Markets are Focused on Italy Today

It is said that the toughest trades to make tend to be the most successful. So, let’s start with a simple question this morning: What would be the toughest call you could make right now in the stock market? And yes, you will need to present some supporting evidence for your “call.”

How about the idea that stocks will continue to pull back and eventually reenter the trading range because of all the uncertainty surrounding Europe (Italy is the new hot spot) and/or the political wrangling surrounding the “supercommittee” that will likely take over the news in the near term? In my humble opinion, both of these are actually pretty logical ideas. So, I’m sorry to say that you don’t get any points for either.

How about the idea that stocks will continue to rally for a while due to seasonality, but fail at resistance as we approach the end of the year? Not bad. But again, this scenario seems like it is a fairly reasonable expectation. But what I’m looking for here is a really tough call – one that would make you very, very nervous to implement.

Cutting to the chase, my feeling is the toughest call that could be made right now is that we’ve embarked on a new bull market in stocks. Did anybody see that one coming? If so, give yourself a gold star because positioning a portfolio right now based on the idea that there’s a new bull in town (and one that is likely to last a while) would be a pretty difficult stance to take on an emotional level right now.

And yet, this is exactly what the fine folks at Ned Davis Research are doing. But, before we get too carried away here, there is one key point that needs to be made. In short, NDR says the “chances” of this being a new bull market are very good. But it is important to recognize that the only real way to determine when bulls and bears stop and start is with a healthy dose of hindsight. So, with that caveat in mind, I will contend that even bringing up the idea that a new bull market has begun is a pretty gutsy call.

Another important factor/caveat here is that we’re likely talking about a shorter-term bull market phase that would take place within the context of the ongoing secular bear environment that began back in 2000. So, sorry to say it, but no, this is not likely to be a replay of 1982 where you could load the boat and play the buy-and-hope game for a decade or two.

I’m sure there will be some catcalls for my bringing this idea to your attention. But before you start sending the hate mail my way, let me say that I’m not sure I agree 100% with this call. I DO see the factors that have brought NDR to their thesis and frankly the indicator evidence is hard to argue with. However, since this market has been SO highly correlated due to the risk-on/risk-off game that tends to move the market hard in one direction until it reverses, my biggest concern is that the traditional indicators may not prove as useful now as they have in the past. As such, call me cautiously optimistic on this call.

If you want to get an idea of the type of environment we are likely dealing with, go back and look at the charts of the market from 1965 – 1982. The key takeaway is that despite an 18-year period where the DJIA made no net progress, there were LOTS of opportunities to make money – on both sides of the market. Back in those days, only the handful of hedge funds that existed played the short side of the game. But if the current trend of shorter-term bull and bear market cycles continues, it is important to recognize that there could be a number of opportunities for those willing to actively manage their exposure to the market.

However, it is also safe to say that making a “call” for a change of market character may continue to be tough duty.

Turning to this morning… With the situation in Greece appearing to be well on its way to being resolved, the markets are focused on Italy this morning. European stock markets and U.S. futures opened lower but picked up earlier today on rumors that Prime Minister Silvio Berlusconi would be resigning in the near future. However, this just in (7:30 am eastern). Berlusconi has said (on his Facebook page – Facebook, really?) that rumors of his resignation were unfounded.

On the Economic Front… There are no reports scheduled for release in the U.S. before the bell.

David Moenning
Editor:  The Daily Decision