The consolidation in equity markets is continuing. Yesterday, we noted that the US equity markets were in the process of digesting the rapid gains made since the beginning of the year (Look Out Below, Thursday Edition).

Since we are “Miserably Long,” I spend lots of time thinking about what could go wrong. Yesterday, we  discussed how mom and pop are still not buying equity mutual funds. The day before, we trotted out SocGen’s chart showing markets are not cheap, by way of Earnings Yield (Why Using P/E Ratios Can Be Misleading). GMO’s James Montier peak profit comments were widely circulated — he discussed how earnings are more likely to mean revert downwards than keep exploding upwards — and that 9eventually) has to mean lower equity prices (I’ll post his chart later).

Despite all this, the comment that seemed to resonate from yesterday’s morning missive was “And yet curiously, the market cannot even muster a triple digit down day. Odd.”

We had every opportunity to see that major whackage yesterday — bad European economic news, weak German PMI data, more slowing in China, European markets down substantially, sell offs in Copper and Crude.

And? We could not even muster a down 1% day.

Contemporaneous to the rally has been a surge of Bearish commentary. It is intellectually appealing, and I am empathetic to their arguments — but they have been on the wrong side of the trend for a long time. Even this week, those arguments have been money losers. At the same time, the Bull camp seems to be in a mad competition as to who can make the most absurdly foolish statement possible. The winner of the silliest bull commentary so far is Goldman Sachs, but there are many other contenders. And despite the intellectual vapidity of much of the Bull arguments these days, the Market has been on their side — at least so far.

The lesson appears to be Momentum + Fed liquidity trumps intellectual appeal + abstract theory.

As to my own positioning: The hot start to the year and my aforementioned Miserably Long posture has me looking for an excuse to lighten up, take some risk off the table, cash in some profits. But I need more than a gut instinct or a guess — I need to see some solid deterioration in market internals or in economic data as opposed to a guess or a gut feel.

The bottom line: The strength of this market — or at least, the Fed’s liquidity beneath it — deserves the benefit of the doubt. Until we see proof that something more untoward is a foot, I consider the current softness little more than back and filling, digesting excess gains from the start of the new year. The recent breakout points across major indices remain key levels to watch.

~~~

Previously:
Predicting Market Tops vs Observing Conditions (March 19, 2012).

Why Using P/E Ratios Can Be Misleading (March 21st, 2012)

The Public Is Still Not Buying Equity Mutual Funds (March 22nd, 2012)

Source:
Chart via WSJ

Category: Investing, Markets, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Bears Need to Put Up or Shut Up”

  1. NoKidding says:

    Re: “Miserably Long”

    Zero Hedge is fun, but I don’t believe anyone reads it for actual financial advice.

    Every day has its own “parabolic blowoff top”, or “risk off event”, or “sovereign debt rerack”. Mixing together the top 30 doom phrases with gramatically correct filler words would produce an article most readers would not recognize as farce.

  2. [...] 4th weekly loss – Reuters Secular bear market set to grip Wall Street – MarketWatch Bears Need to Put Up or Shut Up – The Big Picture Market’s long-awaited correction at hand – MarketWatch Is Our View [...]

  3. dead hobo says:

    BR observed:

    The lesson appears to be Momentum + Fed liquidity trumps intellectual appeal + abstract theory.

    reply:
    ———–
    My guiding light (and personal original idea) deals with a convergence of

    Liquidity
    Animal Spirits
    Velocity

    Liquidity is a function of cash available for investments. It can be due to a large ocean just sitting in a pool, or a finite amount with high velocity that just keeps flowing and flowing, or a combination of both. Animal spirits are the gravy that gets the party going and keeps it running to distraction. Velocity deals with how fast assets are circulating. High velocity has a multiplier effect on liquidity.

    In boom times, all three are high. In crunch times, low liquidity is the probable culprit. The wall of worry is a bank account for animal spirits.

    To apply these ideas, you need to guesstimate how they relate to the general economy, the trading environment (aka HFT) and the playing field made available by central banks. You also have to realize that markets evolve over time and nonsense about long term technical analysis or ‘true money’ or proper stock market valuation are irrelevant except as they affect animal spirits.

  4. Mark Down says:

    “Miserably Long”
    How the NYC Madam descibed John Edwards junk.

  5. Petey Wheatstraw says:

    “The bottom line: The strength of this market — or at least, the Fed’s liquidity beneath it — deserves the benefit of the doubt.”
    _____________

    If you want to attract waterfowl — including the illusive Black Swan — throw lots of corn and other fodder around the home place.

    How is it possible that the same policies that resulted in the past two bubbles will have a different result this time?

    I understand the urge to get while the getting is good, but, as we have repeatedly seen, it’s much easier to get in than it is to get out.

    During the tech and housing bubbles, anyone not participating was labeled a fool. After all, there was no denying that those involved were the smartest people in the room. Until the moment they weren’t. The success they were enjoying was manifest proof that a new paradigm had emerged, and that anyone who couldn’t see it was either a luddite (in the first instance), or ignorant of the “historical fact” that RE only went up (in the second).

    Say what you will, this is NOT a sign that we have entered a new phase of history:

    http://stockcharts.com/freecharts/historical/djia2000.html

    “We had every opportunity to see that major whackage yesterday — bad European economic news, weak German PMI data, more slowing in China, European markets down substantially, sell offs in Copper and Crude.

    And? We could not even muster a down 1% day.”

    Is that a good thing, or a bad thing?

  6. sailorman says:

    Verizon FIOS cut off movie streaming through iTunes and Apple TV yesterday. If it’s just my area, Sarasota, it might be a test case. If it’s their entire network, then this is the first shot in the net neutrality war and that could be a big downer for Apple and the market.

  7. DasKapitalist says:

    “The lesson appears to be Momentum + Fed liquidity trumps intellectual appeal + abstract theory.”

    True but trumps for how long? Hours/days/weeks?
    One service I follow cites many parameters indicating the trend up is exhausted but it’s like waiting for Godot…when will the predicated downturn arrive, if at all?

  8. gordo365 says:

    Feels like classic “climbing wall of worry”. The higher it goes – the more people feel comfortable and come off sidelines.

    Note – mutual fund flows may be getting distorted by wave of retiring boomers.

  9. Mike in Nola says:

    Notice no reference to “economy” in the equation. That’s why I’ve just been a spectator for awhile.

    It’s become all about reading Benanke’s mind. Or rather, all about reading the minds of those who THINK they can read Bernanke’s mind.

  10. 10x25mm says:

    Does the predominance of HFT change the predictive ability of the equity markets, or the timeliness of their predictions?

  11. arogersb says:

    Being bear does not necessarily mean being short or being 100% cash, you can be bear and invest in fixed income assets and still make a return. Last year, for all the hype about the recovery and bailouts, the S&P ended up flat and many fixed income investors made better returns with a fraction of the risk.

  12. MayorQuimby says:

    Anyone who is already long can afford to think along these lines. People who are out will be forced to take a much riskier position (buy high up here and hope for a roll over or sit it out and risk missing out on yet another leg up).

  13. inessence says:

    Other than a geopolitical bomb there is one factor that will put the kibosh on this uptrend equity move and the nascent economic recovery. A persistent increase in interest rates. Two forces at work here. Declining purchases of treasuries by foreign sovereigns, and the traction gained in the U.S. economy. Keep an eye on ten year yields….

  14. VennData says:

    NoK, “…,but I don’t believe anyone reads [ZH] for actual financial advice…” I know people who read if for confirmation, and confirmation bias is what they get. Thy have to have people aroung that agree that we’ll go back under 700 in the S&P so they hold their bonds and huge gold allocation and wait…

    g365, “…mutual fund flows may be getting distorted by wave of retiring boomers…” recall its EQUITY mutual funds that are losing investment, while bond funds gobble it up like tech funds in the 90′s. If I had one piece of data upon which to make investment decisions, that would be it. And I’d do the opposite.

    The angry white American male with low information politically is a powerful force prior to mean reversion. I other words, THE reverse indicator. Talk to an angry GOP genuflector and you’ll see exactly how not to invest.

  15. willtruth says:

    Funny how some commentators disparage ZH. But, alot of people who follow markets all know about the blog.

    So what is it? Bullish groupthink is ok? But, informative data ZH presents is bad if it counters every major corporate groupthink market website that spews the status quo vanilla financial information to keep people invested?

    Isn’t the groupthink / momentum, keep my bonus coming, performance chasing portfolio managers, exactly the reason we see the market crashing constantly over the last decade? It’s all GREED vs risk management.

  16. willtruth says:

    As a follow-up, living in So. California from 1970 and leaving in 2005, being in the industry, every financial firms view on housing was that it’s never had more than a minor percent correction over any 5 year period.

    The street and the American economy was positioned for exactly this outcome. No significant downturn in housing ever! All one had todo is talk with people in California from 2003 ( bidding wars, housing never goes down, They are buying a 30 yr asset for a flip, I’ll get out before the market goes down, etc. etc. ) and a mental midget could see the whole thing was a house of cards.

    But, the smartest people in America, Wall St., modeled it not to happen. So just because the model said so, it wasn’t going to happen. The Wall St. group think is lazy. Are you telling me they couldn’t see what was happening or they didn’t really care to stop the bonuses? I think we all honestly now the answer.

  17. howardoark says:

    My understanding is that after the embarrassments of 1929 and 1932 the accepted wisdom was that the stock market was a suckers game and no one would admit to playing it because only suckers did (and who wants to be thought of as a tool?). It wasn’t until an entire generation that didn’t remember 1929 appeared with new money that the nifty 60s became possible.

    401(k)s make a repeat of that meme nearly impossible, but if there’s another stock market swoon, there will be serious money to be made in alternative retirement investments (REITs, collectables, precious metals, et cetera)

  18. willtruth says:

    Anyone who hasn’t figured out the farce this market has become just needs to look at the print in AAPL @$542, TVIX down 50%+ ( is this how firms watchout for clients and market participants now? Leak the creation of units before the announcement at the close? Why would you let TVIX trade at such a huge premium to NAV if your CS? ) and VXX down 25% compared to a relatively flat cash VIX, BATS imploding, etc. etc.

  19. derekce says:

    The Bears will be right- eventually, and the Bulls will too. Who will be right first? Depends on where we are in the market cycle and it’s hard to tell with all the interventions. Since it looks like it’s been leaked that Q3 will be announced in April, my guess is the Bulls win, as long as that’s true.

  20. James Cameron says:

    Anyone who is already long can afford to think along these lines. People who are out will be forced to take a much riskier position (buy high up here and hope for a roll over or sit it out and risk missing out on yet another leg up).

    Good point. Frankly, I think this rally caught a lot of investors, especially retail, off guard because it happened so quickly and not long after the news was dominated by daily predictions of financial crisis in Europe and budget crisis here. Having been burned so many times investors have been very cautious. Going forward, any number of scenarios could play out despite some of the confident bullish (or bearish calls) . . . bad news out of Europe on a debt auction or yields climbing again could bring those wrenching days back very quickly – or at least remind investors of those wrenching days – or the market could consolidate and then continue to climb, pulling in more investors who are fearful of missing the ride, until . . . I think BR has the right approach here, following the market and tracking the data like a hawk, ready to change course if mounting evidence points against it. Right now, if you’re long, it’s wait and see time.

  21. [...] I mentioned Jame’s Montier’s discussions of cyclical profit peaks and promised to post a few charts [...]

  22. obsvr-1 says:

    If you didn’t get a chance to see Robert Prechter interview yesterday on Cavuto here’s the link:

    http://video.foxbusiness.com/v/1525260097001/is-deflation-biggest-risk-to-economy

    he is 100% out of the market …

  23. from a ‘different Quadrant’..

    http://finviz.com/futures_charts.ashx?t=ZN

    given the level of ‘hue & cry’, about “Yield Spike!”, one would have thought that the 10yr would have been ~122, by now..

    alas..

  24. Finster says:

    willtruth, the reason most investors and professionals read ZH, but keep a healthy distance is that there is just too much sensationalist drive in their pieces and they consistently underestimate the power of policy.

    My greatest gripe with ZH is their insistance that the dollar is toast, paper is going to die to gold but at the same time they are ultra bearish on stocks of any kind. Anyone who has followed weimar/zimbabwe/inflation stockmarket knows that this conclusion is questionable. You either get a collapse of the USD or a collapse of ExxonMobil/S&P500, but probably not both.

  25. Northeaster says:

    “The strength of this market — or at least, the Fed’s liquidity beneath it” -

    Two questions:

    1. Is The Fed liquidity the mover of the markets?

    2. Can The Fed take themselves out of the equation and still have the markets survive?

  26. tagyoureit says:

    Curse my risk aversion…

    I’m thinking about making some baked apples in the slow cooker tonight.

  27. 2. Can The Fed take themselves out of the equation and still have the markets survive?

    A: Not in this Lifetime.

  28. Sechel says:

    There’s nothing to “put up shut up” on. The market is going up due to corporate buy-backs. The state we’re in may continue for some-time until corporate buy-back money ends.

    ~~~

    BR: Corporate buybacks? You think thats whats driving equities?

  29. [...] following the Bears Need to Put Up or Shut Up post, I have been getting into some odd conversations with traders (and ex-traders). Yesterday, I [...]