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The State of the Markets |
With stocks having encountered three straight days of selling, the question that probably comes to the minds of those sitting heavily on the long side is if this dance to the downside is anything to worry about.
The bull camp is currently deferring the question to their technical analysis team, which is saying that, so far at least, the move is being filed in the run-of-the-mill pullback category. The chart watchers for the glass-is-half-full crowd suggest that with the market still making higher highs and higher lows and nary a support zone, trendline, or an important moving average having been broken, there really isn’t much to get excited about.
Then there’s the calendar. With the end of the quarter now just three short trading days away, the bulls argue that we ought to see fund managers put the icing on the cake of a pretty nice quarter. Yes, we know that any trades done during the first part of next week won’t settle on the books during the quarter. But tradition has it that the “window dressing” at the end of quarters tends to go in the same direction that the market headed during the quarter, which, in this case, was up.
However, there have been a couple of very recent developments that might be worth considering before one fires up the margin account to buy that next batch of triple-long ETF’s.
The first thing we need to remember when considering if a particular issue is worth fretting over is, when dealing with the stock market, things don’t matter until they do (and then, of course, they matter a lot). And it is for this reason that we like to let price be the final deciding factor on these scores.
The point is that there are ALWAYS things to worry about in the market. But at the same time, the market doesn’t always care. (Remember, Ms. Market doesn’t give a hoot about what you or I might think “should” be happening.) Thus, if there is an issue that worries you and yet the stock market continues to move higher, well, you probably get the idea – check your ego and your opinions at the door and continue to play the hand you’ve been dealt.
The current mess with Iran could be a perfect example of this point. In short, on Friday, President Obama, with the British and the French at his side, accused Iran of running a secret facility designed to develop nuclear weapons. And while Obama said that he prefers the diplomatic process, he also made it abundantly clear that the military option is on the table.
The Iranians responded to the accusation by publically employing their traditional tactic of deny and delay. Yet on Sunday morning they made headlines by firing a bunch of missiles, which most definitely could threaten the region. Of course, Iran says the missile firings were part of a “planned exercise.” However, to the guys who had talked about military options on Friday, this “exercise” probably doesn’t look too terribly coincidental.
So, will the stock market worry about this on Monday, or Tuesday, or next month? Frankly, we don’t have an answer to that because we don’t make a habit of trying to determine what the market “should” do. However, the issue IS something of which to stay apprised.
I know what you’re thinking, Kevin-who? Fed Governor Kevin Warsh, that’s who. You know, the guy sitting next to Ben Bernanke in the recent FOMC team photo. And to help put this picture in perspective; Vice Chairman Donald Kohn is sitting on the other side of Bernanke. Oh yea, and Warsh is also the guy that is credited with working closely with Ben Bernanke during the credit crisis.
On Friday, Warsh made news with an Op-Ed piece in the Wall Street Journal entitled “The Fed’s Job Is Only Half Over.” In the article, Warsh says that this is no time to for victory dances and that the Fed still has a lot of work to do; not the least of which is withdrawing the extraordinary monetary measures taken to fight off the collapse of the banking system.
Then on Saturday, Warsh made news again by suggesting at a banking conference at the Federal Reserve Bank of Chicago, that the Fed could push interest rates up “more aggressively” than normal.
In Warsh’s words, “When the decision is made to remove policy accommodation further, prudent risk management may prescribe that it be accomplished with greater swiftness than is customary.”
While the concept makes perfect sense, the problem (oops, I mean to say, the potential problem) is that this new statement from Warsh could be the first foray into a new direction for the FOMC. Remember, up until Friday, Fed officials have seemed to go out of their way to reassure investors that they will keep interest rates low for “an extended period.”
So, with Warsh coming out with the idea of aggressive rate hikes just days after the most recent Fed meeting (and the most recent assurance that rates will stay low for a long time), it makes one start to wonder. Or put another way, this potential change in the Fed’s thinking/direction could create some uncertainty about both the Fed’s plan and cohesiveness. And we all know how the market loves uncertainty.
As we mentioned earlier, there are ALWAYS things to fret about. And the two issues presented above may go unnoticed by the market. And stocks could easily continue to work their way higher as they discount improving earnings and a better economy.
But then again, the market has run a long way with only one correction in excess of -5% so far. In addition, there is a fair amount of uncertainty about the outlook for the staying power of the economy going forward. Thus, either one of these issues could be the trigger to help the bears enjoy their favorite month – October.
So, we will suggest that anyone no longer in the buy-and-hope camp needs to know where the market’s lines in the sand reside. In other words, you need to recognize where a move down becomes more than a garden variety pullback and have a strategy in place of how best to play that scenario. Because, as we’ve mentioned a time or three, we do not believe that this is the start of a new multi-year run for the roses and the bears are likely to make their presence felt again at some point in the future.
David D. Moenning
Founder TopStockPortfolios.com
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