Rev Shark: It's Not the Economy, Stupid
10/11/2010 7:58 AM
"Nowhere am I so desperately needed as among a shipload of illogical humans."
-- Mr. Spock of Star Trek
For quite some time, the biggest challenge of this market has been maintaining a bullish bias while ignoring much of the negative economic data. It just doesn't seem very logical, but that has been the way to make money. On Friday, we had another classic example where, despite a loss of nearly 100,000 jobs, the market moved up nicely and hit its highest point in nearly five months.
On the surface, it is very hard to understand, but the disconnect between Wall Street and Main Street has been going on since the lows of March 2009. If you simply look at the stock market since then, there is no clue at all that we are wallowing in one of most stubborn and protracted recessions since the 1930s.
There are a number of explanations for this, most of which are just a variation of there being a lot of cheap money out there with no other place to go. QE 2, which has been in the forefront lately, is simply the injection of more cash into the economy through the purchase of bonds. That money has to go someplace, and market players expect that stocks will be major recipients.
In addition to liquidity, computerized trading, particularly high-frequency, algorithmic trading now makes up nearly 70% of total volume. This trading has nothing to do with fundamentals and can often serve to reinforce prevailing trends and take the market to extreme overbought and oversold levels.
Another factor that may be influencing the market is the hope of a Republican victory in November and gridlock. In the past, the market has excelled when different parties controlled the Presidency and Congress. Odds are high that we are heading that way again, and the market is probably pricing it in.
The only way for individual investors to deal with some of this illogic is to simply understand that our negative views of the economy just don't apply. The horrible jobs situation and real estate market just aren't meaningful to the market right now. At some point, those things and all the government reaction to them will matter, but today is not the day.
Right now, we have a clear uptrend in the major indices, and there isn't any reason to be overly bearish. We are a bit extended, but the S&P 500 cut through that 1,150 resistance level and is holding up well. It was troublesome that we had such intense selling in some of the leading high-beta, big-cap names on Thursday. They recovered some on Friday, but we'll have to watch them carefully now. Another reversal to the downside could be a major problem.
We have some standard Monday morning strength once again, but it is a little quieter than usual with the bond market closed for Columbus Day.
As long as the S&P 500 stays above 1,150, we are technically healthy, and there is little reason to be overly defensive. We have some earnings reports this week, but most of the major reports are still a week or so away. It is the bulls' game to lose at this point, and they have a pretty big lead right now.
