One For The Books

Daily State of the Markets 
Thursday Morning – January 27, 2011  

A colleague pinged me yesterday afternoon with what he believed to be an interesting factoid. He wanted to know if I was aware that the S&P 500 had recently closed above its 10-day moving average for more than 30 trading days (34 to be exact, he said). My initial response was something along the lines of “Yea, so?” (Frankly, I tire quickly listening to all the sport-stat-like iterations of market data that are bandied about these days.) So, after my less-than inspired response, I was provided with the punch line – apparently such a streak has never happened before.

While I didn’t spend the time to verify that the market had never closed above its 10-day simple moving average for more than 30 consecutive days before (I tire even faster of mindless tasks that don’t help me manage money), this little piece of market trivia got me thinking. I know that the bulls have been on an impressive roll. And I have, on more than a couple of occasions lately, gone back to look for the last time the market suffered a bad day or two. I also know that the sentiment indicators recently reached an extreme and that stocks have been stuck in an overbought rut since the first day of December.

After noodling on all of this for a moment or two I came to the conclusion that the current stretch of bull victories was likely one for the record books. If you are not convinced, go ask anyone who has tried to play the short side of the game since the beginning of September. If they are not curled up under their desk mumbling to themselves, they will likely tell you that they have given up trying to pick a top here. As one bear told me recently, “Haven’t you heard? The stock market doesn’t go down anymore!”

Another bit of evidence, anecdotal as it may be, that goes to support the idea that the current run for the roses isn’t likely to be repeated anytime soon was a call I got from a long-time business associate yesterday. I was told in a not-so happy tone that one his clients was threatening to leave him because he didn’t make enough money for him last year. I then asked where the client was planning to put the cash and the response was, “he thinks he can make more money in a mutual fund he read about in a magazine.”

After I got done chuckling (a magazine, seriously?), I responded with, “You know, it’s always the same. Now that the market has gone up more than +90%, the public has decided that it’s okay to return to stock market. Never mind the fact that the average bull market since 1900 has gained something on the order of +81.2%. Never mind that we’ve been in a secular bear market since 2000. Never mind that things are getting more than a little frothy – suddenly people think the game is going to be easy going forward.”

So, now that we’ve established that this joyride to the upside isn’t exactly normal, how do we play it? Should we assume that stocks simply can’t go any higher from here and start selling or better yet, start putting out shorts? Should we join my associate’s client and return to the buy-and-hope game? Or should we just assume the bulls will continue to run, and go buy some triple-long ETF’s on margin?

In case the sarcasm wasn’t obvious, I’m of the mind that none of the above is the appropriate answer. No, my take is that it is time to take the aggressiveness down a notch and just try to make a little money for as long as the fun lasts. I don’t believe it will be critical that you maximize returns on the upside here because in my 25+ years of experience I’ve learned that these record runs tend to end badly and without warning. Therefore, you might want to back off on the turbo boosters in your portfolio. But at the same time, stepping in front of a speeding train can also be painful in the short run. And since it has been said that the market can remain irrational longer than you can stay solvent, well, you get the idea…

Turning to this morning… News that S&P has cut Japan’s debt rating has had little impact as traders focus on sentiment data out of Europe and the economic data here in the U.S.

On the Economic front… Orders for long-lasting goods fell again in December. The Commerce Department reported that Durable Goods orders fell by -1.3% during the month, which was below the consensus expectations for an increase of +1.4%. When you strip out the volatile orders for transportation, orders rose by +2.4%, which was above the consensus for +0.8%. The November reading was +3.6%. However, Bloomberg is reporting that there may have been an issue with this month’s ex-trans numbers.

In addition, the Labor Department reported that initial claims for unemployment insurance for the week ending January 22 rose by 51,000 to 544K. The week’s total was well above the consensus for a reading of 406K. Continuing Claims for unemployment for the week ending January 15 were above consensus at 3.991M vs. expectations for 3.828M and last week’s revised (higher) 3.897M.

Thought for the day: Expect good things to happen today, you might be surprised…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: -0.04%
  • Shanghai: +1.47%
  • Hong Kong: -0.27%
  • Japan: +0.74%
  • France: +0.33%
  • Germany: +0.53%
  • London: +0.34%

   

• Crude Oil Futures: -$0.24 to $87.09
• Gold: -$0.50 to $1332.50
• Dollar: lower against the Yen, Pound and Euro
• 10-Year Bond Yield: Currently trading at 3.440%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -1.13
  • Dow Jones Industrial Average: -3
  • NASDAQ Composite: +5.51

Wall Street Research Summary

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