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Something's Gotta Give



We enter the heart of the earnings announcement season with the focus clearly back on the economic (and therefore Corporate) landscape, given that the War has gone better and more swiftly than expected.

Since the initial surge off the low last October, the S&P 500 is very little changed, despite strong opinions among both bulls and bears that a sustainable advance or decline was approaching. The reality of the market over that period is that while there were times that "felt" like the beginning of a sustainable move was upon us, anything up or down was quickly reversed.

The S&P 500 is basically unchanged from the initial surge off last October's low.

In my view, the reason for the lack of sustainable moves is that investors have basically established their long-term positions and don't want to react to news that has already been circulated and rehashed many times.

The positive spin is that the economy is already in recovery and should pick up dramatically once the war cloud is removed, making earnings estimates (and therefore valuations) overly conservative. The other side of the coin is that there are no signs of real improvement yet, and therefore there is too much hope in the market.

While that is a BIGTIME oversimplification of the current environment, the point is that the longer-term investors have already made their bets on whether the equity market can have a fourth down year in a row. This leaves the more aggressive funds and trading desks that are shorter-term in nature to whip the market around using the various Exchange Traded Funds (ETF's) and futures contracts.

It seems to me that given the fully invested nature of equity mutual funds, something has to happen that will either draw individual investors back to the market or cause the aggressive funds to get long and press the bet to the upside.

My problem is that I find it hard to imagine what would make either of those things happen in a sustainable way over the near-term. The war is nearly over and discounted, so those with a longer-term framework now must look for (or wait for as the case may be) clues of improvement in economic releases and quarterly profits - again that should take some more time.

One thing for sure, the QQQ and SPY are unlikely to lead the market out of the bear mode, so it may be time to watch for sector and individual stock leadership as the first quarter earnings reports unfold. If most funds are fully invested, absent new money coming in, the only way to outperfom may come from aggressive rotation vs. simply buying "the market."

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No positions in stocks mentioned.
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