Manic Market (Makes No Money)
April 4, 2005
Now that the season of complacency is over, we find ourselves in one big rut. The NASDAQ is at lows for the year and right back where it was on election day. It is even dangerously close to a complete breakdown below the 200DMA. Despite my claim that the market would eventually follow technology shares downward, the S&P and Dow Jones continue to outperform their over-valued cousin. Both indices have managed to hold their lows for the year and have not yet given up all the gains from the post-election rally. However, it is quite fitting that the markets have seen fit to wipe out the bulk of the post-election gains. They never made sense in the first place! The rapid rise and subsequent flop that we have witnessed in the past four to five months describes the market's manic behavior perfectly.
The manic market has been full of ups and downs as it has responded to one economic twist after another. One day, oil is up and stocks sell off. The next day oil is down and stocks rally. Heck, the market even took pause when Goldman Sachs dropped an alarmist bomb claiming that oil could soon spike to $105 a barrel! Anyone who does not trade or invest into the oil or energy complex has to be dismayed by the way daily fluctuations in those markets have captivated the rest of the financial market. Today holds a classic example: "Stocks End Higher As Crude Oil Prices Slip" (from AP). It seems that every single day, the financial press looks for a reason in the day's move in the volatile madness of the oil patch. The market has become manic as it remains befuddled over which economic currents will dominate in the near-future. One thing I DO know - oil (and commodities in general) is up and the trend is strong and up. Any stock market move that anticipates a counter-trend in oil is temporary until further notice.
How can I be
so sure? President Bush
is asking for $80 billion more for wartime operations in Iraq, Afghanistan, and
perhaps other hotspots in and around the Middle East. This administration has made it clear to us
that this region is a top-priority. Now
suppose that we are truly in a new world for oil where production capacity
remains tight, new finds remain scarce or politically/environmentally untenable,
and world demand outside of the
In the near-term, the Fed is the biggest wildcard out there right now. On March 22, 2005, the FOMC uttered one sentence that made the markets shiver: "Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident." I have picked apart Greenie's words before ("Greenie Is Still Bubble Blind" and "Forget 'Meanie Greenie': Keep Spending!"), but this time I need no elaborate analysis. While the mainstream pundits are running around screaming bloody inflation now that Greenie has finally given a nod to the possibility that inflation is taking hold, they have ignored the fact that the rest of the statement is as benign (and meaningless?) as ever. The Fed still thinks it is being accommodative (ok, ok - so that means rates will keep rising), and they continue too "ooh and aah" at the economy's overall strength in the face of higher oil prices. The labor markets provide to the Fed its most immediate gauge for inflationary pressures, and they are certainly not alarmed by the "gradual improvement" seen so far. The conflicting mood of the Fed has merely fed into the market's manic behavior. On the day of their latest statement, the rate in the10-year Treasury spiked hard and followed through the next day before fading. Now, in true manic behavior, this rate is again below where it was the day before the Fed spooked the markets! This fallback has allowed the homebuilder stocks to hang in there, but commodities have struggled because the dollar continues to rally. In fact, the dollar is approaching its high of the year. I suspect it will fail this test rather easily (if not, it might be gold that is about to fail a major test at its lows for the year!). Regardless what happens in the coming days and weeks, we can expect to see more manic behavior that frustrates anyone trying to make lasting predictions on the markets.
In the end, it seems the Fed has begun to achieve a softening of the economy without drastically boosting rates. A slow, steady drip of rate hikes combined with some yapping and jawboning are all working their magic right now. Some genius knew just the right words that would put the brakes on….even while the main gist of the Fed's message has not materially changed. Given that the April jobs report was weaker than expected, do not be surprised if the Fed begins to pat itself on the back for a mission accomplished. A significantly weaker stock market would seal the deal.
We are now
facing the next earnings season with the market on edge. Growing scandals in financial companies like
AIG, Fannie Mae, and MBIA, Inc have the market wondering whether the
Most of all, as the Fed continues to raise rates, the market has begun whispering the old adage "don't fight the Fed." Now that we approach the traditionally weak period of May to October, it is time to make more than furtive (and manic!) glances at these warnings. I strongly suspect we will rally for at least two weeks this month: either for the two weeks of earnings or for the two weeks after earnings. Pick your favorite excuse or explanation when it happens. But never lose sight of the fact that the Fed is now fighting against the financial markets. I can guarantee you that we do not have enough hard-earned cash to buy them off. The markets will remain manic until they finally bow down, and you can bet it will be hard to make money the whole way down this stomach-churning trip.
As usual, be careful out there!