Pick a Top — Any Top

Good Evening: After Friday’s equity celebration over the Goldilocks-like unemployment data, the U.S. capital markets followed up on Monday with an uninspired performance. Perhaps some of the true gunslingers among market participants were still making their way home after a visit to last night’s Academy Awards ceremony in Hollywood. Given the somnolent trading today (lightest NYSE volume in 2010), Mr. Market might well be in line for the same honorary Oscar once given to “Sleepy” (along with the other six dwarfs, see the 1938 awards). Last year at this time, Mr. Market could just as well have been handed a statuette for his portrayal of Grumpy.

Another who might merit similar consideration is French president, Nicolas Sarkozy. At a weekend news conference, Mr. Sarkozy almost looked like he was trying to audition for the role of Happy. In an effort to add momentum to recent EU moves to soothe global nerves over Greek financial obligations, Mr. Sarkozy had the following to say:

“I want to be very clear: if it were necessary, the states of the euro zone would fulfill their commitments,” Sarkozy said in Paris yesterday after a meeting with Greek Prime Minister George Papandreou. “There can be no doubt in this regard.” While Greece doesn’t need assistance now, “we have measures, we are ready, we are determined,” he said. (source: Bloomberg News)

While these assurances lit no fire under share prices in the U.S. today, they might have enabled stocks to hold on to Friday’s fairly significant gains. That AIG announced its second large asset sale within the last week probably also helped. If both transactions close, the asset sales will fetch some $50 billion for AIG shareholders (a.k.a. U.S. taxpayers) One year ago at this time, AIG was in the headlines for very different reasons (see below). The announced sale of an almost 80% stake to the U.S. Treasury on March 5, 2009 helped put in the bottom for both AIG and the S&P 500 (coincidentally, at 6.60 and 666, respectively).

Not able to venture too far from unchanged all session long, the major averages finished just about where they went out last week. With a fractional loss, the Dow trailed the other indexes, while the Dow Transports (+0.43%) logged the best gain. Treasurys were beaten up a bit on Friday after the payrolls release, and they didn’t perform very well today, either. A large slate of auction supply this week helped push yields up between 1 and 4 basis points today. The U.S. dollar index was a bit lower this morning before it rallied back to also finish flat. Commodities suffered a similar fate, though it should be noted that energy prices were on the firm side and precious metals were their mirror image. These offsetting gains and losses left the CRB index itself with only a tiny loss today.

“What a difference a year makes!” is over-used and often trite, but it is unusually appropriate in describing the one year anniversary of the March 6, 2009 bottom in stock prices. Today’s paint-drying market moves stand in stark contrast to the white-knuckle volatility seen when stocks were bottoming 52 weeks ago. For old time’s sake, I went back to review what I wrote about the capital markets and found the entry you see below for March 5. “Pick a Bottom — Any Bottom” did not call for an imminent or specific low in the major averages. It was instead the first time during the 2007-2009 bear market that I felt it was apporpriate for investors to begin considering for themselves where and when the inevitable low point might arrive. As I said in the piece, just the mere exercise of trying to imagine a bottom might be a contrary indicator.

I also remember the thought process that crystallized my decision to write about possible bottoms. As I head to the train every morning, I walk under a viaduct that passes beneath the train tracks. Above me is a poorly maintained section of concrete that sheathes the girders above, and, ever mindful of risk management, I used to shift my path on the pavement in order to cross under the part that looked sturdier. One fine morning, I looked up and noticed that I was making a dumb decision. All of the concrete sheathing had already fallen from the poorly maintained section. There was nothing left of it to fall on me — unlike the seemingly sturdy section, which is still poised to give way some day. Markets could be thought of in the same way, I reasoned that morning. Once they’ve fallen a lot, there’s not a whole lot more they can fall to injure one’s portfolio.

So what about today’s markets? Are there any timely calls to make right now? Will the 60%+ move up since last March continue, or, like the seemingly sturdy piece of concrete I cross under every morning, could the stock market take a sudden and nasty tumble? Unfortunately, it’s not that simple. Prices are neither excessively rich nor cheap at these levels, and there are decent arguments on both sides of the bull/bear debate. Economic fundamentals are terrible; yet most market indicators are positive. Without a catalyst, trading should remain range bound.

I may have less conviction about market direction this year than in any year since 2004, but that won’t stop me from turning last year’s bottom-picking upside down to imagine what a 2010 top in the S&P 500 might look like. The first candidate is 1150, which is 2010’s current high water mark. It seems unlikely that the highs are already in, so next up would be 1200, the round number target so many strategists have called for this year. To give this figure some context, 1200 also represents the “pre-Lehman” low in 2008. Then again, if the S&P 500 is to match what the NASDAQ, Midcap 400, Russell 2000, and Dow Transports have already achieved, then it should regain 1250 — the closing level on the last session before LEH suffered its ELE (Extinction Level Event). And, if market participants really get frisky, I guess they could push the benchmark S&P all the way up to 1333.58. Scraping such a height this year would leave the venerable index with a gain of exactly 100% off of last year’s bottom of 666.79.

Like last year at this time, I’m leaving it to readers to imagine for themselves what an inflection point might look like. We can only decide for ourselves what prices make us comfortable and what our exit strategies should be. So pick a top — any top. I just hope that when the Academy Awards roll around next year, readers will look back and want to call me Doc instead of Dopey.

— Jack McHugh

Most U.S. Stocks Rise Following AIG’s $15.5 Billion Unit Sale
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