07-05-2011 Market Commentary

By Eddie Katz Business Insider - Words can't exactly express very well the gigantic rally in the market last week. This chart from PragCap nicely emphasizes what a moonshot it was. The lesson really: The market is efficient...at making idiots of people left and right, as virtually nobody in the previous week would have anticipated anything like this. Citi - The Panic/Euphoria Model signals a nearly 90% chance of equity index gains over the next six months. This proprietary sentiment gauge fell into panic territory for the first time this year only last week and it historically has generated powerful buy signals over six and 12-month time horizons, with average six-month appreciation of 8.9%. While the S&P 500 may get buffeted in the near term by weak consumer confidence or jobs data, other measures augur well for 2H11 returns. Merrill Lynch - A summer of waiting and watching continues We believe market performance over the rest of the summer and into year-end is likely to be determined by three key tactical issues – 1) Greece passing new reforms and getting additional EU/IMF funding; 2) the US debt ceiling deal; and 3) 2Q11 EPS reports and guidance. While risks around Greece and the US debt ceiling have intensified, risks of an oil or interest rate shock have materially subsided. Gluskin Sheff - Maybe there is some excitement out there over the Greek debt rollover plan or perhaps the selling pressure hit an exhaustion point with the stock market down seven of the past eight weeks. This rally seems technically-based – the macro scene looks very soft and the second half recovery story that is built largely on auto sales and production revival is going to be put through a serous test. The first half of 2011 had many themes, including policy tightening in many emerging market countries, especially China and India, the never-ending debt saga in Europe and the dramatic cuts to first-half GDP growth estimates in the United States. Barry Ritholtz - With 6 of the past 7 weeks in the red, the markets have managed to string together a series of winning days. Daily gains both this week and last have ranged between 0.50% and 1.25%. Indeed, the Dow's gains on Monday and Tuesday represent the first consecutive triple digit gain for the Industrials since December 1- 2, 2010. This was the fourth triple digit rally since the April 29th highs. Are we making a major turn? Has psychology become so bad its a contrary indicator? Has the 200 day moving average proved to be inviolable? Perhaps any of those explanations might prove to be the case, although I have my suspicions otherwise. I suspect it is simply a case of funds marking up stocks into the close of the 2nd quarter. What data supports this thesis? I would point to 2 things: Psychology and Trading Volume. Most metrics are showing psychology is either neutral or optimistic. This tends to be supportive of a short term trading bounce, and not a longer-lasting rally. Second, the volume has been anemic, even by the unusually low levels we have seen all year. The overall volume on Monday was well below the 30-day average on both NYSE and Nasdaq. Tuesday was even lower. Rallies on increasingly lighter volume are not signs of aggressive institutional buying. Rather, it supports the Window dressing thesis. Explaining the short term noise is often a Fool's Errand,. In my experience, it tends to reveal more about the speaker's book than it says about the market conditions. But in the present case, I cannot help but be concerned that the long side trade is a bit of a suckers bet much beyond June 30th . . . JPMorgan - Discussion about a tax repatriation holiday is gaining momentum in Congress. J.P. Morgan's Accounting Analyst estimates foreign undistributed earnings are at least $1.4T and growing double digits annually. In 2004, corporates repatriated an estimated $362B, and we expect a much larger figure today. In our view, this repatriation carries a bigger punch than QE--given use of proceeds likely directly benefits equities or US economy. [Editor's note - When a repatriation holiday was announced in 2004, the intent was for companies to bring cash back to the U.S. to invest in capex and more jobs. As it turns out, the cash we spent on corporate buybacks and dividends. Not exactly a bad thing if you own stocks but also not a big help on the economic growth front.] Conclusion - This weekend a client received a preview of the commentary and his question was very basic...and thought provoking. He asked, “are you bearish or bullish?” Well...the answer lies somewhere in between. Of course with a gun to our head, we're going with the former, however, there are various degrees by which we can answer this question...and many of the answers depend on how the question is posed. What is the time frame of the question? Are we only discussing equities or do bonds, commodities and other asset classes count too? We were firmly of the thought that equity markets were due for a bounce, however, even we can't say that we were holding out for a 5% gain. An amazing week to say the least. So now, regardless of whether or not you believe the rally was due to short sellers covering bets, quarter-end window dressing and/or the Greek bailout, we would advise you to look at this rally as an opportunity to at a minimum, reassess portfolio positioning. So to answer the initial question...we're cautious. Not cautiously optimistic which is the easy way out to cover all bets...we're just cautious. Now is a time to minimize loss potential. Perhaps we have to give up some upside, but we're ok with that given the current economic and geopolitical environment. With Day 1 of the post-QE2 era being a success, we would like to see the economic data begin to show signs that the private sector is able to carry the load that the public sector will continue to curtail with continued government spending cuts (although we're not convinced this is in the cards). And what better way to do this than a knockout number on this Friday's non-farm employment report? Let's just hope that the people at the BLS don't survey companies like Campbell Soup (NYSE CPB), Goldman Sachs GS, or Lockheed Martin LMT...at least for the month of June. Hope you had a terrific holiday weekend.