That's the title from an article in today's WSJ.
I've been having an extremely difficult time understanding this market. The market goes higher as the economy continues to slow down. There are a few explanations.
1.) Once the market establishes a trend, it tends to stay intact. The SPY and QQQQ have solid, uptrending rallies in place. For traders who simply look at screens, this says "buy". In other words, traders are ignoring economic fundamentals in favor of technical trading.
2.) The market is anticipating an economic turnaround later this year. There are some economists who are arguing the current slowdown is simply a pause in the economy and economic growth will return to 2%-3% later this year or earlier next year. Traders may be looking to the future in an attempt to get in the ground floor of another rally.
3.) While the market isn't cheap, it certainly isn't expensive. According to Barron's the Dow's P/E is 17.29 and the S&P's is 20.18. While this isn't cheap, we have sen far loftier valuations in the past.
4.) Corporate earnings have surprised this earnings season. However, let's add an important caveat to that statement. It's entirely likely that companies were aware of the earnings slowdown and therefore lowered their earnings guidance. At the same time, analysts may have grown more conservative in a slowing earnings environment, making their projections conservative. This means the earnings beating numbers were in fact fact beating a low-ball set of estimates.
5.) There are a ton of deals going on in the market right now. Traders may be buying shares in an attempt to anticipate the next big merger.
6.) Corporate stock buy-backs are providing upward buying pressure, or at least providing some type of buying floor to shares.
While I spend a fair amount of time on technical analysis, I am also a fan of having a solid fundamental backdrop to a chart. If the economic background isn't solid, then trading for an upward move is far riskier. And right now, the fundamentals just aren't as solid as I would personally like.
That's my take.
I'll add that I've been wrong before -- I thought Madonna would be a one hit wonder.
Thursday Watch
10 minutes ago
5 comments:
Well, Madonna should have been a one hit wonder....
But just look at this week's data.
http://cf.us.biz.yahoo.com/c/e.html
Income up .7%
ISM Manufacturing up to 54.7
Factory Orders up 3.1%
ISM Services up to 56
jobless claims down to 305K and productivity for Q1 up 1.7%.
Housing sucks, but it seems to be sucking just a little less than it was 6 months ago. Other than that, tell me again, what is fundamentally weak?
GDP growth has been sub-par for the last 4 quarters. 1.3% is a terrible growth rate. And it wasn't all housing.
Business capex is weak.
Exports dropped.
Even if it was just housing, that does not mean we can ignore a 1.3% growth rate.
With almost all stock markets on a trajectory to be up 30% YoY by mid-July, either they are totally disconnected from reality, or we should start to see some blowout good economic numbers starting about now.
And per the first comment above, this week so far, generally we have. YoY remittances to Mexico are still positive, so I am not expecting a collapse in construction employment in tomorrow's number. Additionally, durable goods are supposedly just barely negative now YoY.
I really think we are at an inflection point for about the next 60 days where we will find out if a recession is imminent, or the economic expansion re-ignites.
Barry Ritholz has a good piece on his Big Picture blog.
Charles of Mercury Rising
http://www.phoenixwoman.wordpress.com
Is it possible that the steady increase is due to all the Baby Boomers with excess cash, looking for a place to park it?
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