Have the Bears Missed Their Opportunity (Again)?
Yesterday morning's meandering market missive ended with the following note, which seemed prudent at the time it was written: "While the bulls could always get something going should the situation in Syria subside quickly, the cycles suggest that it might be a good idea to be careful out there for a while." In fact, there has rarely been a time when it has been so easy to be negative on the stock market. After all, just about everybody suggests stocks will be moving lower, right?
Right. So, why is it that the S&P 500 finished higher for a fifth consecutive session yesterday? Why has the index closed up in seven of the last eight days? Why did the NASDAQ Composite finish at the highest level in thirteen years yesterday? And why did so many stocks end with big gains on Monday (our Insider Portfolio was littered with gains of 2.5 to 4.5 percent at the close)?
It's So Easy To Be Negative Right Now
Aside from the price action of the past week or so, the bear camp seems to have everything in their favor. By now, everybody on the planet knows "September is the cruelest month." On that note, my readers now know that the historical cycles are projecting a downhill slide for the remainder of this month. There is the situation in Syria, which involves Russia and the price of oil. There is "the taper" to deal with in a couple weeks. There is the anticipated battle amongst the boys and girls in Washington over the budget. There is the fact that interest rates are getting uncomfortable and could easily start to squeeze profits it the rise continues. There is the never ending worry about Europe as the German election is coming up this month, the Italian situation is becoming bumpy again, and Greece is always a wild card. And finally, the bears remind us that the state of the tape is not altogether positive at the present time.
Speaking of the tape action, there is a lot of talk about a decent-sized head-and-shoulders top pattern forming. There is the hard, cold truth that the current bull market is getting old. There is the fact that the S&P 500 is up more than 17 percent year-to-date and as such, many feel that stocks have gotten ahead of themselves. There is a lot of talk about Dow Theory right now (but to be honest, I'm not sure what all the fuss is about as this "theory" involves an awful lot of subjectivity and "art"). There is the fact that respected technician and long-time bull, Ralph Acampora announced Monday that he had turned bearish for the intermediate term (although Ralph did stress he remains bullish on the long-term outlook). And finally, it should be noted that a couple of our "thrust" indicators flashed intermediate-term sell signals recently.
The bottom line here is that it is just so darned easy to be bearish right now. And just eight days ago, it looked like the glass-is-always-half-empty crowd was clearly in control. But, as is often the case in this game, the decline ended quickly and all the negativity was able to produce a pullback of just 4.63 percent.
Why The Turnaround?
While stocks could easily turn again on a dime and embark on a retest of the lows at the drop of an algo, it appears that the easing of fears is the key to the current advance. So, let's break it down.
Syria: In case you were on buses and trains or stumbling around airports on Friday, it is important to recognize that the quick 20-point dive and subsequent recovery was ALL related to headlines out of Syria. As such, it is pretty easy to say that the primary focus is on the potential for an armed conflict in another oil producing country. The worry is that if missiles fly, oil production would be interrupted, which would send prices higher. In turn, higher oil would impact profits.
However, with Congress looking unlikely to back another war and more talk of diplomatic solutions, the fear emanating from Syria has subsided in recent days. As such, shorts have covered and dip buyers have stepped in.
Taper Talk: While tapering is clearly not the same thing as tightening, the bottom line is that when the Fed reduces its bond-buying program, there will be fewer dollars buying bonds and less pressure on interest rates. In short, this explains the "taper tantrums" that has been seen in the stock and bond markets since Gentle Ben first broached the subject back in May. And with the Fed meeting in just a couple weeks, the current expectation in the market is for the Fed to begin "tapering" their stimulus program.
However, the anticipated action by the Fed is beginning to sound more like "taper light." Just yesterday purported Fed mouthpiece Jon Hilsenrath wrote that the FOMC may start to reduce their purchases by only $10 billion per month. The bottom line is that expectations for a reduction of $10 billion a month on the current $85 billion is not exactly a bold move by the Fed. Thus, the current thinking in the market is "don't fear the taper."
Economic Fears: Another fear in the market has been over the lack of growth in the global economy. There is worry about the economies of the U.S. and Europe, as well as places like China, Japan, and Brazil.
However, the recent data seen around the globe has largely been better than anticipated. ISM/PMI numbers weren't bad. Japan's GDP was just revised higher. And China appears to have bottomed out. So again, anyone using economic data as their guide would have to be covering their shorts and/or adding some long positions.
As a result of receding fears, stocks have been movin' on up lately. Of course, the question of the day is if the move is for real or if it will end as abruptly as it started. While we obviously don't have an answer here and we don't play the prediction game, there is very important resistance overhead in the 1680 area of the S&P 500. Thus, we continue to believe that this is a time to put your opinions aside and let price be your guide until the next major theme/move reveals itself.
Turning to this morning... Stocks around the world are rallying this morning on the hope that Syrian President Bashar al-Assad will take the Russian proposal and turn over control of the country's chemical weapons. While the proposal is not new, the fact that President Obama has deemed it a "possible breakthrough" has investors breathing a sigh of relief. As one might expect, gold and oil are lower in response while bond yields and stock prices continue to improve. In addition, better-than-expected data out of China is creating the impression that the slowdown in the Chinese economy has bottomed. Stock futures in the U.S. are pointing to a higher open.
Positions in stocks mentioned: none
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