A Year Without A Crisis Is Like...March 5, 2013 @ 8:03 AM EST
Although my son has been doing the time-intensive, laborious stock research for me for more than five years now, he's really only seen one kind of market environment. This fact hit me between the eyeballs recently when he asked what the market would look like if we didn't have some sort of crisis every year. In short, I replied, "Usually, a year without a crisis is like... well... a bull market."
After spending some time with the weekly chart of the S&P 500, my son went on to opine that the years 2003-2006 must have been pretty enjoyable since there was no credit crisis, no European debt crisis, and nothing really to speak of in the way of a crisis out of Washington. I agreed that there had indeed been some good markets in that period and that we had enjoyed some strong returns. "But," I said, "There were two big differences between that time frame and now. First, HFT hadn't taken over the market yet. And second, stock picking worked well in that period because the correlations weren't sky high."
Ah, remember those days? Remember the days when a solid stock-picking strategy allowed you to outperform the market? Remember the days before the algos moved the market 0.5% a couple times a day just for the heck of it? And do you remember the days before the endless string of crises meant the market moved on every headline, comment, and/or rumor? Ah yes, good times.
Well, don't look now fans, but there is a chance (note that I did say "chance") that those days are returning. Exhibit A in my unabashedly bullish thesis is that stock-picking strategies are working again. The "insider strategy" we employ (where we buy companies that corporate executives who are required to file with the government when they buy their company's stock, are buying - and buying heavily) enjoyed a strong year last year and is well ahead of the S&P again this year. In addition, our concentrated "top stocks" approach also showed strong gains in 2012 and is off to a very good start in 2013.
Next up, the correlation readings of the stocks in the S&P 500 to index itself are dropping. On a 6-month basis, the current reading of the median correlation of the S&P 500 stocks to the S&P 500 index is 0.55. While this is still a high reading from a historical standpoint (the average over the last 40 years has been about 0.45), the current reading is the lowest seen since 2007.
What this tells us is that traders are not employing a risk-on/off approach anymore. No, instead of bombing in and out of a basket of securities based on the latest headline, folks appear to actually be buying stocks that they believe have strong fundamentals and/or good valuations.
And while I could be proved 100% wrong on this next idea at almost any point in the next few months (May is coming after all, and that has meant "risk off" for the last 5 years straight), Europe does not appear to be in crisis mode at the present time. Yes, I understand that there is no "solution" to the debt crisis. And yes, I get that the Eurozone economy isn't going to be humming along anytime soon. However, if the Italian election taught us anything, it was that the European debt crisis didn't cause our market to freak out the way it has in the past (well, okay, my fingers are crossed on that one).
Speaking of things that don't freak the markets out, one needs look no further than Washington D.C. While the initial budget crisis in 2011 caused a ratings downgrade of our country's debt and what I'll call a mini-bear market, each successive edition of the three-ring circus that passes for our government attempting to deal with an issue has been less traumatic for the market. Sure, the budget debacle was a problem and the fiscal cliff created a healthy correction. But the fact that the sequester hasn't been able to sustain the bears for anything more than a modest pullback is something worthy of note.
Now toss in the fact that the public is starting to return to the stock market via equity mutual funds and that the long-lost art of buying the dips seems to be back in vogue and well, things don't look half bad right now. This will be especially true if we can somehow manage to skate through the next six months without a crisis of some sort. As I said earlier, a year without a crisis is probably a bull market year. And finally, my guess is that a year without a crisis would also do wonders for the economy. So, here's hoping...
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blindsided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
2. The State of Fed Policy
3. The State of the "Sequester"
4. The State of European Debt Crisis
The State of the Charts
Although the DJIA is now a good buy algo away from a new all-time high, the rest of the indices are not in the same boat. Thus, the bulls will need to produce some broad based strength soon - otherwise a new high for the Dow in the near-term could produce numerous negative divergences.
Current Support Zone(s) for S&P 500: 1500, 1487ish
- Current Resistance Zone(s): 1535
S&P 500 - Last 3 Months
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Moderately Positive
Intermediate-Term Trend: Positive
- Long-Term Trend: Positive
S&P 500 - Last 12 Months
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move.
Below are a handful of our favorite indicators relating to the market'