Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
There is only one reason that sayings become clichés: Because, often enough, they prove apt guides to real-world events.
The past week's stock-market action has once again lent weight to a number of stock-market clichés. "Don't fight the Fed." "Don't fight the tape." "The trend is your friend." "Never short a dull tape."
What the estimable and longtime floor broker Art Cashin of UBS is referring to as a "low-volume levitation" has summoned these hackneyed aphorisms to the lips of investors since the fever of geopolitical and nuclear fear broke the week before last.
It's true that trading volume on up days in the indexes since the market's recent peak on Feb. 18 has been on average 3% lower than on down days. Clearly, whatever mixed or negative economic news fails to capture investors' attention or heighten their concerns on a given morning means the market defers to its predominant trend, which until further notice is up.
There is no shortage of foreboding things to recoil from, and the 6% to 7% multiweek dip certainly brought them to the fore, whether they be the Middle Eastern tumult or high oil prices or the early signs that big companies might have a harder time beating profit expectations this quarter.
To this point, the "What, me worry?" bounce has alleviated the oversold condition in the market and kept bears on their heels, without decisively proving that the worst is over.
Still, any high-conviction pessimists on stocks have a significant burden of proof to meet. Specifically, they need to fashion a persuasive argument that bull markets tend to peak on natural disasters and civil wars in distant lands, even with the leading economic indicators surging, undistributed corporate profits soaring, and the Institute for Supply Management manufacturing index surpassing 60, a level that is usually accompanied by a miserly Federal Reserve rather than the current free-money version.
Among the reasons that the February-to-March market setback should not have come as a surprise is that the market went almost straight up coming into the year, without taking a breather. It is exceedingly rare, even in good years, for the indexes not to trade lower on a year-to-date basis—at least briefly.
John Harris, who tracks historical market trends at www.wallstreettraffic-light.com, calculates that the market has failed to trade lower in a given year only eight times since 1928, the last time in 1979. And even when it has dipped only slightly, the full-year results have been far better than average.
This might seem something like a truism, but when the maximum year-to-date loss in the S&P 500 was 1.4% or less, the average annual gain was 29%, with the minimum rise 16.5%. So if—and this is a big if—the March 16 market low at 0.06% below year-end 2010 levels holds, history would remain on the side of the bulls for the remainder of 2011. That's not a prediction, but worth keeping in mind.
It seems more likely that we have conditions similar to those in the middle of the last decade, with the Fed pursuing a free-money policy even as the economy shows signs of life and asset markets reflate, with firm credit markets smothering volatility and feeding a range-bound but upwardly tilted risk market.
JEFFREY CHRISTIAN, A FOUNDER and managing director at commodity-research firm CPM Group, is a gold fundamentalist. Not a fundamentalist in the sense that he's devout in believing gold is the one true form of money, or that it has any special value aside from the fact that other people through history have ascribed value to it.
No, he's a fundamentalist in the sense that he studies the underlying fundamentals of the market—mine capacity, production levels, investment demand and the like—as a self-described "gold agnostic."
This work has kept Christian uninterruptedly bullish on gold since the year 2000, when the metal's two-decade price decline began to give way to a bull market that has seen prices more than quadruple, to a recent $1,434 an ounce. He spent most of the '90s counseling clients to sell gold, incidentally.
Christian told investors at the Strategas Research global macro conference on Thursday that he believes gold is near a cyclical peak that could cause a 15% to 20% drop in prices over the next couple of quarters, but within a still-intact secular bull market that will then resume and carry gold above the recent highs.
The scary headlines about Middle Eastern unrest, European debt tribulations and radiation leakage have drawn some hot money into gold, driving futures volumes and open interest appreciably higher. Exchange-traded vehicles such as the StreetTracks Gold Shares (ticker: GLD) control about a fifth of all annual gold demand, incidentally. After a bias to the upside for the coming week related to the expiration of the April gold futures contract, he figures, gold is due for a sharp pullback into about September, assuming the alarming macro news flow settles down a bit.
Silver, which has been the true star of the precious-metals market lately, hit CPM's price target of about $38 an ounce, a 30-year high.
The outperformance of silver versus gold is typical of metals bull markets, especially in the later, frothier stages of a trend.
The Silver-Gold Ratio, a measure of how many ounces of silver can be bought with an ounce of gold, declined below 40 this month for the first time since early 1984, according to data kept by Mark Lundeen, an analyst and writer on the metals markets.
To Lundeen, this suggests that the precious-metals rally is poised to enter a new phase, one featuring broad public interest in owning soft, shiny, not terribly useful metals. Interestingly, Christian doesn't much subscribe to this element of the bull case, believing that those who have sat out the 10-year, $1,000-plus appreciation in gold aren't terribly likely to jump in now.
Lundeen notes that in just the past few years, gold prices have sustained as much as a 14% retreat from all-time highs without derailing the positive trend, and therefore could probably absorb the gut check Christian is calling for in the near term.
THE NEW YORK STATE LOTTERY offers some five dozen different scratch-off, instant-lose (or win) cards. This shows an opportunistic cynicism on the part of lottery operators about the betting public, an idea that newly contrived iterations on the same long-shot arithmetic will draw more dollar bills across the counters of gas stations and delis.
The exchange-traded fund industry is steadily sliding in the same direction. Make no mistake, the ETF structure is uncommonly versatile and allows individuals to cheaply and efficiently play market segments that otherwise would be closed to them. But as the industry matures, the new launches become ever more marginal.
Just last week a new IQ Global Agribusiness Small Cap ETF (CROP) was launched, to allow investors to play the whip-end of the agricultural-related commodity craze. And Deutsche Bank's Invesco PowerShares rolled out exchange-traded notes tied to German, Italian and Japanese sovereign-bond futures, including triple-leveraged versions.
There is nothing inherently wrong with these products, which in Vegas sports-book terms might be called "exotics" for their highly tailored win/lose propositions.
Yet it remains telling that—more than two years after the financial crisis peaked, and after a decade of stagnation in world equity markets—the product-development folks are still trying to exploit the tendency of investors to play arcane angles or to trade one thing against another, rather than simply to grab exposure to risk markets outright. Everything else is never equal, but if it were this phenomenon should be filed in the bullish column.
E-mail: michael.santoli@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Jan Bennink bought 128,000 shares of the foods company.
Even with the business software giant's stock at a five-year high - due to a strong forecast - we're bullish.
Research in Motion's downbeat quarter may hurt Celestica and Flextronics.
Strong earnings at Accenture and Oracle bode well for IBM.
With a 5% dividend yield, Digital Realty Trust offers the security of income and the sexiness of a fast-growing technology.
Credit Suisse says Reliance is better on three key metrics.
Weakness in the bank's shares is a buying opportunity.
Read Full Article »