Jared's Market Commentary - Don't blink

By Jared Rosenbaum OK, so let's see...there are bombs being shipped to the US via UPS/FedEx, the dollar has strengthened, volatility is moving lower, and there are still a ton of people filing for unemployment benefits...yet the market barely even thought about moving down this week. The resilience is phenomenal, but if you look at the previous leaders in this rally, there is a ton of underlying weakness, which means as soon as we have the right catalyst, there is going to be one super sharp move lower. I believe that any strong move down is really a buying opportunity, however this move is probably going to be very painful after the last few months of gains. We could easily see 5-10% wiped out in a matter of days...and while this isn't catastrophic, it certainly doesn't feel good either. Here's how I think we'll set up: The market could actually take a dive on Monday ahead of the elections, but given the recent euphoria we see on Mondays, we're more likely to get a few M&A announcements to keep things floating. Tuesday or Wednesday is when we should get the expected pop, as the republicans are going to take the House and I personally think they will also take the Senate (even though this is still in doubt). The market will cheer this news, which should be the market top in the short-term. Wed/Thurs/Fri (jobs report on Fri) should be when we get a reversal and start this move lower. How long it lasts is anybody's guess, as the markets have a way of taking a month's worth of trading and doing it all in a day or two. With that said, I would expect to see buyers show up once or twice, only to see failures which leads to wider, faster, harder selling. Looking at specific stocks, Apple, which has been by far the leader, has quietly moved from a high of $319 last week down to $300 today. I expect it to try to move back up, but ultimately head down to $275 or so before it heads higher. GS hit a new high yesterday around $164, but it appears that it might be ready to reverse...$150ish is where it should test. Freeport-McMoRan FCX hit $100 last week and is now around $95...it should see high 80's for sure and maybe even mid/low depending on how hard we sell. Mastercard MA got near $249 before heading back to $240...I expect it to hit $220 and maybe even challenge $200 before we're done. My point is that you look at the leaders and they all point lower in the short-term. I've been thinking lately about the longer term and how this whole situation is going to play out. Here are a few thoughts that hopefully will come together to paint the picture that's in my head. First, we have states and municipalities that are beyond broke. The federal government keeps bailing them out, but that is going to end eventually...which might be sooner rather than later if the repubs get serious about cutting spending. Look no further than Medicaid, which the feds dumped billions into the states to make them whole this year...not gonna happen in 2011. Next, GDP came in at 2% growth, which isn't great, but certainly is not anywhere near negative. Here's my thoughts. People were frozen last year, afraid to spend because nobody knew if they'd have a job the next day. Those fears are subsiding and therefore consumer spending is rising sharply, as the American once again proves to have a short memory. So if you look at the working world, people are spending. The problem is there are still a gazillion people unemployed and/or no longer looking for work. The huge glut of these people is going to constrain spending growth. And let's not forget, we all still need to de-leverage, which also keeps it down. I will admit I'm amazed at how many ipads and androids are being sold, but since nobody cares about the future, they are buying this stuff today. There is a huge divergence right now between the strength of corporate balance sheets and the strength of the economy. Companies have so much cash sitting around it's crazy...eventually they are going to put this to work, likely in the form of stock buybacks and/or dividends. This is great for the market, but let's really look at this closer. While a good number of people will see a few bucks here and there in 401k's, the majority of this cash is going to end up in the pockets of the upper 1%, which owns more stock than anybody else. While some M&A will get done (again, the stockholders get rich), that cash is ultimately going back to the rich, since there is no better place for companies to deploy it now or in the near future. Housing: What recovery? People get excited if existing home sales are a couple percentage points, but really this is just foreclosures swinging up and down. With the exception of pockets here and there, the housing overhang is not going away in the next 5 years. There are too many people under water, there is too much supply, there are too many people that can't afford to buy houses, and everybody 21-29 is unemployed...add that up and you have an asset class that has no reason to go up. Let's talk inflation. Core inflation is not moving, while food and energy prices (read: commodities) are going through the roof. So this means that the little bit of money you do have is going to be diverted away from fun things so you can buy gas for the car and food for the family. This effect is going to be interesting, because demand for other goods should go down, depressing prices, which means you have core deflation but overall inflation...or maybe even commodity inflation but overall deflation. Let's see the fed fix that one! Oh, and the fed...watch next week when they say "oh, we don't need QE2," or "we're gonna slow down on QE2." The market will not like that one. We need them to keep buying our garbage in order to prop up the banks and allow mortgage rates to be absurdly low. I can tell you now, 4% does not nearly capture the inherent risk in loaning somebody money. After a housing collapse like the one we're in, mortgage rates should be higher than where they were...not lower! To wrap this up, I think we're about ready for a good washout that will set up a nice buying opportunity. Volatility has been crushed lately, so one of my top picks over the next 1-2 weeks is VXX (current position). The options are cheap enough that going long will really pay off if/when the market turns lower. I also like Google GOOG as a short (current position), along with all of the other tech names that have become insanely expensive. As for the long-term, it will work itself out eventually one way or another. I'll just keep sitting here on my soapbox waiting for somebody else to see what I see.