The Hope Trade Arrives
The eyes of the world are cast overseas.
On Wednesday night, Steve Jobs -- perhaps the greatest visionary of our generation -- passed away after a prolonged battle with pancreatic cancer. Thursday, following a gut-wrenching week of assisted living, we put "The Grand Dame," our 15.5 year-old feline Phoebe, to sleep. And on Saturday, Al Davis, the maverick owner of my beloved Raiders, died at the age of 82. His team, in tribute, rallied for a come-from-behind victory over a talented Texans team.
This threesome shared a common thread in that they all marched to their own drummer. Steve Jobs, after being pushed out of Apple (AAPL), responded by quite literally changing the world. Phoebe, as those who met her through the years will attest, didn't conform to her environment -- the environment conformed to her. And Al Davis, as even his most ardent enemies will admit, changed the game of football on virtually every level.
I'm a reflective person by nature and felt more retrospective than usual this past weekend. As the Occupy Wall Street protests build momentum -- which is in lockstep progression with the tricky tri-fecta of societal acrimony, social unrest, and geopolitical strife that Minyanville foresaw years ago -- I can't help wonder if the future is now. Indeed, I've openly offered that my most lucid thought is to move my family away from the city and while we're actively "listing and looking," that process takes time.
Which brings us to the stock market, whether we like it or not. The equity realm is the single biggest global thermometer of social mood and that fact isn't lost on the boys from the Beltway, particularly with an election approaching. Two weeks ago, we wrote a column in which we offered The Hope Trade Cometh and last week's rally, coupled with this morning's headline, would suggest that it has arrived.
Several conditional elements for an upside surprise are in place; sentiment is sour, the banks are on their heels (into earnings that everyone and their sister knows will suck), and performance anxiety is pervasive, which lends itself to a "buyers are higher" dynamic (if fund managers under-perform as the fourth quarter evolves). That, coupled with the technical set-up -- the first real resistance doesn't come into play until S&P 1250, or 8% above Friday's close -- warrants respect from the grizzliest of bears.
Of course, the bears won't go down quietly; they'll preach that "hope isn't a viable investment vehicle" and remind us that the debt crisis has been cumulatively building for many years and there are no magic pills or sudden panaceas. Should the upside arrive -- markets move in two directions, at least historically -- they'll use rallies to lighten up risk or build short side exposure, depending on which side of the bed they happened to wake up on.
There are a few clues nestled in the fuse that are worth keeping an eye on. The "N's over S's" relationship we've been monitoring is again stretched (see the chart below). That "should" regress to an "S's over N's" (S&P out-performance of NDX) when the dust settles, although we should respect that fund managers will migrate to the high beta sphere if and when they need to play ketchup on their performance.
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Another clue can be found in the financials, as evidenced by the second chart below. They've traded funkier than week-old milk despite the rally attempt in the broader market. That, as you know, has traditionally been a warning sign that something is rotten in Denmark (or Slovenia or Portugal or Ireland, as the case may be). Bank America (BAC), Goldman (GS), Deutsche Bank (DB), Barclays (BCS), and Citigroup (C) are stocks to watch in this regard.
Click to enlarge
If you were to ask me my "official" stance, I would offer that I respect the upside but fear unresolved business to the downside. A hands-over-ears view of the mainstay indices continues to suggest a "bearish churn" under resistance, and the uptick in volatility isn't particularly bullish either. Further, a nagging realization continues to haunt me: The Crash didn't cause The Great Depression, The Great Depression actually caused the Crash.
As the protests multiply in size and scope, we would be wise to remember that social mood and risk appetites dictate the future path of capital markets.
As always, I hope this finds you well.
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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 email@example.com.
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