The market's quiet strength

Despite a flat performance, beneath the surface stocks are showing signs of vigor ahead of big central bank decisions in September.

By Anthony Mirhaydari Aug 14, 2012 2:18PM

Stocks remained mired in the tight, multi-week trading range that has contained price action amid light summer trading volumes, looming policy decisions and a general sense of ennui. Investors have stepped back this week after the Chinese disappointed by not announcing any new stimulus measures over the weekend, while the Germans continue to express their disapproval of any new bailout or monetary easing or liability sharing ideas to push down Spanish and Italian borrowing costs.

 

With the bulls continuing to strongly defend the 1,400 level on the S&P 500, it's only a matter of time before new pro-growth measures push stocks and other risky assets out of the flat spot.

 

 

In Europe, there were reports Monday in the German press that a new lawsuit had been filed related to the new Eurozone bailout fund (awaiting constitutional court approval in mid-September) that could relay its ratification. Despite all the bluster, the fact remains that it is still more expensive for Berlin to allow the crisis to worsen -- threatening its banking system and the foundations of the euro -- than it is to subject itself to a period of higher-than-normal inflation, for instance.

 

Indeed, Tuesday the German constitutional court announced it would maintain its review schedule for the new bailout fund despite the legal challenge.

 

Germany depends on its spendthrift neighbors and a loose European Central Bank to keep the euro down and maintain its export competitiveness. It depends on the peripheral economies to pay the debt owed to its banking system. And it depends on consumers in Athens and Madrid to buy their manufactured goods.

 

And let's not forget that the Federal Reserve, despite July's better-than-expected payroll gain, is on track for what could be an open-ended monthly commitment to purchase mortgage securities on the open market to bolster an already strengthening housing market until the unemployment rate falls below target (say, 7% or so) or inflation rises above target (say, 3% annual core consumer inflation).

 

Bank of America Merrill Lynch sees possible agreement between the inflation doves and policy hawks at the Fed: The doves want to remove the market's obsession with policy stimulus end dates, while the hawks want more structure and rules on easing measures.

 

 

With the population-to-employment ratio flat-lining since late 2009 (shown above) as the unemployment rate starts rising again, and with headline inflation plummeting (shown below), the Fed has the political cover it needs to act and the economic motivation to do so.

 

 

Technically, there are some signs the market has become short-term overbought (the ARMs Index, for instance, has returned to levels last seen during the November 2011 top), but underlying strength remains impressive. Breadth is breaking out. And let's give the bulls credit for successfully defending the closely watched 1,400 level on the S&P 500 over and over again.

 

For now, I've been recommending that my newsletter subscribers sit tight. Other aspects of the risk-on trade continue to perform well: Treasury bonds have dropped, the euro has gained and the CBOE Volatility Index, Wall Street's fear gauge, is collapsing.

 

 

The holdings in my Edge Letter Sample Portfolio continue to do well despite the overall market's proclivity for table-top flatness. Examples include Apple (AAPL), up nearly 6% since early July; the Market Vectors Oil Services (OIH), up nearly 8%; Hercules Offshore (HERO), up nearly 10%; and Teekay (TK), up nearly 7%.

 

Disclosure: Anthony has recommended OIH and HERO to his newsletter subscribers.

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

 

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26Comments
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I always said that when the US citizen pays down or eliminates their debt, this country would be better off.   Now I just read an article saying that Credit Suisse thinks this just may be the case coming out of this recession.   People are paying down on their debt instead of buying more toys.   This may hurt the economy in the short term, but will help the overall health of the country in the long term.  Now all we have to do is change the attitude in Washington from a spend all you can to a save all you can climate.  This can only be done when the present administration leaves the Whitehouse.   Normally no one likes the cold of Fall and Winter, but this year, November cannot come too soon.
Aug 14, 2012 6:09PM
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I agree with this article.  S&P is currently trading at depressed PE values and record breaking profits speak for themselves. A slow-down in growth is not the same thing as a recession.  The S&P should be at 1450, minimum.  1500 by end of year would make the S&P at about fair price. 

 

All thats needed is a 3-4 more positive economic news (such as the strong retail sales release from this morning), to clear the current malaise.   

 

Some of the blow-hard commenters saying the market should collapse remind me of tin-foil hat wearing conspiracy nuts who think the planet Nibiru is about to crash into earth and aliens are planning to enslave humanity.

 

So, businesses are "card-board cut-outs"?!?  Okay Truman, keep living in that fantasy land.  Let us know when you have some actual, verifiable facts or data, to justify your pending cataclysm. 

 

One thing I will agree to.  If we "close the banks", "end the fed" and "get rid of wall street", then you would most definitely get your sought after global catastophe.  Fortunately, those in charge of monetary policy aren't nut-cases, so that will never happen.

 

Aug 15, 2012 6:30AM
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"Close the banks"? You don't recognize the value of having a conduit to conduct business? I guess you don't need a checking account, bank credit card, debit card, or savings account. Do you keep all of your cash under your mattress and only conduct cash transactions? "End the Fed"? OK. What will you replace it with? Or, do you propose going forward without the instrument used to contract the economy when inflation is heating up and to stimulate the economy when a slow down occurs? "Get rid of Wall Street"? Will there be no secondary market to sell shares on the NYSE? Will there be no way for us to put our capital to work by buying stocks or bonds? Even through our deferred comp accounts? Oh Yeah, I forget...our money goes under the mattress to keep there until we spend the cash. I think you are qualified to serve as Obama's Secretary of the Treasury."

 

Checking account, bank credit card, debit card, savings account: The middle two aren't even bank products. The checking and savings accounts are no longer exclusive to banks and better done by non-banks. Wall Street and the Exchanges no longer help America, just the wealth class, yes, get rid of them TODAY. What would you do with your money if you couldn't commercially deploy it so it continues to take down America? You'd probably have to use it to rebuild us. That is-- unless you work where it is hurting us (Wall Street or banks) then YOU just start over with a conscience and some education.

Aug 14, 2012 4:16PM
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If the fed stays away from stimulus and keeps inflation down, between 0% and a deflationary 1/2%, consumers will buy more and employment will pick up.
Aug 15, 2012 6:23AM
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"All thats needed is a 3-4 more positive economic news (such as the strong retail sales release from this morning), to clear the current malaise."

 

Retail sales were actually dismal. Go ahead and keep living on the data. If you left your mother's basement and went to the Mall, you'd see first hand, no one is there and the stores are filled with clearance racks. If we can gain on pure propaganda, then it's time to shut the whole charade down.

Aug 14, 2012 6:04PM
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Oooohhhh......here we are @ 13.1.....again.   LOL
Aug 20, 2012 6:48AM
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" I think the actual data is more reliable."

 

Verify that. Take ANY poll and bring the respondents to validate their response. Verify the number of in ANY data involving unemployed, credit, etc. The data is false because we can see variances to it in our every day life. You are a delusional sociopath.

 

"Agreed, which is why day trading, or even inter-week trading, is for suckers. (unless you're on the inside.) However, long term trends are still governed by the same forces that have always influenced markets"

 

No it isn't. While major aspects and factors are intentionally controlled and manipulated, there isn't a way for 'tradition' to be a constant. We've been here before. Try looking up history instead of trying to discredit people who did.

Aug 19, 2012 1:38PM
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These articles keep stating "investors have stepped back", "when will investors step back in ?"
Isn't it clear by now that at least 75% of all trades made each day are made by traders and not by
investors ?  It is the traders stepping back or stepping in that are the real movers of the short and mid-term market movements along with media hype.   The short and mid-term market valuations have been hijacked and  are being manipulated by a small number of traders, hedge funds,
options traders, etc. to the detriment of everyone else.  Articles should be written addressing true market movers as the culprits and not try to pass off the volatility and market gyrations on to everyday investors.

Aug 20, 2012 3:32AM
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"Isn't it clear by now that at least 75% of all trades made each day are made by traders and not by
investors ?"

 

Agreed, which is why day trading, or even inter-week trading, is for suckers. (unless you're on the inside.)

However, long term trends are still governed by the same forces that have always influenced markets.

Which is why another massive crash, such as that predicted by some of the crazies around here, simply cannot happen. There's no equities bubble (PE's are low), there's no recession (in fact, we're still in the very early stages of a slow recovery), there's no competing investment type (interest rates are extremely low) and there's no reason to expect another sharp contraction in the money supply or freezing of credit (as with 2008 crash).

Look at history, those are the causes of every significant crash since records have been kept. With none of the above at issue, a crash is simply not in the cards.

Perhaps 2013 will bring some issues with government spending cuts / taxes, but unlikely, given the current group of elected officials.

I think we're in good shape for the next few years.

Aug 14, 2012 5:35PM
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, "it's only a matter of time before new pro-growth measures push stocks and other risky assets out of the flat spot"
Anthony, when in the last few years has a flat spot after an increase been followed by another  increase?  Flat spots after an increase are just about always followed by a DROP.  And it's only "a matter of time" until the earth is consumed by an expanding sun, but I do not expect either activity to happen this summer.  History tells us there will first be a drop followed by a flat spot then followed by an increase.
Aug 15, 2012 6:19AM
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"How much is the national debt? And I'm guessing all those bond holders are SCREWED! Ain't gonna be no austerity here in the U.S......we can't even stomach a slight growth period! Can you imagine going through what Greece is going through?"

 

The Greeks are actually... okay. They burned down their banks, got rid of bad government and have debt holders by the balls. If you ask a Greek about it, the subject will quickly change to-- US. Greeks know that our situation is far worse than theirs ever was.

 

Close the banks. End the Fed. Get rid of Wall Street. If you aren't 100% invested in job recovery, you won't be here come New Year.

Aug 15, 2012 7:51PM
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"Go ahead and keep living on the data."

 

And you keep listening to those voices in your head.  I think the actual data is more reliable. 

 

Speaking of data, auto production went up 3.3% in July.  (actual, physical vehicles, not card-board cutouts.)   When was this financial armageddon supposed to be again?

 

Aug 14, 2012 2:56PM
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The market & economy are flat & have been. Any uptick has been smoke & mirrors. Only after november provided the idiot in office is gone will there be hope.

Aug 14, 2012 4:11PM
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"the Dow is up 62% over the past three and one half years.Valuations are still very decent and companies have very good profits and are sitting on a record amount of cash."

How did they get that cash? They terminated personnel, sold proprietary secrets, factories and the equipment needed to conduct business. They're just cardboard cut-outs of the brands the founders built. Not ONE publicly traded piece of crap shoddy business with GOP-supporting directors and hired-in management will survive this. How can they? We have no self-sufficiency left in America and our "pusher" China is going bust. You're an idiot if you think the Dow will keep going up. The odds of cataclysmic drop to zero exceeds any argument about continuance. We are a quadrillion down from this paper pushing administrative era.

Close the banks. End the Fed. Get rid of Wall Street. If you aren't 100% invested in job recovery, you won't be here come New Year.
Aug 14, 2012 3:12PM
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OMG what a giant cluster. There are signs of vigor allright. A vigorous and complete collapse as compressive contraction tightens its permanent grip around the financial throat of the worlds overextended, debt montized, leveraged throat.

Aug 14, 2012 2:44PM
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I'm going to invest in that Italian Hitler wine.

 

 

Aug 14, 2012 4:05PM
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"I just read an article saying that Credit Suisse thinks this just may be the case coming out of this recession. People are paying down on their debt instead of buying more toys."

BS. Way more people are unemployed under employed and no longer looking. You don't end your income shortfall days by saying... hey, I'm going to go blow some cash on foreign made crap so I can further suppress my existence. People are paying off debt because all they have left is a good credit rating.

Close the banks. End the Fed. Get rid of Wall Street. If you aren't 100% invested in job recovery, you won't be here come New Year.
Aug 14, 2012 4:01PM
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Markets show signs of complete manipulation. Anthony... everything is going down the drain but wealth keeps the phony markets intact? Who are you kidding?

Close the banks. End the Fed. Get rid of Wall Street. If you aren't 100% invested in job recovery, you won't be here come New Year.

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