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The Markets Go Round and Round


There will always be two ways to play, and we'll rarely know which to choose.


Standing in the middle of nowhere,
Wondering how to begin.
Lost between tomorrow and yesterday,
Between now and then.

And now we're back where we started,
Here we go round again.

-- The Kinks' "Do it Again"

I'm absolutely amazed at how life and the markets that are part of our life work in cycles. Unfortunately it often takes hindsight to see the perfection of the patterns. It turns out that almost exactly a year after the Lehman Brothers' collapse, the stock market had mounted a full recovery as the S&P 500 Index traded to 1080 last week, a mere 1.7% from that fateful September 15 when the wheels truly came off the market.

Today we may be seeing the completion of the circle and the beginning of a swing lower. With the break of the 1040 support level, third-quarter profits that booked, and investors that stuck with a "buy and hold" (being able to essentially scratch the past 52 weeks), the stock market might actually begin seeing distribution rather the constant ratcheting higher that's defined the market since the March low.

In my Monday morning missive for the OptionSmith newsletter I addressed the conundrum I, and I expect many others, are facing:

It's hard not to remain skeptical that the fundamentals don't support the increasing optimistic economic outlook. Rather the price gains seem to be fueled by increasing performance anxiety and the large amount of cash that remains on the sidelines. Money managers have been forced to buy into ever higher prices and analysts are helping rationalize the push higher by raising estimates that are pricing in a full and smooth recovery…This has created a dilemma between the perceptions that the market simply will not sell off and the need to remain on guard because a sharp correction could occur at anytime."

A Bridge Across Disbelief

To accommodate my opposing views, I tried to build a bridge across my disbelief that stock prices could keep accelerating higher and the knowledge that the market can, justifiably or not, do whatever it wants much longer than seems warranted -- or as the saying goes: could remain solvent.

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No positions in stocks mentioned.

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