Is the Boogey Man Still Under the Bed?

Be afraid. Be very afraid. This is the prevailing sentiment in all the market these days, which is unfortunate because the fundamentals of the economy are improving, and a sustained recovery is coming.

The quote above is an excerpt from the opening paragraph of the article I wrote two weeks ago. I present it again because market conditions have changed considerably since I wrote that, which causes me to wonder if the change in market conditions means we are moving back into a bull market. Some technical indications point to this, and most economic fundamentals surely point to this as a possibility, but we have all been fooled before. After all, the “issues” that sent the market into a tail spin are still with us. Overhauling the financial system is still on Congress’ plate. The Greece issue, as well as all of the foreign sovereign debt issues, has not been resolved. The employment rate seems stubbornly stuck around 10%. China is still maneuvering to slow its heated economic growth. Our deficit and debt are still here and growing. Yet, this week, the market has taken in the positive corporate earnings, the strengthening manufacturing sector, the uptick in housing starts, and the rise in consumer spending for January. Does this mean the bad news above has been digested fully and now the good news has a chance to get swallowed?

A partial “yes” answer is in order, as well as a qualified “no.” Sorry for the ambiguity, but reality is reality and if one does not accept reality, then fantasy is the only other available option. As traders and investors, fantasy is not an option, so let’s stick with reality.

Yes, big economic and fiscal challenges  remain on the table, and more than one of them hold the potential to impede our economic recovery, but nothing out there presents the same conditions that could send us in the near term to the economic precipice again. 

The above quote immediately followed the opening sentences above, and in this is the reality of which I write. Big economic and fiscal issues still challenge us, but, and as well, as President Obama said, and most all economists agree, we have moved away from the possibility of a total collapse similar to the Great Depression. This is very real, and no amount of hand wringing, nay saying, or apocalyptic preaching will change this reality.  And here is more reality.

It might very well be that what we witnessed in the past weeks was (and possibly still is) that much predicted correction that has been on the lips of pundits and analysts since a year ago March. In fact, it was a correction. The markets adjusted downward to compensate for the rapid climb up since last March. Okay, we can accept this, but does it mean we are back full swing in a bull market? Yes, to a degree, we are back in bullish territory, but no, it is not a full-on bull rally.

This week the markets recaptured much of the losses incurred earlier this month, which indicates bullish sentiment, so, in this regard, factually the bulls are in charge for the moment. But here is the rub. The lingering global and domestic economic issues out there, as well as other issues that have not hit the media’s front burner yet (commercial real estate foreclosures, for example), will most certainly have a negative impact on the market in the coming weeks and months. Add to that the possibility the Fed might hike interest rates sooner rather than later to combat what the January Consumer Price Index (CPI) pointed out – inflation may be coming – and we have a brewing scenario that could easily sweep power back into the hands of the bears. Yes, one bullish week does not a bull market make, if you will.

I suspect what we should expect in the near term is more of the same – choppy waters  with some high peaks and low troughs. The real question to ponder, though, is this – will we get past the gargantuan global and domestic issues that are keeping a level of uncertainty in the market sooner rather than later, or will we find ourselves bobbing about in the choppy waters for some time to come. If it is the former, than we can expect some calmer waters in the second half of the year. If it is the latter, than we should expect dehydration from a lack of drinking water, blisters from overexposure to salty water, and a certain amount of exhaustion from flailing about just trying to stay afloat. We should all mentally prepare for either reality to present itself because the best defense is a good offense.