The WSJ summed up last week’s market optimism in “It’s All Good, Right? Right?”
The indefatigable optimism of Wall Street is something to behold at times. The market has just been treated to the largest one month of layoffs since the dreary 1970s, which was on the heels of a slew of other global indicators that underscore the depth of the worldwide economic decline. And yet, markets have handled the news reasonably well over the past few days, putting together its strongest week so far this year.
Headed into Friday’s action, the Standard & Poor’s 500-stock index had gained 2.42% on the week, and is adding on further gains Friday despite the horrific employment news. The market has also shrugged off a release from the Organization for Economic Co-operation and Development, which noted that its composite leading indicators are at their worst levels since the 1970s, with most economies deemed to be suffering a “strong slowdown.”
“You gotta love the Street: two hundred S&P; CEO’s come out the last two weeks saying things are worse than expected, worse than they’ve ever seen, can’t say how bad it will get, and all we talk about is stabilization because pending home sales ticked up and ISM wasn’t in the thirties,” says Kevin Flynn, president of Avalon Asset Management in Lexington, Mass.
The bits of good news in the past two weeks have been minimal. They can be classified as opinion (the Institute for Supply Management’s surveys, along with Germany’s IFO survey of business sentiment, both of which showed improvement from extremely depressed levels) or hope (expectations for a stimulus package and further progress on the bad bank plan). That has lifted the spirits of investors, for as David Kotok, chief investment officer at Cumberland Advisors in Vineland, N.J., says, “markets like clarity and certainty even when the policy is not the best.”
However, unlike in mid-November, sentiment indicators do not reflect the same level of worry that persisted during that volatile period. Certain sentiment indicators, such as Investor Intelligence’s bull-to-bear ratio, shows about an equal number of each, compared with late 2008, when bears were dominant. The equity put-to-call ratio still reflects a bearish position, but a less extreme one than at the end of last year, and volatility indexes have shown substantial declines — the Chicago Board Options Exchange Volatility Index was lately at 42.32, not far from the lows of the year.
“I think we’re going to carry on getting a relentless slew of extremely poor data, but as you know in these bear markets, people latch on these things and get a bear market rally going, and then the weight of bad news crushes it again,” says Albert Edwards, global strategist at Societe Generale in London.
[Emphasis added]
That’s my belief as well as I pointed out in Friday’s commentary. If you get sucked into this rally, get your ego out of the way and be big enough to admit that you could be wrong by using a sell stop on your positions to minimize losses should the trend head back south again.
Once realization sinks in that this stimulus package will have little effect on pulling the economy out of its doldrums, the drop in the market will be fast and furious. Remember the first $350 allocation of TARP money? Down the drain with nothing measurable to show for.