Marketview: Sentiment Gap


A quiet week with the entire range of broad indices contained to less than 1%. The $DJIA snapped a 10-day winning streak on Thursday making it the longest since 1996. The $SPX came within 3-points of the closing high. The big news of the week was that 14 of 18 banks passed the Federal Reserve stress tests. Of note was $JPM and $GS only getting conditional approval for their capital plans with a stipulation that they will have to resubmit in Q3. I suspect singling these institutions indicates they are the most aggressively trying to maximize their TBTF status. I anticipate there will be a correlation with gaming the system and equity returns to investors in the financial sector. $GS and $JPM appear to be on the bleeding edge of system gaming as far as the Fed is concerned.

Very light week on critical data points with only Consumer Sentiment making an impression. A reading of 71 puts the overall sentiment of the consumer around a long-term average even as the market trades at an all-time high. This can be interpreted in a couple ways. Maybe the market is wildly overvalued given relative to the outlook of the average participant in the economy. Alternatively, public sentiment has been reset so hard in the last couple years that it will take much higher prices to elicit a positive response from the average participant. Either way, there is a large gap between what the market is doing and how the public feels about it. Call me cynical, but it is more probable that public sentiment is dragged higher by a well performing (and manipulated) market than a well performing market gets dragged lower by an underperforming public sentiment. This is one of my primary reasons for maintaining a more bullish outlook in the last couple years. Based on where the public stands relative to market performance, we are still in the early stages of a bullish cycle in the longest-term view — but if the last couple years are any indication, it will still be an ugly ride higher.

Leaders this week were financials, energy, and basic materials. Laggards were consumer staples, technology, and consumer discretionary. Even as everyone can see a wildly overbought conditions, breadth continues to make new highs with the market and divergences resolved along the way. The market auction process works both ways; this will not last forever. Tops are nearly impossible to call, but remember that as unimpeachable as it appears now, it will most certainly look uninvestable in the future. Tighten stops and ratchet up discipline. Keep gains.

Next week we have Housing Starts and another FOMC rate decision coupled with a Bernanke press conference. I cannot wait hear about the nuances of every syllable of Bernanke’s answers discussed over the coming weeks.

Winners: $BA, $LMT, $RTN, $BAC, $WFC, $AAPL, $NOV, $BHI

Losers: $EBAY, $AMZN, $GOOG, $V, $MA, $HD, $CL, $PG


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