Market Commentary for the week of June 25, 2012

Dull.
While the Dow Jones, S&P, and global bourses initially followed the EU’s announcements about Spain and Greece with a rebound, the rally stalled last week because facts trumped suspicion.  Short sellers and profit takers took control of the markets averting a weekend of being “long” in the face of more bad news.

Throughout, the skeptics remained on the sideline, leaving the “fun” to those with shorter attention spans.

All this occurred as summer volume declines began.  Up-versus-down volume was a smaller percentage of trades than in previous weeks during the rally.  Overhead supply is clearly offering resistance boundaries to any sustained breakout potential.  The 6 month rally appears to be diffusing.

While there is every hope that we can resume an advance and/or a breakout, technical resistance levels and stochastic negative probabilities might prove difficult in the next few weeks.

Besides, the cyclical advance that began last October was essentially a linear move in response to a decline from the previous summer.  In real terms, 6 months is a short intermediate cycle.  It is difficult to sustain momentum when relative strength numbers are moving so fast with no cyclical selling pressure as a counterbalance.

Thus, while the market seemingly had no key resistance, it was building negative potential all the while it was streaking upwards.  Now, we are faced either with a prolonged distribution period, or an immediate linear negative response to our prior upleg.  Both are “not good.”

Duller.

If a move to the downside does materialize there has to be a sequence of support breakdowns which accompanies it.  Over the past few months, we have streaked into a range whose probabilities of trend maintenance are diminishing.  The envelope opened and now it must close.  An equivalent analogy is either a parabolic ride on a roller coaster, or a missile shot straight up into space.  The trajectories, and end result, are quite different. 

As the market has struggled to gain “technical” traction it has also wrestled with fundamental economic diffusion.  While prices, in general, are not rising, there is a “pocketbook sense” that things are more expensive.  Fewer are being hired.  Portfolio valuations are stagnating, at best, as home values mostly continue to recede. Your Thanksgiving food basket this year will be appreciably more expensive than last.

And as “austerity” becomes the catch phrase du-jour, we feel, as well, that things are financially out of reach.  Salaries are “earning” less, eaten up by food, fuel, and tuition increases.  The percentage “going out” each month is taking a bigger share of family incomes.  This loss of discretionary abundance is at the core of a confidence crisis which renders the markets, and the economy, inert.

As a result there remains continued risk that we are far from moving above the top end of the market’s range, or our comfort zone.  It is not necessary to suggest a doom and gloom scenario.  But with the current statistics available, the weight of the evidence infers a stronger downside probability.

Market Commentary for the week of June 18, 2012

Reduced objectives.
The big problem last week was in trying to distinguish between macroeconomic factors and underlying stock performance.  The resulting decoupling made some equities more vulnerable than aggressive weekly gains might otherwise have one believe.  As we muddle through the disappointment of global austerity packages and downwards earning revisions, too many stocks have spurted up simply on trader’s dreams for a new bull cycle.

Many global brands are taking on a tarnished look, too, despite our hopes otherwise, and causing my relative strength integers to “bunch” in negative territory.  I find it very difficult to find a scenario in which a bull market instantly materializes from here.

Stock pickers, however, don’t seem to mind the one-off opportunity a “dead cat bounce” might offer.  Divorcing themselves from strict balance sheet analysis, those same traders see anything “hammered down” as potential “bought up” candidates.  In the end, it’s all about the acceptance of one’s discipline within the parameters of the time horizon allotted to your expectations.

The global economic crisis has, further, depressed the bond markets, making it nearly impossible to find a bidder for marketable fixed income securities.  Despite global brands and intrinsic fundamentals, bonds are also becoming trade vehicles for speculators, and right now downside contagion has spilled over into debt, too.

Fast versus diligent.

It’s going to take awhile to remediate these stochastic integers.  It is quite possible that history will repeat and allow for price-versus-valuation differentials which continue to depress stocks for several months (years?) hence.  There are few scenarios in which I envision long-term secular (bear) trends to reverse precipitously.

That doesn’t mean, though, that I am forecasting a disaster.  In past episodes of bear market capitulation following a long-term bull phase, fiscal or monetary experiments have been able to reverse declines by accelerating improvements in productivity, commercial exchange, and earnings potential.  Successful budget negotiations, domestically and abroad, can produce outstanding sentiment, performance, and fundamental indicators.

There still remains a question mark about the duration and magnitude of our bear market.  Complicated by concerns about economic recovery, and the means we employ to get there, the markets are weighed down by stress and collective paralysis.  Our resilience is being sorely tested.  Moreso than fundamentals, Wall Street is unpopular.  A reversal in sentiment is more necessary than a reversal in global balance sheets, although as I pointed out last week, it matters not whether the “chicken precedes the egg.”  Our interests need to be met before we feel comfortable enough going all-in into the markets.

Crisis of confidence.

While we wrestle with the political and economic variables of the market, the volatility is taking prisoners and leaving many investors bloodied and disillusioned.

Our strategy must change, from trading depressed stocks to investing in long-term potential.  What’s missing right now is a context in which we feel comfortable looking beyond next week for solutions.

Market Commentary for the week of June 11, 2012

Snowball.
Each week produces a newer round in global woes, this past being highlighted by Spain and a verbal, if not political, battle over whether austerity trumps spending.  We will not know how the debate concludes, but we can see its effects.  Manufacturing slowed and consumer confidence went with it.  The unknown consequences of a global economic paralysis is, nevertheless, having specific impact upon our markets.  Most notably, the stock market is morphing into a roller coaster ride.

I’ve said for months that the bearish numbers in my data represent a significant inflection from the last major bull cycle (2003-2007) and are intrinsically negative for financial assets.  Thus far, real estate, portfolios, and commodities have decelerated in value worldwide.  With few exceptions, aggregate bearishness pervades the landscape and justifiably reflects future expectations.

Following on the heels of global monetary indicators, domestic jobs growth is slowing.  While this is predominantly a coincidental effect of other factors, its effect, too, over time is to readjust investor’s mindsets about the sustainability of their goals and expectations.  Despite vacillations up and down in the employment data, the unwritten consequence is a mental paralysis that spills over into discretionary spending.

With so many variables in play, I expect our “market recession” as well as our economic pivot downwards to continue.

Who’s standing or sitting?

Global policy makers are attempting to do whatever is necessary to avert both of those predictions.  Europe is trying to tighten its union for the sake of its economic survival.  The debate, of course, is whether to issue Eurobonds and “spend” out of recession, or to allow secular trends to manifest, eventually recalibrating a “new normal” with less risk for the future.  Any step forward, irrespective of one’s political leaning, is a positive.

While it is likely that the volatility in global bourses will continue, the bigger question is to what degree that uncertainty will further erode markets or the prospect of a turnaround.

The U.S. market is likely to see continued decline.  We have crossed from “intermediate reflex rally” to secular bear too many times in the past year.  Decisively, the secular bear trend is winning.

We know, historically, that all “bears” precede new “bulls.”  The question, though, is when.  Japan is still in the throes of a market gone bad because of carelessness and profligate spending.  While I do not subscribe to a 20 year bear for the West, there is a strong likelihood of a technical retracement of the last bull by 40-50%.

Both time and sentiment are working in our favor to find a terminal support value, but it will not occur without a confluence of fundamentals, confidence, and political willpower.  As consumer savings diminish, so too will corporate capital expenditures.  It doesn’t matter any longer whether the chicken or the egg comes first.

Anyone who hoards cash in this market is both wise and greedy.  Certainly we must keep our powder dry.  But if you have the wherewithal to impact social consciousness and well-being, and you don’t, then you risk perpetuating the very thing from which your “rainy day” fund tried to avert.

When the spigot runs dry, the whole farm dries up.

Market Commentary for the week of June 4, 2012

Trajectory.
More importantly than not, it is vital to focus upon a bigger broader landscape when evaluating the condition of one’s portfolio, than to focus upon tinier exogenous noise as those factors which indicate the probability of outperformance.  Too often, and with more frequency, I have seen micro-analysis paralyze investor’s decision-making, rendering them incapable of reasonable response.  What to do, after all, with presidential politics, government stalemates, tax issues, unemployment, European sovereignty issues, gold’s ever expanding role in portfolio allocation, the housing crisis, talk-radio biases, college tuition, and milk prices?

Ignore them.

Not in a sense that each isn’t a significant, or relevant, factor in geopolitical economics.  But more because, as stand-alones, each has minimal impact upon the trajectory or duration of secular market trends.

We know, as “quantitative” scientists, that the weight of market cycles has an evolutionary bias, irrespective of the latest commentary on business television.  (The networks have air time to fill; markets have no hourly agenda.)  And yet, we wake up to the “futures” report, stop to look at gas prices, and await Friday’s jobs numbers.

I am not suggesting that these data are insignificant.  In fact, quite the opposite.  Each has a quantifiable relevance to the “whole.”  And yet, it is not the whole we focus upon, is it?  Instead, we become mesmerized, polarized, and confounded by the effect of each, to the exclusion of the big picture.  Portfolio activity, as a result, becomes disjointed and panic-driven.

It’s as if we forget that every adult was once a teenager, every teen once a toddler.  Similarly, market progressions have a timeline, a life-span.  The laws of science are immutable.

Science.

Now, do they always unfold exactly the same way each time?  Of course not.  Toddlers fall off chairs, teens make bad decisions, sometimes.  Markets make chaotic adjustments.  The dot.com crisis, the credit crisis, terrorism, assassinations, weather catastrophes are all examples of exogenous noise, sometimes man-made, sometimes man-made averted.  Each is a factor in the timeline of statistical phenomena. 

We count on being able to navigate through those events, sometimes scientifically and sometimes intuitively.  But we hold fast to certain tools, certain skill sets, that we know to be true in order to mitigate the effects of crisis or to maximize the leverage of benevolent events.  Like gravity, for example.  Without it we float away.  Why?  I’m not smart enough to explain gravity for you.  But without it, and its implications, we lose a foundation (literally) of society.

In financial markets, there is also a gravitational equivalency.  Trends, the amalgamation of factors, are also scientifically quantifiable.  If we isolate duration and magnitude of those trends we can better explain the long-term probabilities of market behavior.

We are in a period of flux, no doubt.  As earnings acceleration patterns recede worldwide, we would expect equity capital gains probabilities to recede, as well.  Some companies do “better” than others; others do worse.

What is less easy to quantify is the panic-driven, 24 hour news cycle response to market events.  Without confidence that our immutable laws are, in fact, immutable, the financial landscape loses some of its gravity, and in the ensuing panic, a bit of its gravitas, as well.