Is the Market Holding Upside in Reserve?
By Sean Udall Mar 08, 2011 10:45 am
Huge up day last Thursday was spurred by the fact that it was the one day oil was down and the economic numbers took center stage.
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Huge day last week on Thursday versus muted to down action for the bulk of the week, and that down action accelerated yesterday. So what's the difference? Is it just all about oil and minor geopolitical strife? Is 1-2% of our daily oil really worth all this sudden and seemingly dominating negativity? It's certainly dominating the news. Is the world running so well that there's nary another negative thing to discuss? Heck, what about the Greece debt downgrade? But that's another lark. Anyway, back to the central question: What spurred that huge up day amid all the negativity? Simply put, it was the one day that oil was down (or at least off the boil) and the economic numbers took center stage.
And what a set of numbers we got last week. Here's just a few that were released, and many others were equally good.
- Chicago PMI -- huge number above 71
- ISM Index -- beat at 61.4
- ADP Employment Change -- well over 200K jobs
- Initial Claims -- well under 400K
- Nonfarm Payrolls -- 192K versus 62K but the key is that it's nearing 200K
- Nonfarm Private Payrolls -- 222K versus 68K and again well over 200K
- Factory Orders -- 3.1% versus 1.4%
By the way, this isn't a new phenomenon. I have been seeing and commenting and authoring pieces on the Buzz & Banter about numbers like these since mid-late 2009, while also laying out the thesis before hand on why they were going to come months earlier. These economic numbers are not just good, they are producing levels not seen since the mid 1980s or mid 1990s; numbers the strongest in 15, 20, or 25 years.
Yet you will see little headline news of the magnitude. It's more normal to see that this recovery is "muted," or headlines like:
- GDP isn't rising as much as it has in prior recoveries.
- Not enough jobs are being created.
- The market is rising on QE2 and little more.
- What happens when we take away the punch bowl?
Folks, QE2 doesn't explain all this strength. In fact, does it explain 10%, 5%, or even 3% of it? Now conversely, the very low level of rates are a real root cause. The interest rate picture has been central to my variant growth thesis for some time and remains so. Moreover, I'm on record that the Fed should have taken 50 bps for the emergency cuts away already, and I still believe we see some hikes in this calendar year. However, the fact remains that rates are very low and proving to be highly stimulative to the global economy.
We had a ripping rally since last summer/fall with the markets broadly in the 20-25% plus range. On the other hand we did have a material correction in stocks last year and last summer the Nasdaq had fallen 16% off of earlier year highs while earnings and revenues from the bulk of the the Nasdaq 100 participants were rising in the 20-50% ranges (or higher) depending on the stock. This vastly compressed relative valuation levels and helped propel stocks to the levels we just witnessed.This quarter we have seen largely the same reaction. Great reports, though few great reports were good enough to prevent 5-10% sell-offs in many stocks. So once again I am seeing a similar setup. The selling of late combined with the strong earnings picture is again driving relative valuation rapidly lower. Once the world realizes that oil isn't going straight to $150 and gas straight to $5 per gallon, we could see surprising strength. Do we see SPX 1400 before May? I penned late last week that I felt the next major hurdle for the Nasdaq was 2880; once breached we should see a move to the 3250 level, give or take 50 handles.
In the meantime, corrections (even corrections the whole world says they want so they can buy into), never feel as welcome or as good when they are occurring. Especially now. Years ago you could hide out in long-sided vehicles or stocks to avoid downside. Now given the vast market rule changes and proliferation of levered ETFs it's nearly impossible to find stocks that are inversely correlated to the broad market. Microsoft (MSFT), Intel (INTC) and extremely high net cash Techs (like Monolithic Power Systems (MPWR)) are perfect examples of this.
Bottom line, it's hard to know exactly when all this ends, but at this point (after yesterday's decline), I'm more urgently looking for exit points on the remaining market hedges I was putting on into strength and will resume the hunt to press current and additional longs.
