Hope Springs Eternal


In sharp contrast to the mid-80’s, late 90’s, and perhaps even the middle 00’s, this has been among the most unpopular market rallies ever. And, perhaps for good reason as most of us have a profoundly difficult time forgiving or coming to terms with the notorious and unpredictable waves that pounded our portfolios. We’ve learned our lesson! Most recently, the S&P500 sank over 5% after the US election, was down 3% on the fiscal-cliff and most recently down 2% on the Italian elections. On each occasion a genuine attempt was made to sell the market lower (most recently on 2/25) but downside momentum petered out every time. Something between seller exhaustion and buyer support?

Some self-acclaimed market experts suggest this recent market nuance is a healthy dynamic for a paralyzed bull. Personally, I liken it to images of sailing the formidable Drake passage where the otherwise unobstructed waves of the vast Southern Ocean squeeze through the relatively narrow and shallow bottleneck of the Drake Passage, and in the process, generate complicated, unpredictable and often brutal weather. Yet, it hopefully and eventually gives way to a flat sea of calm.

All creation is groaning…
Late winter is a unique period that draws a peculiar similarity to our current market environment. I look out my window and observe landscapes full of old, tired snow seemingly holding hostage any life that remains beneath it. I notice the bare trees, their branches limping with exhaustion, or the bramble best fit for next year’s fire pit. Combine with that, the days are getting longer, the gauze color skies become brighter and this morning’s singing of a male red-winged black bird. The signs are apparent – yet, I simply can’t imagine this period of deadness can possibly give birth to a renewal of flowers and fauna.

Imagine July 2012 as the markets late winter. We looked as far as our eyes could see to nothing but the ambiguities of Europe, China, and the US. The macro-economy faced a hard and cruel winter and the continual slush of headlines kept us from being able to imagine – or comprehend – that this dark, cruel, winter would ever cease. And yet, spring did arrive with:

• Europe - has become somewhat steady as structural changes (e.g. OMT, LTRO) have put the overpowering concern of sovereign market access to rest.
• China – a gradual rebound in growth have clearly dialed-down the “hard landing” fears.
• US – business activity has picked up (e.g., durable goods, capital spending), a more congenial tone in DC providing progress on the tax and spending front.

Envision this year’s 8.75% rise in the S&P 500 as nothing other than the full expression of spring in all of its glory, majesty, and splendor. The market has been groaning for good news, a glimmer of light, an insinuation of hope - anything. And, like earths seasons, the market didn’t simply sprout too soon or too late, it appeared when conditions where exactly ripe. We saw the signs but just couldn’t envision far less prepare for the dawn when the crocuses finally cracked through the soil.

The market has clearly turned a deep dark winter into a warm and satisfying spring based largely (not solely) on the good fertilizer spread onto China, Europe, and the US. Right now, it appears the key to everything is what’s next? Can the market continue to climb this far and this fast simply on containment? If not, what’s the next metric? Where, when, and to whom will the baton be passed to dictate the next move? Sadly, we are forced to funnel this endless “what if” information into a prism with the hopes that it can be deflected long enough to provide us with a single beam of information to help justify any conviction that we may possess.

Larry Shover, SFG Alternatives

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