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Tuesday, July 7, 2009

Market Thought... of mice and men

Will the market break or will the market hold? The Markets are now sitting smack on their supports. Now its time for them to decide.

Its moments like these that make me rethink my thesis, and force the difficult task to second guess myself. On May 11th I had a similar thought with my "Market Thought... the challenge" post, debating with myself whether there was enough juice to make the markets keep going up. (subsequently re-reading the post, I realized I got the top end of this recent rally dead right :)

Well, now its time to re-evaluate the overall thesis...

Is there still a bullish case?...

1. Treasury’s rate rising signals, IMO, an increase tolerance to risk and benefits the stock market. At the moment this does not appear to be the situation. Looks like the yield wants to settle at 3.35 or so. However, it could bounce from there.

2. Inventories are too low and the replenishing of them spurs economic activity. I have not seen any reports or articles to state inventory replenishing is over. I do hear a lot of the talking heads speak to this cycle ending, but I think they are getting their ques from the market and not data points. (Although I am of the school of thought that certain inventories will remain low until credit starts to expand in this country again.)

3. Volatility is declining. Although the VIX has been up the past few days, it is still in a negative and declining trend. And barring a catalyst I do not see it breaching the current trend, let alone reaching the mid 3os.

4. The financial media has become blindly bullish. This is no more. LOL. They are following the pack.

5. Perceived stability within the financials. Stability with the financials is no longer a question, and with potential write ups do to mortgage modifications, financials can be potential leaders.

6. Global trade stability via the Baltic Dry Index. With all the negative talk recently, the BDI has been very stable, and rose pretty nicely in June. This is a true indication to global trade, and speaks to goods being moved, which makes me question certain negativity.

As for the negatives... all the negatives are still in play, except now the commodity prices are correcting. IMO, this can lead to a decoupling (at least in the short-term) of commodity prices and the market. With lower input costs, profits can rise. (I think this is why we are seeing names like PG, CL and the like are seeing money going into them. Not so much that they are defensive names.)

What will happen is ultimately any one's guess, but individual names are not pricey with the market at current levels. Now taking the above reasons into account, we have a very real reason to purchase stocks if they get too low in price. If the markets break the current support, we will have this.

The only caveat that will merit a lower market and individual stock prices will be the uncertainty that Cali/US Gov. will create if they have to go to a showdown. Uncertainty reduces values, hence provides a fundamental reason to a decline.

Basically, if we break down... I will be a buyer.

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