What Is and What Will Never Be
I can't believe I'm in the mainstream and I don't have a thing to wear!
Note: The following column was written as part of a special series for our friends at CBS MarketWatch. Please take the time to explore their world and view more outlooks for the back nine of '04.
After widespread anticipation and considerable consternation, our fabled Federal Reserve followed the route of perceived safety and spoke in hushed tones. While I would have preferred to see our financial system take 50 bips worth of medicine, the powers that be decided that slow and steady has the best chance of winning the race. These are, of course, the same politicians who insist that there isn't any inflation but that's a discussion for another time.
My market view is a juxtaposition of the near-term influences and the longer-term structural imbalances. I attempt to assimilate four primary trading metrics-fundamentals, technicals, structural and psychology-and line up as many ducks as possible before risking my hard earned capital. This approach, along with other insightful and real-time educational commentary, can be read daily at www.Minyanville.com (our animated financial infotainment community).
The combination of Friday's payroll data and pre-holiday jitters makes the next few sessions difficult to assess. The landscape, however, contains clues that can help us navigate these near-term nuances. The banks, which I consider to be the most influential sector in the marketplace, are stuck between double support (BKX 96ish) and key resistance (BKX 98ish). A breach of either side of that channel will provide a siren for the reactive trading masses.
If the financials can lead the breed higher, they will trigger reverse head-and-shoulder patterns (bullish) in the NDX, INDU and S&P. These potential signals, coupled with relatively tight corporate bond spreads and leadership from the transports, bode well for an initial lift. If and when this scenario unfolds, it is my belief that the capitulatory action will then lead us to the path of maximum frustration.
We must remember that trading, in its most basic form, attempts to capture the disconnect between perception and reality. Therein lies our task at hand as we balance the current psychology vs. the latent and looming trap doors. Timing will likely emerge as the clear differentiator of performance in our delicate dance between what is and what will be.
I have considerable concerns regarding the sustainability of a rally from current levels. I firmly believe that the recent gains were (are) a cyclical bull within a much broader-and painful-secular grizzly. Mr. Greenspan has resorted to unprecedented levels of stimuli and is desperately trying to buy time to allow the imbalances to self-correct. With consumers, corporate America and the U.S government up to our collective eyeballs in debt and the carry trade in vogue, the specter of higher rates has profound-and very scary-implications.
It remains my humble opinion that when the dust settles, our economy is poised for a stagflationary turn that will catch most players leaning the wrong way. Recent inputs from Wal-Mart (WMT:NYSE), Target (TGT:NYSE), General Motors (GM:NYSE) and Washington Mutual (WM:NYSE) cast a dark cloud on those blinded by the light. One need only to look at the eight year lows in fear (VXO) and the historically high levels of optimism (Investor's Intelligence) to see that virtually nobody is positioned for a sharp turn lower.
I can't tell you whether the unraveling of our tangled financial web will be a cancer or a car crash but understanding the dynamic is the first step towards proper positioning. I will offer that the journey is more important than the destination and our goal is to remain proactive in our approach. Trade smart, remain disciplined and always allow for a margin of error. For at the end of the day, we're all responsible for our own choices.
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