Is the Bull Market Running Out of Breath?

by: Bo Peng

The relentless bullrun since the small bottom after the Japan quake has been quite impressive, ignoring all bad news and potential troubles. It's as if whenever the broad indices dip into red, some invisible hand sticks in and pushes it right back into green.

But last few days have shown some signs of bull fatigue. Bellwether momentum stocks [Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and much less noticed industrial metal smelter Allegheny Technologies (NYSE:ATI)] have diverged from the market and become weak. ATI is an interesting stock in that it not only tracks S&P 500 very well (only more volatile) but also often slightly leads -- its business is mature, stable, and closely tied to the fundamentals of the economy. And the broad market have followed the dome shape intraday, going up in the morning and then losing steam towards the end. Repeated dome shape is often indicative of a top. One more thing: M&A has been a major driver in recent months. M&A tends to peak towards the end of bullruns -- yet another testimony to the superior foresight of corporate executives, matched only by their well-deserved superior compensation.

My guess is the market is waiting for a trigger to let out some steam, which could be small or big. And there're plenty of potential candidates. I'll just list out a few here; you can easily find more in-depth discussions of them in the blogosphere.

  • The Japan nuclear disaster is a gift that keeps giving. So far it's still mostly local and the rest of the world has been largely -- and sadly -- standing aloof. If/when the world rushes in to help, panic.
  • Nikkei and Yen have been on a free fall while BoJ is trying to follow the Fed and print up liquidity. But sorry, BoJ doesn't have quite as much luxury as the Fed since the yen is not nearly as much a reserve currency as the dollar. The reserve status is for Fed to kill, ruin, destroy (which they've been doing a fine job at so no worries). Printing will not increase their purchasing power. When will they have to dump JGB and U.S. treasuries to buy the increasingly expensive oil and other basic materials and components to stabilize the economy and then rebuild? I know they won't. But when will they?
  • Portugal just stopped pretending. I've been eyeing Spain for a year now but more people are asking -- how long can Spain remain below the radar?
  • China raised rates. ECB did, too. Brazil is curbing capital again. Notice that all these are not to cool down economy, bur rather only to stop commodities inflation, which is of course not due to Fed's actions (why anyone would think of such devious thoughts is beyond me, but even if it is the inflation will be transitory anyway so stop bitching). This is akin to drinking piss to quench life-threatening thirst -- rational, yet a bit unappealing and with consequences. So, as the Fed keeps printing and drives commodities prices down according to Fed research by PhDs from decent departments, commodities will keep going higher and higher; as the inflation is transitory according the chairman, it will continue. The new global imbalance is that Fed generates the huge, sustained dollar tsunami that washes out the whole world. When will the world stop taking it in the rear and drop the dollar for bartering?
  • Earnings season is coming up. Manufacturers and retailers have been trying hard to swallow the pain of higher input prices not caused by Fed. I think the shrinking margin will show up this quarter. This may not be so disastrous if not for the rosy estimates.
  • Housing, employment, wages, Obama's $1B campaign. I bring up the last point only to highlight the strength of recovery and the progress our society has been making. If a skinny kid with a funny name can raise $1B for his re-election campaign, why is anybody worried about government shutdown? Apparently I'm not the only one thinking government shutdown would be a long-overdue, much needed break for the people. But such an event might have interesting market implications.

I don't know when the trigger will come. Stupid, insane bubbles can keep bubbling for a long time. In the bigger scheme of things, the current one is probably not that impressive in the stupidity department. But I thought it's very impressive with its open, unmitigated audacity of hopium. It should be almost morally satisfying to watch it burst.

Disclosure: I am short ATI, SPY, EWJ, FXY.