is that this type of decline usually has a catalyst or a trigger. In other words, unless something comes along to cause investors (oops, I mean the sell algos) to panic, the market usually (key word) doesn't do a big dance to the downside just for the heck of it. And I believe this to be especially true when stock valuations are not excessive (think 1987 and 2000).
So, my thinking is that unless we see a new catalyst - or a resumption of one of the old catalysts - I'm just not sure the market will repeat the now three-year old trend of succumbing to a severe correction every year. I know, I know, Europe is a rate-spike away from becoming a problem again. But frankly, I think that if Europe was going to be a problem again, then the election in Italy would have produced more than a four-day decline of -2.8%. In addition, it seems that the professional politicians in Washington have finally figured out that none of their jobs are safe if they continue down the recent path of brinkmanship. The quiet passing of a continuing resolution to fund the government for several months would be my exhibit A here. Therefore, my guess is that both Europe and the budget battle in Washington are off the table for now in terms of being a correction catalyst.
Of course, I could be wrong. As the saying goes, things don't matter until they do and then they matter a lot. And of course, I don't base my investment decisions on my macro view. As usual, I let my Market Environment Model (which Friday sported a reading of 90%) and my trading rules dictate my moves. So, my working thesis is really little more than a "two cents worth" opinion or a "just for fun" forecast.
If I'm being objective, the biggest potential catalyst for a big decline I see out there is the Fed pulling the punch bowl from the QE party. While I vehemently object to the idea that the only reason stocks are going up is in response to easy monetary policy (although "don't fight the Fed" is clearly a key component), Bernanke's bunch has made it clear that they will keep the money flowing until unemployment reaches 6.5%. And with Friday's report showing the current rate moving down to 7.7%, I can see how traders might be starting to focus on this issue. As such, if we start to see signs that the economy is really starting to gain traction, then I could see how a "severe" correction could begin.
But since most economic data is still in the "Goldilocks" column at the present time, I'm going to stick to my thesis for now: No new crisis = no severe correction.
Turning to this morning ... Weaker than expected data out of China over the weekend as well the continued concerns about the eurozone have put a damper on the enthusiasm for stocks in the early going. Recall that there is no economic inputs slated for today to guide traders. In addition, if it's Monday, we can expect the sellers to show up as every Monday except one - last week - so far in 2013 has finished in the red.
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: -0.33%
- Hong Kong: +0.00%
- Japan: +0.53%
- France: -0.50%
- Germany: -0.36%
- Italy: -1.02%
- Spain: -1.45%
- London: +0.01%
Crude Oil Futures: -$0.21 to $91.74
Gold: +$2.50 to $1579.40
Dollar: lower against the yen, higher vs euro and pound
10-Year Bond Yield: Currently trading at 2.041%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -3.02
- Dow Jones Industrial Average: -15
- NASDAQ Composite: -6.41
Thought For The Day ...
Remember happiness doesn't depend upon who you are or what you have; it depends solely on what you think. -Dale Carnegie
Positions in stocks mentioned: none