The market’s ability to rally strongly in the face of any news is noteworthy for both the bulls and the bears. Last week I said that job growth was coming soon to a market near you. Evidently the Labor Department didn’t get that memo as only 39,000 jobs were created in November, falling way short of the estimate. After two huge rallies, this was the bears’ chance to crush the market right? As Jim Cramer would say, “Wrong!” The market actually ended in the green on Friday, causing a lot of ripped out hair on the floor of any bear’s office.
Why Is This Happening?
There are a few reasons for the bulls’ resilience right now. First of all, we are in a very strong seasonal period. The end of the year is usually a bullish time when investors are in a festive mood and often bid stocks up. Barring some unforeseen Black Swan event, I expect this to continue through the end of the year.
Secondly, that “win-win” argument was mentioned several times on Friday. Weak economic news means that the Fed will continue to open up the monetary spigots and overflow the economy with money. Strong economic news shows that the economy is recovering and stronger profits are on the way. At some point this logic will fail to motivate the bulls but clearly that hasn’t happened yet. I have a suspicion that at some point down the road, many investors will kick themselves for buying into it for so long.
Also, don’t underestimate the performance anxiety of many institutional investors. This has been a tough year for many of them and there are a lot of money managers that have underperformed the averages. In order to catch up, they are forced to chase hot stocks and try to juice their returns that way. This has kept an underlying bid under the highest-beta names in which seemingly no price is too much to pay.
Beware January
All this being said, January could be the true test for the bulls. The calendar will turn to 2011 and money managers will have a clean slate. This means that fundamentals will matter more than performance anxiety. Be careful about being too anticipatory in calling a top, but I would suggest to tread with caution. Respect the trend, but realize what is driving it as well. If you know the factors at work, you will be able to act quicker when conditions inevitably change. That will give you the edge you need to make money in this market.
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