Marketview: Talking Point Volatility

Despite the terrible sentiment towards the fiscal cliff and reactionary selling after the election, November managed to scratch out a slightly positive return on the month.  Greece bought some time, and yields in Spain, Portugal, and Italy were all lower.  GDP was revised higher this month but the composition was viewed suspiciously as it mostly consisted of inventory investment rather than demand components.  Fiscal Cliff negotiations appear to be nowhere near resolved and the market is manufacturing volatility based on the political talking points.

This week the Federal Reserve shopped the idea of further quantitative easing measures in 2013.  Bernanke is officially the Pablo Picasso of this central bank game.  Either he’s played every turn nearly flawlessly, or he’s managed to muddy the waters so thoroughly that no one knows which way is up.  It’s undisputed that he’s managed to spur a general bid in risk assets.  Our stance has been to remain long-term bullish based on steady improvement in housing and job creation.   I’m very open to the fact that these broad measures of the economy could be masking bigger problems in overall production, sales/earnings, and the fact that lots of jobs created are of lower quality.  Is housing improvement,  job creation (slow) and QE enough to keep the economy from contracting?  This is the real debate.  Everything else (including the fiscal cliff) is noise.

This definitely feels like a legitimate inflection point after such a long run.  Our indicators are skewing negative and we will be cautious until they’re back in risk-on mode.  Dr. Bernanke has a good track record of harming the financial future of those betting aggressively on continued weakness.  Plus, there will almost certainly be additional volatility before the market picks a definitive direction.  As I noted at the end of October, it feels like we’ve seen this movie before:

These pullbacks feel a little Groundhog Day-esque at this point.  First, buyers become apathetic to equities in the face of government intervention.  Then the market looks like it might just rollover — for real this time.  Ultimately, support is found and stocks run with everyone collectively chasing and covering higher.  Most frustrating bull market ever.

This cycle will eventually fail.  The question everyone wants to know is: when?  One tell that I’m watching for is intense volatility/indecision on the way up to 1440 and failure to make new highs (the ATR should be higher than the July thru August 2012).  If this happens, there’s a higher probability that the bull market has completed and we are entering a bear cycle.  Violent indecision tends to come before big selloffs.  But we’re not there yet, and this is a lower probability outcome.  Until something meaningful changes, there is greater possibility that we are still firmly in the groundhog day market and have new highs ahead of us.  We have to wait for the market to unfold.  Stay flexible to new information.

The ideal market leadership in financials, basic materials and tech we were looking for has not yet materialized.  Instead we saw utilities, consumer staples, and industrials lead the rally.  Financials, energy and healthcare were the worst performers.  Not the healthiest sector rotation for an up move.

Winners: $EXC, $AEP, $ORCL, $GOOG, $AMZN, $EBAY, $HAL, $BHI

Losers: $C, $GS, $BK, $INTC, $IBM, $MSFT, $BMY, $BAX, $GILD

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