Constructively Cautious

The S&P 500 finished the week a smidgen lower as Cyprus uncertainty, discouraging European Flash PMI’s, and big-name lackluster earnings (e.g. FDX, ORCL) tempted traders to become just a little more suspicious of this rally. However, the skies weren’t all gloom as we were happily surprised with solid US housing and building related numbers, a “stay the course” Fed meeting, along with decent earnings reports from: ADBE, LEN, and MU. Summarizing the week, it was deeply encouraging to see stocks remain as resilient as they did despite the fresh headwind – especially considering most of us have been looking for any excuse for that “big correction” for months!

Besides all the known and convenient excuses to sell this market (e.g., Cyprus, Italy, reversal in European growth numbers) it seem the biggest emphasis (and potential risk) for this market has been and will undoubtedly remain future growth and earnings. Given that, we must first recognize there has certainly been quality signs of global growth – especially from both the US and China – thus one of the reasons the market has climbed to such lofty plateaus over the past 10 months. However, Europe most recently has seen a disappointing reversal in economic momentum and the US earnings outlook is inconclusive at best. Stocks in general have been exhibiting signs of pause – or fatigue – for quite a while now and a period of healthy consolidation would probably be most appropriate and welcomed! The markets simply cannot be indifferent to both good and bad information – at some point it needs a new impetus to carry it to its next comfort zone.

Gold’s 18-month broad and volatile trading range continues however, demand support was back pushing it up and through the very important $1600oz. level. Fear based buying? Inflation imminent? Just over one month ago, (gold below $1560oz.) the conversations were getting longer and louder with regards to gold being overvalued by any standard measure. Perhaps the buying momentum has nothing to do with fundamentals and everything to do with history? Gold has encompassed countless kings and conflicts and its value has ebbed and flowed typically based on the fear of unfamiliar monetary/fiscal policy of those governments. As “there is nothing new under the sun,” we can add Central banks to that list.

Adding to the angst of traders was coming to terms that no one can properly identify the catalyst of this market. On one hand, we are comforted that the latest numbers, in aggregate, are pointing to the US nearing escape velocity. On the other hand, 10-year US Treasuries rose (again) closing the week yielding below 1.95%. It is theoretically true that our yields should be trending higher if in fact the economy is healing however, it’s very important to think of US yields on a comparative basis as they are actually substantively higher than many of our peers. (e.g., Germany, Japan, U.K).

Confusion itself is damaging to market momentum. It pilfers our inspired affections, deep seeded convictions and warps our best wisdom. Muddle and mayhem quickly turn tailwinds to headwinds – shredding our sails of sincerity in the process - reducing them to tattered ribbons. It’s abundantly obvious the direction of things has suddenly become harder to grasp now. And yet, the market remains faithful, firm, and fixed in its conviction to grind higher until further notice.

It is true that US growth metrics continue to turn heads as jobs, consumer, and manufacturing data points all meet/top expectations. Euro numbers albeit “mixed” are overshadowed by investors recent faith in Europe’s Sovereigns market access (i.e., LTRO, OMT). In a quirky sort of way this perceived market backstop has prevented the regions many problems from taking on global-macro significance. Headline risk has moved from the front page to the funny pages. China’s recent cross-current economic releases surely has added confusion – giving severe credence to both the dove and the hawk – yet, the market right now seems to be offering sympathy and occasion. What we need is a new impetus!

Larry Shover, SFG Alternatives

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