The Bulls believe this is the beginning of a multi-year expansion; the Bears think its the end of a cyclical run. Frustration levels on both sides are palpable. It may turn out that both sides are correct, only using very different time frames.
Looking towards the 2nd half of the year, we view the market’s prospects as dimming considerably. Risk levels are high, complacency reigns, and the Bull itself is ragged and aged. That’s before we get into the structural problems of the economy, trade deficits at record levels, and current account balances a mess. The Federal deficit is worsening. A bloody and costly war is sapping dollars that could be put to better use elsewhere. The dismay over the Iraq situation is causing the President’s polling to reach its nadir since taking office; worse yet, the sentiment decay is spilling over to consumers. All this as the prime drive of the economy – Real Estate – shows every sign of rolling over.
Over the shorter term, prospects viewed through a technical lens continue to show signs of resilience. The advance decline line has improved. One day reversals and negative outside days have been shrugged off. There’s plenty of liquidity, with cash looking for a place to go. Money flow remains strong (albeit targeting emerging markets). The Dow Transports have broken out. Action in the Option pits has been mildly bullish. While the bearish camp describes this as complacent – and they are correct – one still must respect the underlying strength revealed. More significantly, the S&P500 is now up for 5 consecutive months. If the trend is your friend, your friend has been telling you he markets want to go higher. A plethora of bad news has been absorbed, and still, the market powers on.
For those who believe that the market is in the 9th inning of its bull run – present company included – there is the real possibility of yet another leg up. Indeed, the underlying strength argue that the timing of the top could be further into 2006 then we previously imagined. While we haven’t hit our original 2006 price targets – 11,800 on the Dow and 2600 on the Nasdaq – they remain possible 1H 2006.
All it would take for that to happen would be reassuring comments from Bernanke & Co. tomorrow. One last lunge upwards remains a very realistic possibility before any top is put in. In the face of the new Fed Chief’s 1st policy statement, we suggest a more hedged stance than a naked short one. Nimble traders can get long. Watch 1294 on the SPX as a bearish signal, and 2320 on the Comp as a bullish one. Either side getting penetrated moves us away from a hedged strategy and more towards a naked positioning.
note: this was emailed 3/27/06 ~noon