The market is deciding something; it is thinking about what to do; it is torn – should it continue to believe in the economic future or should it believe that the momentum is not real, that the bubble will burst, as the doomsayers are screaming?

This morning, I have been watching the price-action of the indices, as well as my trades. My goal is to get a sense of the market mindset, to find out if my thoughts about the previous two days are accurate. What I think is the market does not want to blow up, yet it would like a rest, a step or two backward would make it feel better. I think the bulls are not hesitant, as much as they are waiting to see if there is a large opening to get in deeper. I think the market is watching Asia, the Nikkei in particular, to see if that mighty 7.3% drop has follow through. I think the market is not afraid, as much as it is uncertain, which is the mantra for the last four years.

  • Japanese shares ended +0.6% after a roller coaster session in which stocks bounced nearly 4% and then plunged anew – dropping to more than -3% before eventually recovering. The gyrations followed yesterday’s slump of 7.3%.
  • Sears Holdings (SHLD) shares plunged 12.3% pre-market after a Q1 report that was much worse than expected.

So far, the follow through on the Nikkei is positive, but tomorrow is another day. I think it needs a bit of correction, as it has risen high and fast recently. I don’t know if it will shed more, but it should. As to Sears, I put that in there to demonstrate a point – the market takes earnings much more seriously than the day-to-day news. Yes, it might react to the day-to-day news, but since that news is not wholly bad, it tends to take it with a grain of salt. The last three days in the market are an example of this. Yes, it is down, but it is not out. It picks itself up each day and moves on, a bit shaky, but it moves on. Perhaps there are reasons for its scrappiness.

  • Dish nears financing for Sprint bid.
  • DirecTV, Time Warner Cable vie for Hulu.
  • Google mulls offer for Waze.
  • Toshiba Corp and U.S. private equity firm Kohlberg Kravis Roberts & Co are among those expected to bid for Panasonic Corp’s healthcare business.
  • Kyobo Life Insurance, South Korea’s third-largest insurer, said on Friday it had made a bid for a controlling stake in ING’s South Korean insurance unit, breathing new life into a delayed deal previously valued at roughly $2 billion.
  • Manitoba Telecom Services Inc said on Friday it has struck a deal to sell its Allstream business, a fiber optic network stretching across Canada, to Accelero Capital Holdings for C$520 million ($502.8 million)

The above is not a sign of a market in fear. M&A activity signals corporations are not afraid to leverage and the high-yield bond market proves it.

  • The speculative grade bond market set a new record last week with the Barclays Capital High Yield Index yielding below five percent for the first time. With yields at new record lows, the index also hit a new record high dollar price of $107.36.

Simply, investors have lots of faith that corporate debt defaults are less likely in this current market environment andthey are willing to not only put their money there, they are willing to get little in return for it. The information below puts this in context.

  • During the depths of the credit crisis, the yield on the aforementioned index reached a record high of over 22%. Just four years later, the yield on the index went from its all-time high to its all-time low.

It is hard to imagine the market can look at the above and think the sky is falling. In fact, one could argue that the high-yield trade is so overcrowded that investors might begin abandoning it for a market that gives a better return, one such as the S&P 500, for example. Maybe, but in the meantime, the market is digesting the economic data below, data that offsets some of the “bad” economic data that has come out recently.

  • Germany’s Ifo index of business confidence rose to 105.7 in May from 104.4 in April and topped estimates of 104.5.
  • The Commerce Department reported that orders for Durable Goods (items expected to last longer than a year) rose +3.3% during the month of April, which was above the consensus expectations for an increase of +0.9%
  • The European Union is pledging 5 billion euros ($6.5 billion) to boost research on semiconductors and other electronics items used in everything from smartphones to cars, in a bid to boost the sector which is lagging U.S. and Asian rivals.

Yet, themarket also has to contends with the constant barrage of the doomsayers, folks with lots of money and some hefty credentials behind their names.

  • Universa president and chief investment officer Mark Spitznagel says he’s pretty confident that the market will crash, or fall by more than 20%, in the next six months — a year max. The sell-off in Asian stocks Thursday, he says, is a “hint at what’s going to happen.” “I think there will be a lot of false starts before it does, and this may be one of them,” said Spitznagel.

Again, another hedged prediction, which is as it should be with Mr. Spitznagel, as his company sells protection against a market correction, and it is attracting some business.

  • Universa buys this protection in the form of options that generate huge returns when the stock market falls by more than 20%. Universa Investments, which spends hundreds of millions of dollars a year buying crash protection, has attracted a record amount of money into its fund this quarter.

Yet, as I always do, putting the above into context helps make more sense of a seemingly large piece of information.

  • Universa’s view that a crash is coming is not widely held, making crash protection cheap, he said.

Again, there are reasons that the market does not believe a crash is coming, and those reasons are not delusional. The market understands the global economy is not headed backward.

Trade in the day; Invest in your life …

Trader Ed