One More Time?
The Bulls believe this is the beginning of a multi-year expansion; the Bears think its the end of a cyclical run. Frustration levels on both sides are palpable. It may turn out that both sides are correct, only using very different time frames.
Looking towards the 2nd half of the year, we view the market’s prospects as dimming considerably. Risk levels are high, complacency reigns, and the Bull itself is ragged and aged. That’s before we get into the structural problems of the economy, trade deficits at record levels, and current account balances a mess. The Federal deficit is worsening. A bloody and costly war is sapping dollars that could be put to better use elsewhere. The dismay over the Iraq situation is causing the President’s polling to reach its nadir since taking office; worse yet, the sentiment decay is spilling over to consumers. All this as the prime drive of the economy – Real Estate – shows every sign of rolling over.
Over the shorter term, prospects viewed through a technical lens continue to show signs of resilience. The advance decline line has improved. One day reversals and negative outside days have been shrugged off. There’s plenty of liquidity, with cash looking for a place to go. Money flow remains strong (albeit targeting emerging markets). The Dow Transports have broken out. Action in the Option pits has been mildly bullish. While the bearish camp describes this as complacent – and they are correct – one still must respect the underlying strength revealed. More significantly, the S&P500 is now up for 5 consecutive months. If the trend is your friend, your friend has been telling you he markets want to go higher. A plethora of bad news has been absorbed, and still, the market powers on.
For those who believe that the market is in the 9th inning of its bull run – present company included – there is the real possibility of yet another leg up. Indeed, the underlying strength argue that the timing of the top could be further into 2006 then we previously imagined. While we haven’t hit our original 2006 price targets – 11,800 on the Dow and 2600 on the Nasdaq – they remain possible 1H 2006.
All it would take for that to happen would be reassuring comments from Bernanke & Co. tomorrow. One last lunge upwards remains a very realistic possibility before any top is put in. In the face of the new Fed Chief’s 1st policy statement, we suggest a more hedged stance than a naked short one. Nimble traders can get long. Watch 1294 on the SPX as a bearish signal, and 2320 on the Comp as a bullish one. Either side getting penetrated moves us away from a hedged strategy and more towards a naked positioning.
note: this was emailed 3/27/06 ~noon
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For years, I've wondered if the post bubble period would play out like the 1930's here in the US or more like the 1990's in Japan. At this juncture, the answer appears to be neither. There's an echo bubble of sorts in the Russell 2000, and the Spyders and Qs trade at 25 and 39 times earnings, respectively. However, there's neither been a huge run in the Naz nor a spectacular collapse.
Because I'm a quant dork, I like to apply statistics to lots of things. One of these things is the NCAA tournament. Over the last five years, I've called four out of five NCs (I picked Kansas in '03), and 13 of 20 Final Four teams. However, this year, I didn't get a single team in the Final Four (I had Nova, Kansas, UConn and Texas). Does this mean my methodology is flawed, or simply that this was a "black swan" tournament for me. The fact that only 4 out of 3 million people called the NCAA tourney correctly so far over @ ESPN makes me think it's the latter.
Does that mean I should have loaded up on George Mason at 250:1? Or that any of the Final Four teams is even a top four team? No and no. By the same token, there's a possibility that the Naz could make a Mason-like run here against all odds to 2600 or higher. However, I would suggest that the risk level here is something like picking a Florida-LSU NC game. Sure, you might be right, but would you really risk your hard-earned dollars to be right?
Posted by: Bynocerus | Mar 28, 2006 10:30:47 AM
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