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Random Thoughts: The Market is Speaking; Are You Listening?

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The action under the hood of the market suggested the bears have their best chance this year to make a downside statement.

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As political sex scandals and forward promises of fresh tech IPO's jockey for mindshare this week, the stock market has quietly slipped from atop its perilous perch.

While speaking at the Reuters 2011 Investment Outlook Summit this past Tuesday, I offered that the action under the hood (of the market) suggested the bears have their best chance this year to make a downside statement.

"This is not a market for hope," I told the panel of reporters, "There's no shame in admitting it's hard; there's only shame in pretending that it's not."

What am I basing this assessment on? A few items, in no particular order:

  • The mainstay indices -- the Dow Jones Industrial Average, the S&P 500, and the NASDAQ -- share a similarly sullen pattern of "lower highs," which is traditionally a sign of distribution (institutions reducing exposure).

  • The former stock market leaders -- Google (GOOG), JP Morgan (JPM), Goldman Sachs (GS), among others -- have been under pressure. Without those generals leading by example, the rest of the troops could lose their way.

  • Bank stocks, which generally lead the broader market in either direction, act like pooh. The KBW Bank Index (BKX) is down 17% since Valentines Day, compared to a 5% decline in the S&P.

  • The dollar index is attempting to establish a "higher low," which is potentially bullish for the dollar. While asset classes and the dollar can both decline, I don't foresee a scenario where they'll rise together (a stronger dollar is a headwind to higher stock prices).

  • The spring of discontent in the Middle East has morphed into a hot and bothered summer, and the specter of geopolitical strife has both tangible implications such as higher crude, which is an implicit tax on the consumer, and intangible consequences such as social mood, which shapes investor risk appetites.

  • To be sure, there are two sides to every market -- a bull case and a bear case -- and the residual grist will shape our forward financial path.

  • While corporate credit markets continue to suggest higher stock prices -- although we must note the relative widening (negative) in the spreads yesterday following the best issuance month in history -- the destination we arrive at pales in comparison to the path we take to get there.

  • Until the dynamics above -- the tenor of the financial stocks, patterns of lower highs, emergence of leadership and the direction of the dollar -- shift, we would be wise to remember that capital preservation is the first step towards wealth accumulation.

  • Have a great weekend; you've most certainly earned it.


R.P.

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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 todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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