Market Comment - September 18

(Marco Bonelli) Does the market make sense?

...truly the wrong question as it always does and at the same time it doesn't!

Nevertheless some market participants talk about the "new norm" and a new "equity culture". I still believe that equities are driven by the underlying fundamentals on the long run and that stock prices eventually move back to the fundamental trend once they traded too far away from it, on the upside or downside - each time it makes sense until it doesn't, that's when the fundamentals kick in.


On that road, there are, always have been and always will be many distractions, events, developments that lead stock prices away from the underlying trend. The housing and credit bubble was one these developments; the resulting monetary stimulus is another!

§  As if unlimited QE3 wasn't enough to turn market and stock analysis and asset allocation measures upside down, further research pieces and also rumors clearly fall into the category "absurd":

§  "Uncertainty has pushed up the U.S. unemployment rate by between one and two percentage points since the start of the financial crisis", a Federal Reserve study shows. There is no doubt that consumer uncertainty leads to less spending and consequently less investment and hiring on the corporate side but it's a very isolated, ceteris paribus view that attempts to explain very complex and hard-to-measure developments that the Fed continues to define as "cyclical". Doesn't a statement that the U.S. unemployment rate would be around 7% instead of 8 to 9% without the current level of doubt among consumers fall more into the economic propaganda two days after the announcement of QE3 that already has a strange political smell - and if it's only an attempt to secure Ben Bernanke's own job after the current term ends on January 31, 2014?

§  Then there are these ongoing rumors about a release from the Strategic Petroleum Reserve (SPR) where some may wonder, where this rumor even comes from. Should the government release parts of its emergency crude petroleum storage, which is meant to relief any major supply disruptions, in order to lower higher energy prices that were probably 75% driven by QE speculation (and now implementation) and 25% by the very disturbing developments in the Middle East? By the way, the 10-year uptrend for crude runs between $80 and $90 and the price trades within a wide $80 - $115 range for the last three years, so the rally from below $80 in June to $100 on Friday last week and the pull-back following two failed attempts to break above $100 falls into the category "normal activity" and doesn't even justify considering a release, unless you desperately try to utilize all means to win an election.

Despite all distractions, events and developments, market players try to get back to business as usual: "We've had a big move up so it's not surprising to see a pull-back" was the standard explanation for yesterday's down-day. Highflyers from the last few days, basic materials, financials and energy received the stamp for worst performer while the classic defensives, healthcare and consumer staples landed in the Top-3 bracket, adding to their month-long outperformance that propelled both sectors, along with consumer discretionary already to all-time-high levels, far ahead of the SPX and all other cyclical sectors. This Friday is also a big expiration day, so a lot of activity this week may be attributed to the derivative market.

While mostly disappointing economic data in combination, the upcoming and probably disappointing Q3 earnings reporting season and ongoing negative economic news from Europe and China may lead to a QE3- "sell-the-news" pull-back, the roughly 5% upside until the Dow Jones reaches new all-time highs, 7.5% for the SPX and around 10% for many other indexes appears to be quite manageable and more a question of "when" than "if". Unfortunately this already is or will soon become consensus expectation...

Trade well.


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