STREETWISE
Gummy Bears
By MICHAEL SANTOLI
Try not to overthink what the market might be saying. Cut in half from here? Unlikely.
EVERYONE SEEMS TO BE INSPECTING THE TEETH and gums of this galloping rally, searching for signs of rot and vulnerability. Haven't the riskiest stocks led? Aren't stocks pricing in fundamental improvement not yet evident? Weren't all those earnings beats from cost-cutting? Doesn't this move resemble epic bear-market fake-out rallies of the past?
Maybe. At a certain indeterminate index level, this market will have to answer to these concerns. But aside from practicing veterinary dentistry without a license, folks bringing this kind of scrutiny to every up tick in the Dow run the risk of over-thinking what the market is saying.
Listen closely, and a few things about this moment in the market are pretty clear: The dollar is driving things, and capital is routing labor.
The U.S. dollar index peaked at the same time the stock market bottomed in March. Since then, the greenback is down 13%, which happens to approximate the year-to-date gain in stocks, though of course the equity market is up 50% since the March low. Nearly every bit of the year's upside has been logged on days when the dollar was weaker. In addition, the Dow Jones Global Ex-U.S. index is up about double the S&P 500's gain, and only five of two dozen national markets, all in Old Europe, have done worse than the U.S. in dollar terms.
It's gotten to a point that explaining the daily movement in U.S. stocks is almost as superfluous as saying that one side of the seesaw is down because the other is up. A glance at the quote screen at 2 p.m. Friday told the story. The intraday change in the Dow, oil and gold all stood at plus 1.4%.
The influence of global macro sentiment is also evident in the recent pattern of overnight/overseas trading setting the tone for U.S. trading. Frequently this summer, the pre-market direction is obeyed at the New York open, after which the indexes stall. In nearly half of all trading sessions since June, the overnight index change has exceeded the move from U.S. open to close.
These inter-asset relationships probably will change, or at least become less reliable on a daily basis, but it's hard to say when or why. For what it's worth, perhaps the most consensus-bucking opinion on Wall Street is that the dollar could firm or strengthen without obliterating stocks.
While perhaps not to be celebrated from a societal point of view, capital seems to be in ascendance over labor in this growth-starved, soft-employment economy. Morgan Stanley strategists point out that employee compensation fell by an unprecedented 6% in the most recent reported 12-month period, while productivity growth -- in defiance of past recessionary patterns -- remained positive.
Jim Paulsen of Wells Capital Management maintains a "profit leverage indicator" derived from measures of business productivity, total unemployment and factory unemployment. It has skyrocketed to levels not seen since the mid-1970s.
Whether this rebound is now fully priced in is the subject of a valid argument, with the equity market no longer appearing cheap. But it's tough to dispute that the profit spring is quite compressed.
The market is at an interesting juncture now -- more so than most times, even.
A year ago, the most resolute bears were calling for the S&P to sink to 1000. Six months ago, the boldest bulls thought we could get up to 1000. We're there.
Perhaps the time to become seriously concerned won't arrive until professional traders and snack-table laptop investors quit passing around this latest version of the "Four Bad Bear Markets" chart so energetically.
(Click to enlarge)
It shows this rally to have about equaled the duration and magnitude of the doomed rebound off the 1929 lows, and to have outpaced the other post-bear recoveries of the past century.
It argues, perhaps, for a true retrenchment or stall soon. But the idea that this market should ultimately be cut in half from here, as the Dow was from the 1930 high, neglects the trajectory of those past markets prior to their peak. At the end of the 1929-'30 rally, the Dow was back at a level it had first reached two years earlier. The S&P today is at a level first touched more than 11 years ago. To believe we'll drop that way is to have great confidence that we're on Japan's 1990s path.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
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