Just a quick note this morning, to try to illuminate the nature of the cusp at which the markets find themselves.
On Thursday the markets made it clear they didn’t want to go higher. And on Friday they made it just as clear they didn’t want to go lower.
Friday was a great day. Score one for the bulls. For all the major markets it was a classic “one day reversal,” with prices opening lower — and then closing higher. According to all the textbooks, that’s a good thing.
The Dow Jones Industrial Average advanced into new high recovery ground, racking up a 16.6% gain from its bottom on March 22. The Russell 2000 Index of small-cap stocks made it to new high ground, too, for a 13.9% gain since March 22.
But the broader indices didn’t make it all the way up to the sunshine. The S&P 500 Index (with a 13.3% gain since March 22) and the Wilshire Total Market Value Index (with a 13.9% gain) both closed below the highs set last Wednesday.
The NASDAQ Composite didn’t make new highs on Friday, either. But since its bottom, which occurred two weeks later on April 4, it has now risen 33.7%.
For all the indices, that’s a long way to come in a remarkably short time. And well deserved, considering the hammering that had come before. But at some point — some point soon, like now! — the markets need more than technical snapback to keep the advance advancing.
Of course the bulls want to believe that Friday’s dramatic reversal in the face of seemingly catastrophic unemployment figures is proof positive that continued advances are inevitable under their “don’t fight the Fed” thesis. And tax cuts are on the way, that will “put more money in peoples’ pockets.” And then there’s all that “cash on the sidelines” that is supposedly just waiting to get in at bargain prices before they get away.
Sounds great, and I hope it’s true. But at the same time, the economy is still struggling with both a monetary deflation and the hangover of a massive capital investment boom-and-bust cycle. Neither policy-makers nor markets have much experience dealing with either of those threats, never mind both of them at the same time.
And the reality is that, even after the brutal correction of the last year, stock markets overall remain near all-time highs by any traditional valuation method. To sustain those spectacular valuations we need commensurately spectacular economic performance — of the type that that economy was generating in 1999 and early 2000. Nothing in even the most strongly argued bull case offers the catalyst for that kind of performance. And after last year, investors made conscious of the importance of value will — in the end — accept nothing less.
So until I see the catalyst, I still say we’re in a bear market rally — one to be enjoyed right up until the last moment, but a bear market rally nevertheless. And I continue to worry that we have already seen “the last moment,” at least for a while. The bulls have gotten too emboldened. It’s seeming too easy again. The markets need to correct the gains of the last month, and see if there’s anybody really there to buy when all these supposed bargains get even better.
