I noticed a lot of articles this week discussing the 5 year anniversary of the financial crisis. It's been clear to me that the crisis still hasn't faded from people's memory and I'm sure the flash crash of 2010 and the 20% drop in 2011 helped keep those memories fresh.
I read the latest commentary from newsletter writer Sy Harding who believes there's high risk in the market. A few weeks ago he said that he feels conditions are similar to 1973 which of course preceded a nasty 40% bear market. I disagree with Harding about this. He tries to make the contrarian case that investors are enthusiastic about the market given that they have been "pouring"money back into the market. It's true that this year marks the first since the bull market that investors have been net buyers of equities but it's still a long ways to go before they make up for all the money they've pulled out since 2008 and so it's a big stretch to claim this year's inflows signals investors are once again enthusiastic about the market- some cautious optimism, yes but that's about it. If you ask the average guy on the street what he thinks about the market or the economy I doubt you can say people are enthusiastic about the market. There's still plenty of pessimism/worry out there. I still see people use the term "reccessionary" when describing the current climate - that's not the sort of thing you see near bull market peaks. Harding also points out how some sentiment indicators are showing a lot of bulls and how this is a contrary indicator. This is a weak argument. I've said this before, in a bull market, it's only normal to see optimism and so it can be "tolerated" for quite some time before a correction takes hold. Second of all, sentiment has been very fickle. It has only taken modest weakness in the market to see sentiment go from showing lots of bulls to lots of bears. Sentiment such as AAII, market vane, ect, should be used to navigate ST/IT moves in the market. It's not effective in making LT calls. When it comes to the LT, I've said it here before more than once, all bull markets have ended when there was a combination of greed and tight monetary conditions. At the very least, instead of greed, there should be a general sense of optimism/complacency about the economy by the public and there's no way you can make that claim, meanwhile monetary conditions are about as loose as they can be. So, until I see greed and tight money I will give the bull market the benefit of the doubt and treat every downturn as just a correction.
Harding also points out some recent economic data points which have been disappointing. This is weak yet again as he's cherry picking anything that would reinforce his bearish view. For instance, he made no mention how Europe and China have been showing surprisingly good numbers which is pretty significant for the global economy given that they've been a drag on it for so long. It should be noted that Sy Harding is a big believer in the "Sell in May and go away seasonality" and so he tends to be biasedly bearish from May-November. Given that his seasonality beliefs have been a failure so far this year, he's probably digging in his heels a bit and maybe getting hurt as well since he tends to recommend bear ETFs during this period.
This week everyone is awaiting the taper decision by the fed. The expectation is for a modest taper. If the economy keeps improving, the market is going to have to deal with the prospect of the unwinding of QE and the uncertainty that it brings. In 1994 and in 2004 the fed started taking away the punch bowl and this caused markets to have a moderate correction with months of sideways action until it got the sense that the fed was done tightening without hurting the economy much. I don't think a modest taper would be the equivalent to the start of a tightening campaign compared to 1994 and 2004. In those years the Fed started raising rates which is a much more restrictive action than a modest taper. However, we know the market is anticipatory and so if it gets the sense that tapering is sure to pick up steam then we will probably have another 1994, 2004 type period in the market. That's possibly what could be in store for 2014, which coincidentally ends with the number 4! We'll take it one step at a time.
I haven't mentioned Syria because I felt that yet again it's another one off (like Cyprus last year) which won't have a LT impact on the market and if futures are an indication of what's in store for Monday, the market won't be far off from making a new bull market high.
I started a position in Corridor Resources last week (CDH.to). I'll talk about it more in the next post.
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