Market Commentary

Why are the markets going up?  Does it matter?  Clearly, there has been virtually no selling pressure; and it's been that way for months.

Jim Cramer said: "Really bad markets go down on the same news over and over again. Really good markets just keep going up on news that is well-known and is, well, hardly, news."  By that definition, we are in a good market.

Respect the Trend.

The primary trend is higher.  Higher highs and higher lows is the definition of an up-trend. Until price tells you otherwise, the key message is that Bulls control the market.

Imagine how frustrating it has been to be a Bear (because they simply haven't caught a break, and classic bear setups just aren't working). Will there come a time when Bears control the market again?  Of course there will.  Before that there will probably be a few nasty selling episodes. For now, though, all they know is that the market simply won't fall, no matter what the readings say, and no matter how overbought the daily index charts happen to get.

The Markets are a harsh teacher … and the hard lesson to learn is to avoid front-running a move. Over the long-term, it is safer to respect the primary trend.

A Condensed Restatement of the Bullish Case.

One of the StockTwits columnists posted this excerpt from a post in Barron's written by Michael Santoli.

The reasons the bulls are bullish are also pretty universally agreed upon. The industrial economy has gathered some momentum, the emerging markets are surging, companies are flush, profits look set to rise decently again, the Federal Reserve is seeking new ways to penalize risk aversion, taxes won't go up and the market tends to do well in the year after a midterm election.

And we can add to the list the likelihood that another financial-engineering cycle is just getting into gear, so expect lots of equity-friendly refinancings by stretched companies, re-leveraging by cash-rich ones and buyouts hither and yon.

The thing is, it's all pretty much true. And because of that, and given that stock valuations are not excessive, it's tough to think a likely pullback or worse would signal some major top.

That pretty much says it … Hope you have a great week.

So long 2010.  Here is a quick recap of 2010 from JibJab.

Here is a Look Back at the "Year-That-Was" from a Market-Perspective.

Despite a shaky start, it was a strong year for the markets. Since July, the bears lacked conviction … and the bulls pushed things higher.

The 20 Top Charts of 2010 from the Economist

What makes a popular chart? The theme running through the 20 most viewed daily charts published on the Economist's website in 2010 is hard to discern, with charts detailing everything from iPad prices to beer consumption. The most popular, by far, showed the ratio of the salary of a country’s leader to its GDP per person. (On this measure, India’s prime minister is especially poorly rewarded.)

The interactive graphic tree map, below, indicates the relative popularity of the top 20 charts. Such maps are handy for showing a large number of data values that would visually overcomplicate a pie chart. Coloring groups subsets within the data, as in this case, to create a heat map.

So, goodbye to 2010; I look forward to sharing 2011 with you.

So long 2010.  Here is a quick recap of 2010 from JibJab.

Here is a Look Back at the "Year-That-Was" from a Market-Perspective.

Despite a shaky start, it was a strong year for the markets. Since July, the bears lacked conviction … and the bulls pushed things higher.

The 20 Top Charts of 2010 from the Economist

What makes a popular chart? The theme running through the 20 most viewed daily charts published on the Economist's website in 2010 is hard to discern, with charts detailing everything from iPad prices to beer consumption. The most popular, by far, showed the ratio of the salary of a country’s leader to its GDP per person. (On this measure, India’s prime minister is especially poorly rewarded.)

The interactive graphic tree map, below, indicates the relative popularity of the top 20 charts. Such maps are handy for showing a large number of data values that would visually overcomplicate a pie chart. Coloring groups subsets within the data, as in this case, to create a heat map.

So, goodbye to 2010; I look forward to sharing 2011 with you.

The S&P 500 Index has had quite a run.  On Wednesday, Bespoke noted that it has been up 14 out of 16 days.  Since 1990, the S&P has only been up 14 out of 16 trading days two other times — once in September 1995 and once in May 1990.

So, You Might Guess That Bullish Sentiment is High.

Well, it is probably higher than you realize.  We haven't seen readings like this in a long time.  The American Association of Individual Investors poll had the highest percentage of bulls (63) since October 2004, and the lowest percentage of bears (16) since October 2005.

Moreover, lots of other sentiment measures are showing similar readings. 

Carl Swenlin, from DecisionPoint, reminds that while high levels of bullish sentiment among advisors, investors, and money managers usually occur at market tops, market tops do not always occur when sentiment is very bullish. Sometimes people respond to the obvious and correctly align their market posture with the price trend. In situations like this we have to wonder whether or not they are wrong.

In other words, an excess of bullish sentiment is a caution sign and should cause concern because such sentiment peaks are often followed by price corrections, if not bull market tops.  However, that doesn't mean it is safe to use sentiment as a timing tool. Perhaps sentiment is better used as a simple indicator to help paint a picture of the market environment. So far we have no indication from our trend-following models that there are major problems ahead.

Another Measure Brims With Confidence.

Here is a slightly different take on perceived risk.  The Barron’s Confidence Index is a confidence indicator calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. For example, a rising ratio indicates investors are demanding a lower premium in yield for increased risk  and thus are showing confidence in the economy. 

As shown below, there has been a solid improvement in the ratio since its all-time low in December 2008.  This indicates that bond investors have grown significantly more confident, opting for more speculative bonds over high-grade bonds. The ratio is back at levels last seen in October 2007, before the financial crisis.

Presidential Cycle Points to a Bullish 2011.

Here is another piece of data pointing upwards.  Historically, the third year for a president produces a good return for investors. Investment strategists Liz Ann Sonders and Sam Stovall say why 2011 will be no different.

Bottom-Line:  The economy and stock market end the year stronger than expected.  Happy New Year!

The S&P 500 Index has had quite a run.  On Wednesday, Bespoke noted that it has been up 14 out of 16 days.  Since 1990, the S&P has only been up 14 out of 16 trading days two other times — once in September 1995 and once in May 1990.

So, You Might Guess That Bullish Sentiment is High.

Well, it is probably higher than you realize.  We haven't seen readings like this in a long time.  The American Association of Individual Investors poll had the highest percentage of bulls (63) since October 2004, and the lowest percentage of bears (16) since October 2005.

Moreover, lots of other sentiment measures are showing similar readings. 

Carl Swenlin, from DecisionPoint, reminds that while high levels of bullish sentiment among advisors, investors, and money managers usually occur at market tops, market tops do not always occur when sentiment is very bullish. Sometimes people respond to the obvious and correctly align their market posture with the price trend. In situations like this we have to wonder whether or not they are wrong.

In other words, an excess of bullish sentiment is a caution sign and should cause concern because such sentiment peaks are often followed by price corrections, if not bull market tops.  However, that doesn't mean it is safe to use sentiment as a timing tool. Perhaps sentiment is better used as a simple indicator to help paint a picture of the market environment. So far we have no indication from our trend-following models that there are major problems ahead.

Another Measure Brims With Confidence.

Here is a slightly different take on perceived risk.  The Barron’s Confidence Index is a confidence indicator calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. For example, a rising ratio indicates investors are demanding a lower premium in yield for increased risk  and thus are showing confidence in the economy. 

As shown below, there has been a solid improvement in the ratio since its all-time low in December 2008.  This indicates that bond investors have grown significantly more confident, opting for more speculative bonds over high-grade bonds. The ratio is back at levels last seen in October 2007, before the financial crisis.

Presidential Cycle Points to a Bullish 2011.

Here is another piece of data pointing upwards.  Historically, the third year for a president produces a good return for investors. Investment strategists Liz Ann Sonders and Sam Stovall say why 2011 will be no different.

Bottom-Line:  The economy and stock market end the year stronger than expected.  Happy New Year!

The Markets are up, so all is well.  Meanwhile, Obama Claus is suited-up and ready to continue delivering the debt. Consider it our gift to future generations …

Market Commentary

The S&P 500 Index remains at the top of its trading range and is making new highs for the year. 

Watch For Weakness as Breadth Weakens.

Notice the negative divergence, marked by the red arrow.  While the S&P 500 Index surged higher, less than 80% of the stocks in the index are trading above their 50-day moving averages.  This means that not all stocks have been participating in the current rally, which is a potential warning sign of impending weakness.

Looking For a Positive Sign? 

Lumber is surging.  Moreover, the Homebuilders SPDR and the Home Construction iShares  both are showing strength. This may show an increase in demand and often implies more construction.

Seems like good news to me.  Jim Cramer recently advised: "It is never too late to change. Things are good, not bad. Don't play irony. Don't be too skeptical. Be opportunistic."  What do you think?

The Year-End Bespoke Roundtable.

At the end of each year, the big financial media outlets typically conduct roundtables to get outlooks from key players in the financial markets.  The Bespoke Roundtable asks twelve of the most popular financial blogs/websites the same 34 questions regarding their 2011 outlooks and their take on 2010.  There are many insightful tidbits worth thinking about.

The consensus view is that the S&P 500 will be up in 2011, bonds will be down, oil will be up, the dollar will be up, US home prices will be up, and China's stock market will be up.  Interestingly, the consensus view was the exact same as it was last year for all asset classes except for gold.  Less participants think gold will go down in 2011 than they did in 2010.  Here is the link to the full post.

The Markets are up, so all is well.  Meanwhile, Obama Claus is suited-up and ready to continue delivering the debt. Consider it our gift to future generations …

Market Commentary

The S&P 500 Index remains at the top of its trading range and is making new highs for the year. 

Watch For Weakness as Breadth Weakens.

Notice the negative divergence, marked by the red arrow.  While the S&P 500 Index surged higher, less than 80% of the stocks in the index are trading above their 50-day moving averages.  This means that not all stocks have been participating in the current rally, which is a potential warning sign of impending weakness.

Looking For a Positive Sign? 

Lumber is surging.  Moreover, the Homebuilders SPDR and the Home Construction iShares  both are showing strength. This may show an increase in demand and often implies more construction.

Seems like good news to me.  Jim Cramer recently advised: "It is never too late to change. Things are good, not bad. Don't play irony. Don't be too skeptical. Be opportunistic."  What do you think?

The Year-End Bespoke Roundtable.

At the end of each year, the big financial media outlets typically conduct roundtables to get outlooks from key players in the financial markets.  The Bespoke Roundtable asks twelve of the most popular financial blogs/websites the same 34 questions regarding their 2011 outlooks and their take on 2010.  There are many insightful tidbits worth thinking about.

The consensus view is that the S&P 500 will be up in 2011, bonds will be down, oil will be up, the dollar will be up, US home prices will be up, and China's stock market will be up.  Interestingly, the consensus view was the exact same as it was last year for all asset classes except for gold.  Less participants think gold will go down in 2011 than they did in 2010.  Here is the link to the full post.

The markets are showing remarkable resilience in the face of bad news and global unrest. This coming week will be another test, because of the uncertainty surrounding what's happening in Ireland, the fallout from insider trading investigations, and a somewhat oversold market.

Why should insider trading affect the market? Because institutional investors are going to try and get out of any fund they're worried about meeting part of that investigation. The result will be massive redemptions and a lot of selling.  It is certainly something to watch.

Let's Look at World Markets.

It has been a tough two weeks for global markets.  Most major indices are down; and, yet, that is not so bad considering the news about sovereign debt, war, and global cooperation.

Who Is Bailing Out Ireland?

Expect the questions about who will bail out Ireland to weigh on the markets.  Here is a graphic that explains the situation (click on it for a bigger version).

What About the Euro?

According to the Financial Times, BlackRock's founder Larry Fink, founder of BlackRock, the world’s largest money manager, believes that the euro will fall sharply as a result of the escalating eurozone crisis and turmoil in financial markets.

In an interview with the Financial Times, Fink predicts that the single currency, battered this week by the fear that the fall-out from Ireland’s debt problems will spread to other countries including Portugal and Spain, will fall to $1.20 against the dollar, a slide of nearly 10 per cent.

What Level of Holiday Sales Will Santa Bring?

Another driver worth watching will be how the market responds to holiday sales.  Black Friday is one thing; the issue is whether consumers will spend real money throughout the season.

The markets are showing remarkable resilience in the face of bad news and global unrest. This coming week will be another test, because of the uncertainty surrounding what's happening in Ireland, the fallout from insider trading investigations, and a somewhat oversold market.

Why should insider trading affect the market? Because institutional investors are going to try and get out of any fund they're worried about meeting part of that investigation. The result will be massive redemptions and a lot of selling.  It is certainly something to watch.

Let's Look at World Markets.

It has been a tough two weeks for global markets.  Most major indices are down; and, yet, that is not so bad considering the news about sovereign debt, war, and global cooperation.

Who Is Bailing Out Ireland?

Expect the questions about who will bail out Ireland to weigh on the markets.  Here is a graphic that explains the situation (click on it for a bigger version).

What About the Euro?

According to the Financial Times, BlackRock's founder Larry Fink, founder of BlackRock, the world’s largest money manager, believes that the euro will fall sharply as a result of the escalating eurozone crisis and turmoil in financial markets.

In an interview with the Financial Times, Fink predicts that the single currency, battered this week by the fear that the fall-out from Ireland’s debt problems will spread to other countries including Portugal and Spain, will fall to $1.20 against the dollar, a slide of nearly 10 per cent.

What Level of Holiday Sales Will Santa Bring?

Another driver worth watching will be how the market responds to holiday sales.  Black Friday is one thing; the issue is whether consumers will spend real money throughout the season.

Market Commentary

A flat market doesn't mean that nothing happened.  Last week may have started and ended in about the same place; however, the market showed a lot of resilience.

Where Did The Fear Go?

The lack of fear and the lack of selling pressure is surprising to me.  On one hand, that is a bullish sign.  On the other hand, sentiment is often a contrary indicator.

One well known measure is the Chicago Board Options Exchange Volatility Index (commonly referred to as the VIX), a measure of fear and how much investors are willing to pay for options as protection against declines in their portfolios, has drifted down to levels that were coincident with short-term market tops in April 2010 and a series of tops in 2007 and 2008.

In addition, the latest report by Investors Intelligence measuring the sentiment of investment newsletters, shows 56.2% are bullish, while only 20.2% are bearish.  This is the highest level of bullishness since December, 2007 (which was just a couple of months after the severe 2007-2009 bear market began).

Likewise, the weekly poll of its members by the American Association of Individual Investors, showed sentiment had reached 57.6% bullish last week, its highest level in a number of years, higher than just before the 2007 bull market top (54.6% bullish), higher than just before the top in January of this year (49.2%) and higher than just before the April top (48.5% bullish).

It plunged to only 40.0% bullish this week, which had some pundits saying, "Ah, that removes the risk from the investor sentiment side."  But, according to Sy Harding, unfortunately that's not how it usually works.

Smart Money – Dumb Money Confidence Index.

The chart, below, compares the bets made by small traders (a.k.a. the "Dumb Money"), to those of large commercial hedgers (a.k.a. the "Smart Money").

In practice, Confidence Index readings rarely get below 30% or above 70% (they usually stay between 40% and 60%). When they move outside of those bands, it's time to pay attention.

Even more noteworthy is when there is a wide confidence spread with bullish bets by the Dumb Money and bearish bets by the Smart Money. This type of sentiment spread only happens a few times a year. We often get substantial bullish reversals when that happens.

Conventional trading wisdom says that Crowds are usually wrong at turning-points.  That doesn't mean they are wrong all the time (yet I take special notice when the Smart Money clearly disagrees).

Business Posts Moving the Markets that I Found Interesting This Week: