“See me. Feel me. Touch me. Heal me.”
They say that beauty is in the eye of the beholder. For stock enthusiasts around the world, the next few weeks will put that theory to the test.
The final earnings avalanche of 2007 is upon us as traders anxiously await the upside validation. The rally off the angst-ridden August lows has been impressive and relentless, leaving the bears to wonder what happened to the housing debacle, credit crunch and seemingly stretched-out consumer.
Indeed, through good news and bad, the bulls haven’t blinked since Hammering Hank and Helicopter Ben opened the spigot of liquidity and flushed out negativity. The million-dollar question, of course, is whether the tape can sustain the gains attained.
The market, as I’ve learned through the years, is comprised of four primary metrics
. Four legs, if you will, that set the table for any profitable decision making process. The more balanced the metric assimilation, the more likely a positive outcome becomes.
(AA) in the rear-view and last week’s financial confessions behind us, we thought it would be helpful to chew through the current dew. Technical Analysis
We’re at all-time highs in the S&P
and it’s hard to view those technical breakouts with a negative lens regardless of whether you agree with the catalyst or popular perception that triggered them.
For my part, I use charts as a context with which to define risk. I don’t defer to this metric for, if I did, the market would be “better” higher and “worse” lower. That stylistic approach works in a momentum driven tape but it’s a death knell during periods of two-sided market volatility.
While the broader market complexion appears clear, there are numerous blemishes under the surface that warrant our attention. The non-confirmation (of new highs) in the transports and banks, for instance, are historically pertinent negative divergences. Ditto the market internals, as both the NYSE advance-decline line and new highs peaked earlier this year.
Further to that, leadership is narrowing as fewer stocks lead us higher. Case in point and courtesy of our friends at Lowry’s, only 17% of the DJIA components hit a new all-time high (and 33% hit a 52-week high) on October 1st when the DJIA tagged an all-time high. Psychology
One of the reasons that this disconnect gets little attention is a function of the sexiness of the current leadership. The master beta
names - Google
(GOOG), Research in Motion
(AAPL) and Baidu
(BIDU) - morphed from hiding spots during the credit contagion to vehicles for quarter-end performance anxiety to momentum plays in one fell swoop.
History tells us that fervor and frenzy are most acute when risk is highest. That’s not to say these names and others (China and the emerging markets) can’t trade higher—the last phase of denial, migration, & panic is always the most vicious—but we’ve seen this movie before. It is comical in some ways and sad in others that we collectively fall prey to the same sultry sirens.
A wise trader once offered that bottoms are points and tops are processes. I’m not brave enough to call a top but I am aware enough to absorb the anecdotal evidence that surrounds us. In two short months, volatility has fallen 60%, put protection has been purged and bullish sentiment in both the AAII and Investor’s Intelligence are at the highest level in nearly a year.
I’m uncertain if we’ve reached extreme levels of speculative frenzy but equally unsure if it’s a necessary precursor for a fall. We’ve got the dot.com and real estate bubbles behind us and China and credit ahead. The question becomes whether investors will view the former storms as lessons or the future blues as mistakes. Fundamentals
Thompson Financial recently reported that third-quarter earnings are on pace to show a flaccid 1.7% rise vs. last year’s 20% growth. Popular perception, as evidenced by last week’s reaction to Citigroup
(C), Merrill Lynch
(UBS) and Washington Mutual
(WM), is that this was a “kitchen sink” quarter.
A hiccup, if you will. A burp, or sorts.
The key to the collective reaction will lie in the theme of guidance. If enough companies fess to uncertainty, the all-important psychology metric could shift. More likely, however, we will see feigned assurances by corporate America that they’re constructive on their outlook.
In my experience, this could potentially be more problematic for the marketplace. The fatal flaw of fundamental analysis is that news is always best at the top and worst at the bottom. After the rally we’ve seen, buying the rumor and selling the news is a viable—and entirely unexpected—outcome. Structural
We’ve spoken at length about the “asset class deflation vs. dollar devaluation” dynamic and you know what’s at stake. Either the dollar is gonna take it on the chin or asset classes will retreat en masse. (See Russian Roulette!
Last night, while writing this column, I received an e-mail from a reader who asked if it’s possible that we enter into a Weimar Republic style hyper-inflationary equity blow-off. My answer to him was yes, albeit with a very big asterisk.
The difference (aside from the obvious) is that the world wasn’t denominated in Deutsche Marks between 1919 and 1933. That, while the Federal Reserve would opt for hyper-inflation over watershed deflation, foreign holders of dollar-denominated assets now have leverage in global financial policy directive.
Thus, the question becomes one of patience and process. The Beltway has steadily moved towards protectionism, intervention and over-regulation and they will play this hand until they are called on their bluff.
The upside of anger is that in an interwoven global financial fabric, the rest of the world will suffer in kind if the cards fold on the table.
And that risk, as we’ve come to understand, will be pushed out on the curve for as long as humanly possible.
No positions in stocks mentioned.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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