Not To Excited About A Rally

The futures are up sharply this morning pre market. I am not too excited. The rumor mill is turning out some nice spin on the European leaders attempt to stem their financial crisis once again. We have trod down this well worn path many times. Will they work it out this time? Or is it Charlie Brown trying to kick the football?

The other positive spin in the market place is Black Friday sales. Many news reports were breathless reporting fantastic sales. Up, up, Up, the whole world is up! However, reporters are about as sharp as a marble when it comes to actual numbers, business profitability and discerning the real issues and facts. I line up behind Barry Ritholz and don’t think much of Black Friday yet. It remains to be seen what people bought, and what profit margins were. My guess is people held back on a lot of purchasing before the big day, then went out and purchased necessities at lower prices. This might affect purchases and margins in the future if it’s true.

If you look at a one month chart ($SPY, $ES_F), you will see how the euphoria of October lead to huge disappointment in November.
SPDR S&P 500 Stock Chart

SPDR S&P 500 Stock Chart by YCharts

It reminds me of the old physical science adage, “For every positive action there is an equal negative reaction.”. I don’t like looking at one month charts, but because October was so extraordinary, it makes sense to see if it carried over, and of course it didn’t.

Count me in as a dispassionate observer. I think that too many people have converted to cash and are on the sidelines. Volume is being traded and concentrated into fewer and fewer hands, all with similar strategies. The guessing game is not about market fundamentals, but more about “risk on” or “risk off” and which way the dice are going to roll today. Groupthink markets are not my cup of tea.

Clearly, the American market was oversold based on the day to day business data and fundamentals. Over the past fifteen years, any day trader has learned a hard lesson; the market will behave irrationally longer than you can remain solvent. In 1999, the NASDAQ rally is a perfect case and point. The constant extreme breaks and rallies of today have forced traders into assuming less risk, and conserving capital. No one is ever all in.

Once the market gets upward momentum, a lot of fund managers will start chasing it. They can’t afford to miss a rally, especially at year end. They have end of year statements to send to customers, and if the market is up 8% and they missed it, they will have to answer a lot of questions. If I were a fund manager I would not buy, I’d just buy calls, or sell puts if I was slightly bullish.

There is a lot of headwind. The waters are extremely choppy. We will get through it, but I don’t see extreme volatility ending for at least another year. November 2012 will be a pivotal month for the market.

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