Market Commentary for the week of April 19, 2010

Risk/reward game.

Risk appetites abated last week as investors digested early profit and earnings data and came away less-than-sated.  In addition, the Dow hitting 11,000 was a wake up call for anyone who wasn’t paying attention in the last year.  We’ve come too far, too quickly for many people’s tastes.  That prices are this high magnifies the risk quotients in equities, and could quell any interest some might have for putting money to work in the short-term.

My cycle screens are giving way too many caution signals for me to run through or ignore.

For the long haul.

Nonetheless, it is critical to widen the aperture on our perspective and recognize that we are in a secular bear, both in the economy and in the financial markets.  Very little investment capital is flowing into the markets even though the rebound in prices has been resounding.

While we may be on track to expect good news, no good news is forthcoming.  In fact, in today’s climate of inertia and skepticism, most news has already been discounted for its impact upon upside momentum.  As the markets top out, they build a higher probability that the next short cycle is down, making it harder for even the smallest bits of good news to stem the tide.  This headwind is immutable and, on balance, unyielding.

Bottom-up analysts stand to suffer the most.  Their insistence upon one dimension means that they have no more than a 50-50 prospect for performance.  Owing to the year-long rise in nearly all sectors, a measure of certainty has fallen over the probability of performance in equities, and it’s not good.  To be sure, there are always “pockets of performance” and individual aberrations to the norm.  But by historical standards this current upleg is quite mature and not likely to remain intact nor reverse the broader secular bear cycle.

I suspect that this season’s earnings reports will be better than last year, but historically tame by traditional benchmark standards.

Few indicators, in fact, are exceeding historical norms.  While some look like “improvements,” it is through the wider aperture that we can really see the lack of confidence and momentum in economic data.  Costs are simply too high, profits not high enough.

Low expectations.

I expect that this quarter will be more difficult than most in generating absolute and relative beta.  Considering the starting point for this quarter, following 12 months of near-linear growth, it is likely to be a muted opportunity at best.  Until we drain some money out of the markets, or unless the average investor jumps in, the cyclical bull we all hope for is somewhere down the road.

What will be the catalyst for a reversal of this secular bear trend?  First, we could try turning off the torrent of negative “exogenous noise” about immorality and greed on Wall Street and start sending a positive message about zero-tolerance for miscreants and synthetically fabricated investments.

But that’s not likely to occur by next Friday, is it?