July 27, 2009

Good Morning All,

Markets have now put more than two weeks into the third stage of the recovery rally which began last November; yes I know that lower index lows were made in March, but the process, in my view, really began with the post Obama election decline and subsequent recovery, when stocks in the tech sector traded at "silly" price points.

Investors who bought tech, biotech and agro stocks at that time (refer to my list) fared rather well. Those who missed this first down play were offered a long intermission during the month of February wherein they could assuage their fears through a look at even greater opportunities as banks, oils and other commodities joined the across-the-board rally that followed the aforementioned March lows. This upswing lasted through early June with indexes putting on 40% gains, while many individual stocks doubled or even tripled during this brief period...and then in the face of rising bearish sentiment, the July rally began in earnest.

We often write of "market adages" in this space and we are once more reminded of the two that make up the traders creed; don't fight the tape and don't fight the Fed. The first of these is not all that complicated; it simply means that momentum in any direction will carry prices higher or lower than anyone rationally expects...until it is broken. The second posits the case that lower interest rates and an active printing press will eventually spur economic recovery, a condition that is long preceded by higher stock prices.

The initial recovery from the lows was a reaction by bargain hunters to advantage themselves of those investors who allowed late-in-the-day panic and threats of armageddon to color their judgement. The March wave corrected many of the "silly" price inequities mentioned earlier, while the July explosion has been fed by earnings reports that have come in well above expectation (please refer to June comments). So the question now is...what comes next?

The fuel that bull markets run on are cash and fear, both of which are in plentiful supply. Tops are made when the cash is spent and euphoria has replaced dread. We are nowhere near that point, but we may be in for a refreshing pause as early as this week. Use it to buy in advance of the next major upleg that should take the S&P 500 above 1200 by early September, after which we might experience a more serious and traditional early autumn decline.

Commentary

In America , the Republicans continue to test the borders of sanity as their opposition to the Sottomayor nomination and their embrace of the intellectually-challenged ex-Governor of Alaska so aptly illustrates. Aside from their lock on hypocrisy, they are stupidly throwing away the Hispanic vote along with that of the moderately intelligent...third party anyone?

In Montreal , Earl Jones (our mini Madoff) was arrested yesterday. I suspect that the dollar amounts lost will be much less than the media has estimated. If he had stolen 50 or 100 million, he'd be outta here. Not much comfort to the victims although Registered accounts may still be intact.