Marketview: Bear Carnage


Crazy holiday shortened week.  At the 11th hour and 59th minute there was a deal struck to avoid the fiscal cliff and the market opened for the New Year with the full relief that the drama was over.  Some information leakage obviously happened on Monday.  News of a sluggish economy persists and yet billions of dollars are pouring into stocks.

This week was one of the most clear examples of a risk-on trade that we’ve ever seen.  While everything moved in tandem to the upside: energy, financials and industrials led; healthcare, utilities and consumer staples lagged.  Investors who had hedged up before the end of the year were forced to unwind some protection and reposition.  The big news is the reaction in the treasuries market.  Money is slowly starting to rotate out of safe assets and into risk assets.  We are at the very beginning of a big trend here.  All those historic inflows into fixed income we’ve been hearing about over the last couple years will eventually cycle back to equities.  The only question is in the timing.

The market has chosen a path in which the probability of an imminent bear market has been clearly reduced.  Sure, there’s still a small chance that this is just an exuberant move in the face of an inconsequential deal.  The more likely scenario is that we’re now beyond the tipping point to the upside.  Markets, especially in this era, love to press the boundaries.  The closest boundary now is the 2012 market highs.  An auction higher will test how many additional participants can be shaken out of cash or short positions.  I anticipate that the market will press shorts above the 2012 highs and above the round number: 1500.  We will reassess at that point.

Winners: $MET, $C, $MS, $NOV, $HAL, $HPQ, $DELL, $FCX

Losers: $EMC, $MSFT, $IBM, $WMT, $MCD, $HNZ, $PG, $AEP

It’s impossible to know how long the rally lasts or whether it is sustainable.  Money moving into risk assets while the world-at-large hates stocks has been the signature recipe for sustained moves higher during this bull market.  We’re seeing that now.


We are short-term overbought as evidenced by the extremely lopsided breadth.  This can be resolved by time or a pullback.  Both are healthy and a pullback would be very well received.


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