Markets in the Mirror

Watching the markets recently has been like having midcourt seats at a professional tennis match – back and forth, back and forth. Since April 26th we have had two weeks down followed by one week up, one week down, one week up, one week down, followed by two weeks up, then two weeks down, only to be capped off with a week up, a week down, and this week we finished up. Whew! That is a back and forth market! After all the back and forth’s – the markets are down around 10% in that timeframe.

The economic and earnings news over that timeframe has been just as frenetic. Many of the economic reports are pointing to a second half slowdown, while some experts are calling for a double dip recession. The earnings releases thus far also paint a very mixed picture. Dozens of companies are back to all time record earnings. Many show vast improvement from their worst levels two years ago, yet others are still struggling to recover.

Fed Chair Ben Bernanke came out with some honest talk as he testified before the Senate Banking Committee and stated that current economic outlook is "unusually uncertain." The markets sold off on that news, but rallied the next two days when investors also took Mr. Bernanke’s comments to mean that interest rates would remain at zero for a much longer period of time. You and I can’t get at any of that free money – but bankers can and rather than lend it out to stimulate American business, they give it to their trading desks to drive up the markets. And that is where we stand today. A mixed to poor economy, with mixed earnings and free money for the banks to pump up the market.

How does that help us? The plan appears to be to print enough money to stimulate the stock market so investors make some money. They in turn will spend it to stimulate business profits. Which will eventually result in more business to create jobs which will allow other people to drive this circle effect further. Unfortunately investors are withdrawing money from the stock market in droves. Many have chosen to hide out in the bond market which is paying ridiculously low levels of income. The bond market does not seem to be acknowledging the rally in stocks. Whom would you rather believe? The bond market or notoriously bullish investment managers?

Markets are now breaking above their down trend channels and their respective 200 day moving averages. This could set the stage for a continuing rally. Could we possibly move in one direction more than two weeks in a row? Markets are overbought at this juncture so don’t pin your hopes for a straight line up just yet.

The European bank “stress test” results came in on Friday and not surprisingly they showed that for the most part, their banks are ok. It seemed quite humorous, the amount of attention given to these tests. The people doing the tests had a vested interest in ensuring that the majority of banks came through with flying colors, so they did. Last year the US markets started to rally in earnest after our own banking stress tests. I think the Europeans took this exercise from our playbook and are hoping for the same results.

Ironically, the markets are exactly at the same prices that they where they were one month ago. Maybe some investor’s perception has changed, but perceptions have had a way of changing very quickly lately. Since April 26th we have had nine days where 90% of the volume traded up and 11 days where 90% of the volume has traded down. If it were only 90% up days that might indicate a further rally to come. If it were all 90% down days – that might indicate a bottom and a rally to ensue. However, this mixed action indicates indecision and should the markets falter, there is tremendous risk to the downside. Ten of the last 22 trading days have produced moves of 1% or more. One usually has to go to an amusement park for rides like that. There is nothing fun about the current market environment. Only time will tell if this gambit by the Fed works, we will all be much better off if it does.