Market Assessment: Running of the Bulls or Cusp Points ?
My what an interesting time we're having all of a sudden. In the last two weeks most of the major US indices have run up about 5% on hopes of a Fed cut. Despite that there seems to be an increasing hesitancy on the part of the markets. In fact attending the neighborhood Xmas party Sa. night got to chatting with two of my neighbors friends who're in the business. Both of whom lamented how volatile the markets have become. We avoided busting the long-term downtrend and in fact seem to be almost exactly repeating the up/down cycle from last July to Nov. And for the same reasons. Like July the Nov turndowns were triggerred by new revelations of credit market difficulties and a return of widening credit spreads indicating re-acclerating problems. And this time around, as Fri's results show, we don't appear to be as complacent as everyone was in August. In fact if you look at the prior dipsy doodle it was 10% down and 11% up. Well we've almost exactly mimiced that and the certainty of at least a 25 bps cut on Tue is high. So the question is will the bulls keep running or are we seeing a major change in outlook and expectations ? Certainly the higher-frequency data doesn't support a strong outlook for '08.
Here's my preliminary hypothesis: this volatility will continue and increase into and thru '08 making this very much a trading market while, I think/hypothesize/guess that we'll move sideways for a long while until deteriorating economic conditions force a more severe downturn. Or at least until we get greater clarity on the outlook for GDP, profits and earnings over the rest of the year and into '09/'10. As we've pointed out btw Housing and Credit markets continue to deteriorate rapidly and the understanding that this could go on for a while is widening. As we pointed out in the pior posts the apparantly good GDP and employment news has never been treated with so much caution by the commentariat.
Along those lines we'll point you to the following weekend news stories just to give this set of arguments some backup. Below the line you'll find our latest summary assessment table along with a couple of market outlook charts for you reading and review.
Stocks feeling out the Fed U.S. stocks finished near the flat line on Friday, but managed to pocket weekly gains of nearly 2%, as investors remained hesitant to make large moves before next week's policy-setting meeting by the Federal Reserve. "We have a Fed decision on Tuesday; who is going to make a big bet now? So we have a lot of folks sitting on their hands," said Art Hogan, chief market strategist at Jefferies & Co. Ahead of the opening bell, the Labor Department reported the addition of 94,000 nonfarm payroll jobs last month and said the unemployment rate held steady at 4.7%. Economists expected the rate to climb to 4.8%. The data "points to an economy that is not slipping into a recession anytime soon, but we're likely to see some sort of a pullback here because most of the news is already digested, and a rate cut is already priced in," said Cardillo.
Bulls to ride Fed next week Wall Street likely to see fresh gains thanks to anticipated rate cut. U.S. stocks are likely to rise early next week with another interest rate cut all but guaranteed from the Federal Reserve, but strategists said the strength and durability of any gains will hinge on the central bank's outlook for the economy and on whether there is any further fallout from the credit-market meltdown.
- S&P 500 Declines After Job Data Reduces Speculation of Larger Fed Rate Cut
- Stocks Sputter After November Job Report
Here's our assessment table we've explained elsewhere. See what you think:
| FACTOR | SITUATION | EVALUATION | Surprises to Watch For |
| Structure | Asset deflation pressures Dollar pressures, Rising inflation Supply/Demand imbalances for oil Spreading Credit market problems | C/C- and dropping | Worsening of known credit problems and accleration Widening of credit market problems to other asset classes Short-term credit squeezes are spreading among lenders |
| Fundamentals | Slowing Economy Housing worsening with outlook for 20-30% price declines Credit tightening with increased capital pressures Fed and general outlook for sub 2% growth | C- and dropping | Housing problems worsening in perception (not earlier analysis) Risks of recession rising
Jobs reports o.k. but viewed skeptically |
| Technicals | Markets back to synchronicity Fed cut expected Credit problems still pushing toward quality Upbounces in all markets | B/B- and strengthening in short-term | Bounce appears short-term and week; based on Santa rally |
| Outlook | Major change in outlook and realization of structural and fundamental problems
| B-/C+ | Bounce underway but watch for arrest & sideways if fundamental outlook weakens, or worse. |
Now let's complement that with a multi-time period chart of the SP500 that compares and contrasts
the last five years with the last six months with the last 10 days. If you take a look we think you'll see many of our themes confirmed with the long-term trend intact. What we argue are the underlying structural and fundamental realities won't be fully reflected until that uptrend is violated. At the same time we seem to have begun loosing our "irrational exuburance" after an earlier runup this year above the long-term trend and, based on the six-month chart the markets appears to be shifting to more of a trading range. That would suggest an investing strategy for the next several months of going long at the bottom of the range and short at the time. And if you're investing for the long-term it also suggests a) waiting for those bottoms to become clear and b) keep a careful, careful eye on the long-term trend getting busted. Remember in '02 how reality finally set in after 18 months of thinking the next uptrend was just around the corner and everything got driven down without exception. That's a risk you should be keeping mind, in our humble opinion.
At the same time the premiums that built up in, particularly, the technology stocks earlie this year appear to be evaporating. Here in a complementary chart the SP500 is compared to the NYSE, the Nasdaq and the NDX. Notice that while the NDX gained and kept a bit of premium in the long-term, and that the NYSE which is much broader index reflecting the impact of the small-caps over the long-term, that the differences have evaported in the last ten days. Fascinating indeed. Implications ? Certainly food for thought and careful consideration indeed !
To a certain extent the increasingly negative outlook for capital spendinng in general and technology investment in particular is beginning to be reflected in these indices.
The other thing that would be worth looking at is how the various sector are performing, what their differentials are. And the same for various int'l markets. Will Emerging Markets for example continue to recieve disproportionate returns ? We think so even though recognition of their bubblicious nature is increasingly widespread.
Good fortune and good hunting to us all !