Rev Shark: Respect the Upside Momentum
09/27/2010 8:16 AM
"Where would we be if we had I.O.U.'s ... floating all around the country?" Instead he decided to "issue currency against the sound assets of the banks. The Federal Reserve Act lets us print all we'll need. And it won't frighten the people. It won't look like stage money. It'll be money that looks like real money."
-- Treasury Secretary William H. Woodin (from "Closed for the Holiday: The Bank Holiday of 1933," Federal Reserve Bank of Boston, March 7, 1933)
The action on Friday caught many market players by surprise. After three weak days in a row, we were due for a bounce, but the strength of the move reflected some panic-buying and performance-anxiety. Volume could have been a bit heavier, but breadth and leadership made up for it.
What triggered the action were some OK economic reports, but mostly it was a hedge fund manager who earned over $4 billion and was the highest paid hedge fund manager in 2009 that fanned the flames. David Tepper on CNBC simply set forth a common sense theory that either we have a bad economy and the Fed drives the market up with more money printing or we have a better economy and that drives the market. No one seemed particularly inclined to argue with him, and that is what really spiked the action on Friday.
The possibility of QEII has been driving the market all month. At the end of August, there was much worry that we were headed for a double-dip recession, but Ben Bernanke and the Fed have made a number of not-so-subtle hints that they are prepared to run the printing presses as needed should they need to do so. That has kept a bid under the market and has sent us straight up for nearly a month now.
Since the bottom in March of 2009 the primary driving force in this market has been excessive liquidity and cheap money. There just aren't many places for cash to go so it ends up flowing into the market and gives us these straight-up, light-volume moves.
This phenomenon has caused many people to struggle with the market. First, it just isn't easy to reconcile with the state of the overall economy. The stock market hardly reflects any economic problems at all while most individuals have a dramatically different perception of real estate, jobs and economic growth. If you have tried to use the health of the economy to determine your level of stock market bullishness, you have likely had a tremendously difficult time.
The second difficulty that this excessive liquidity causes is that stocks tend to act in an unusual fashion. First, they are much more highly correlated because when the money flows into the market, it isn't selective. Big baskets of securities are purchased, and everything goes up together. Individual stock picking has mattered much.
Lately, there is a preference for some of the big liquid momentum names such as Apple (AAPL - commentary - Trade Now), Google (GOOG - commentary - Trade Now), Netflix (NFLX - commentary - Trade Now), Chipotle Mexican Grill (CMG - commentary - Trade Now) and the like, but I suspect that has to do with fund managers trying to make up some relative performance. It is still liquidity-driven action, but managers have been unable to outperform by just buying indices, so they are focusing a bit more on certain names.
The most important thing we can do as individual investors is to simply be aware of what is driving the market. Fighting a flood of liquidity just doesn't work very well, even when we are technically extended and/or have a lousy economy. If the Fed is still printing money, it is going to drive the market, no matter what else is going on.
I try to deal with this by not being overly anticipatory. I want to respect the upside momentum until I see some clear evidence that it is slowing. I thought the slowing last week was an indication that we were due for some consolidation, but it's hard not to be impressed by how quickly we heated up again on Friday.
At this point, there are some tremendously extended charts, and if we see further upside, you better be ready to do some chasing if you want to play. That is not easy to do if you are prudent about entry points, but straight-up V-shaped moves are a pattern that this market has embraced and will continue to embrace.
We have a quiet morning so far and aren't repeating the big gap opens we saw to start the last two weeks of action. We'll see how quick the dip-buyers are to jump in after the open, but even some of the bulls wouldn't be unhappy to see a rest at this point.