The market has had a good run this year, but it seems like a top is forming. Now's the time for caution.
The big question -- as always, when thinking about the stock market -- is: What's next?
One camp suggests the market will grind higher and torture underinvested bulls for the rest of the year. The other thinks the fundamental backdrop is such that stocks cannot continue to trade at these prices and must go lower.
Stock picks for 2010
It seems the market might have trouble making much upside progress. It's been unable to rally well for a couple of months now on good news (though bad news hasn't hurt much either).
And, from a contrarian standpoint, the low level of bearishness ought to give one pause. Last week Investors Intelligence reported the second-lowest level of bears in 20 years. It feels like the market may be building a top, which is oftentimes a process that takes a fair bit of time. More from MSN MoneyWhy the Fed loves inflation3 reasons 2010's economy looks iffyHow much longer can gold rise?A better way to fix the FedArrogant Fed hasn't learned a thingTop formation entails undulation On that score, last Monday Justin Mamis wrote several paragraphs about market peaks that I thought were really well done. I pass them along as food for thought:
"The stock market is becoming increasingly familiar. We've seen this before (or lesser variations thereof). This is how an important top forms over a long -- very long -- period of time. Market timing has nothing to do with the daily news, because it truly is anticipatory, no matter how much daily news items, such as pennies-better-than-expected earnings reports, are embraced as glorious.
"Friday's (Nov. 27's) seesaw 'up' on the so-called employment report, and 'down' when that childlike burst of enthusiasm was exhausted, is but one day in the gradual ebbing of the extensive rally -- 10 months in duration and still incomplete . . . although, of course, 'tis getting later and later. (It took over a year for the '07-'08 top to evolve -- from spring '07 at about Dow 11,000 to the breakdown in the summer of '08 in the neighborhood of 11,750.) And this rise, remember, is to a secondary lower high.
"But Friday's reversal is interesting in itself, although it was more like a quitting than a reversal. . . . And keep in mind that the (eventual) first selling wave down will therefore be bought, as if it is just a correction.
"We've gone into this essentially trivial detail because this is the way long-term tops evolve over time. Not only is the economic news and the financial news calming (and indeed encouraging), but the lack of selling pressure makes the market look benign.
"Replete with optimism, tops therefore really do take a long time to form, and to form in seemingly 'safe' ways . . . no Halloween costumes, no kids hollering 'trick or treat,' but akin to a Norman Rockwell painting. We see ebbing to and fro, while the consensus sees a polite rest -- making next to nothing worrisome out of Friday's 'quitting,' because a willingness to 'buy the dips' protects any tinge of bearishness from creeping in."
Video: The Fed needs an exit strategy
It's been a great rally since March (when I closed my short-only hedge fund), but it may be time to be a bit more careful.
Continued money printing by the Federal Reserve may prevent the market from declining precipitously, but that doesn't mean individual stocks can't become individual houses of pain.
Search for a Bill Fleckenstein article by topic or stock symbol.
Dow of 9,641 on Jan. 20th 2010. That won't really hurt.
Dow of 7,819 on August 7th 2010. That's going to hurt.
Yes bgDog the bears have been wrong for 10 months. I suppose you think it is better to listen to the bulls who in the summer of 2007 were saying "buy, buy, this market is going higher!"
Neither should be taken without question. There is something I heard years ago, "Don't fight the Fed" and an interesting statistic, when the Fed eases monetary policy the NASDAQ always goes up, when the Fed restricts monetary policy the NASDAQ always goes down. Given the money the Fed pumped into the economy in the last year the rise in the market is no surprise. I think the current bull will end in the spring, but if the Fed keeps pumping money in I could be wrong. But the Fed is creating another asset bubble. When it is eventually forced to cut back the money supply this bubble is going to pop with a loud bang. And then the Fed will be in a worse position than it was in 2008. It will be much tougher for it to pull the fat out of the fire next time.
But for now, hey, it's party time!!! It's 2006 all over again! And anyway the gov't will rescue the bigdogs and leave average Americans with the bill. Isn't it nice to see how those Wall Street execs whose recklessness and greed brought us the crash of 2008 are partying now with our money?
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