Warning: Dangerous Curves Ahead!

By Todd Harrison  JAN 25, 2013 10:21 AM

The denial-migration-panic continuum is due to shift.


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

"We are in this era where financial innovation and product structuring, particularly in the debt markets, has been very stimulative," says Henry H. McVey, chief US investment strategist at Morgan Stanley (NYSE:MS).

"VIX doomsayers are out of data; options markets are confirming the recent strength in stocks, and to such an extent that we may be looking at a new, calmer volatility environment for quite some time," says Jared Woodard of TheStreet.com

“We will not have any more crashes in our time,” said John Maynard Keynes in 1927, as highlighted in our Question Conventional Wisdom series on Minyanville.

Peter Atwater—and Bob Prechter, for that matter—has written extensively on the notion that social mood and risk appetites shape financial markets, not the other way around. Through their lens, the stock market crash didn't cause the Great Depression—the Great Depression caused the stock market to crash.  It's a subtle, yet critical distinction.

I'm in their camp, as evidenced by recent work that includes The Devolution of Social Mood. In fact, I'll be joining like-minded individuals at The Socionomics Institute Social Mood Conference in Atlanta on April 13. I find this school of thought fascinating, in part because most of the world is trained to think in a completely different way.

The headlines above are consistent with what we would expect at five-year highs.  Fear has morphed to greed—at least in the institutional realm—and the denial-migration-panic continuum that has been tried, true and tested, remains very much in play.  We touched on this yesterday in The Three Phases of Leave and would be wise to respect the unexpected despite headlines and highlights to the contrary.

While the bulls are quick to point to the earnings in Google (NASDAQ:GOOG), IBM (NYSE:IBM), Netflix (NASDAQ:NFLX), CSX Corp (NYSE:CSX), and McDonald's (MCD) as validation of the recent ramp—while dismissing the Apple (NASDAQ:AAPL) miss as company-specific—I would offer a few words of caution.

First, the market is a leading indicator; so much of this news is baked into the tape (although, through objective eyes, the reaction to news is always more important than the news itself).

Second, social mood is bifurcated at best and the disparity between a stock market rally and legitimate economic recovery is palpable. There are haves and have-nots, red states and blue states, Wall Street and Main Street—and that’s just stateside.  This dynamic continues to manifest internationally, be it Costa Rican capital controls or Chinese currency manipulation.

Third, as flagged back in December 2012 when the S&P (INDEXSP:.INX) was at 1420, the technical pattern "works" to S&P 1520 and we're a kitten's whisker away from that level.

In short, the easy trade for the bulls is in the rear view; that doesn't mean we can't climb higher, it simply means you should see both sides before risking your hard-earned coin, and practice discipline over conviction as we together find our way.

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Twitter: @todd_harrison

Positions in GS, SPX, RIMM