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Tuesday, July 5, 2011
More Questions Than Answers
As I sit here writing – post a fitting fireworks spectacular, I have more questions than answers with regards to the markets recent display of its own pyrotechnics. It was only a few short months ago that I postulated that the market would likely receive the end of QE2 with more tones of rationality than blue notes. The abstract thought being that commodities would take it on the chin once risk donned a discriminating coat – and the equity markets would eventually stabilize and benefit from the diverted capital flows and cheaper input costs.
And while the commodity market has followed script and looks exceedingly vulnerable over the next several weeks – the degree of equity stability and the impact of a transitioning currency has yet to be determined. Irrationality cuts both ways and in this vein the market has yet to display any semblance of stability. I suppose this should come as no surprise considering the nature of markets in a quantitative world.
With that said and judging by its breathtaking (for the pun – see here) velocity and trajectory – the extend of last weeks rally was misjudged by almost everyone. Certainly the market was due for a bounce – but last weeks gains were exceptional by most any standards. Stability would not be my first choice in characterizing the markets remarkable recovery.
At times like these when the market exhibits behavior far exceeding my own expectations – I tend to pop my head up to see what the next guy is thinking. Anecdotally, the market blew threw each of their respective targets with not a hint of resistance at each technical level. Mind you these are not your average market surveyors – but the best of the best market timers. A certain word comes to mind that I have alluded to over the past several weeks – audible.
It was a straight line to 1340 with barely an hourly candle off step.
And while there was a surplus of bearish sentiment and late-to-the-party shorts to fuel a sprint in the other direction – the nature of the rally needs to be qualified in the rarefied historical context that it deserves.
It was the 29th best week for the stock market out of 3,207 weeks since 1950.
That would put it in the top 1% of all weekly rallies over the past 60 years. Bespoke had an interesting snippet of research that went back a bit further that isolated 7 occasions where the market rallied for 5 days with gains of 0.75% or greater. I would be remiss to remind you that if you torture data long enough it will confess to almost anything. With that said, the general gist of the data was that the market typically continues to rally in the weeks and month following the rarified surge (by an average of 2.29% and 3.58%, respectively). Data mining it a bit further, considering one of Bespoke’s exceptional rallies was during the fall of 1980 when the market came down with a specific bout of silver fever and a transitioning currency, the market had less than stellar returns one week and one month out (0.23% and -2.14%). Food for thought, but I still have more questions than answers.
Question – When will the euro give up the illusion that it is a stable dollar alternative and not fatally flawed in its present political form?
I think sooner than later, but if this past week was any hint at foreshadowing the months and weeks to come – perhaps juggling sovereign debt-bombs is just a relative feat of strength and not a liability. Who knew the markets were so progressive?
Question – I am concerned about the price structure of the equity markets over the past 6 months? The longer this looks like an ever-broadening top, the more concerned I get about the longer term picture.
Question – Did the government bond market hit the relief valve last week? Could the story on Morgan Stanley mis-trading interest rates mark the bottom of this rate move? If true, that should be supportive for equities – in the same vein that redirected commodity inflows were good for equities.
And that’s just the tip of inquiry.