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.