Market Comment - March 14

(Marco Bonelli) The power of disbelief and liquidity!

Whoever was wondering (like me) what the reason might be that drives traders and investors to buy stocks higher, with or without the mini-correction we saw last week, here is the answer.


Highly divided opinions about the market direction (call it confusion), the Fed driving investors out of bonds and off the sidelines into the stock market and mounting performance pressure towards the end of the quarter deliver a favorable environment for stocks!
           
With most banks now paying dividends (no, JPM's announcement ahead of the "official" release of the stress-test results and 45 minutes after the release of the statement from the FOMC Meeting was NOT coordinated...) and obviously being healthy enough to withstand the next financial crisis, isn't that a symbolic development that sort of puts the whole crisis officially behind us? On back of the economic recovery scenario and a steepening yield curve, the financial sector admittedly looked quite interesting for a couple of weeks, however, were a lot of investors convinced that you have to be invested in banks in particular?

The key for sentiment and liquidity to work is that the underlying fundamental picture doesn't change! The market played the economic recovery in the US in the last almost three months, the majority of economic statistics confirmed this scenario and last weeks Humphrey Hawkins testimony manifested the positive outlook. Yesterday's FOMC meeting repeated the more positive view and while it means that QE is put on the back-burner (that still disappointed a few market participants last week), an ultra-supportive monetary policy with low interest rates into 2014 should more than make sure that the recovery will become self-sustaining.

Whether numerous mixed signals regarding the true strength of the economic recovery (yesterday, the NFIB Small Business index showed less optimism about the economy and employment for instance, although the index itself edged higher, mainly on expected higher inventories), how much global economic weakness will effect the recovery in the US and how sharply reduced earnings growth plays into the fundamental picture remains to be seen. So far these factors are perceived as temporary and the consensus anticipates a strong second half 2012.

After yesterday's strong performance that improved a lot of vulnerable chart pictures considerably, it's hard to argue against the trend but will investors be more convinced now than they were yesterday or last week? Without any obvious changes in the perception of the fundamental picture, sentiment and liquidity may drive even higher. As John Maynard Keynes famously stated, "The market can stay irrational longer than you can stay solvent." Rational or irrational, similar to the Dow Jones that easily cruised through 13000 yesterday, the SPX will most likely do the same with 1400 and it will be harder and harder not to participate!

Trade well.


(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)