Markets Drifting Again

For all the talk about earnings for Q2 and how disappointing they would be, the current beat rate half way through reporting is the highest in the last ten quarter at 65.1%. One sector that continues to impress is the financials as 68% reporting beat estimates. They remain impressive and are leading the market overall. Thus, owning the banks, brokers and insurers only makes sense going forward. Like earnings, this is a sector that has been over talked on the downside. We have discussed many times the benefits of owning the banks and they have not disappointed over the last twelve months.

The markets continue to ‘wander’ higher. The move on Monday was not a poster-child for optimism. Despite the overall performance there were the usual leaders and opportunities. The leaders like PCLN, WWWW, NFLX, SLB, AAPL and others continue to find money flow to move higher. We have been trading some of these on our pattern trading list and they have done well. They show signs technically of being overdone short term, but they continually find buyers on weakness. Like the market these leaders are drifting again, higher.

Fed President Fisher was out in normal fashion of saying the Fed must tapper and soon! That put a damper on the markets, but he has done this before. The challenge is the little boy who cried wolf! He is always talking about the need to cut and let the economy stand on it’s own two feet… blah, blah, blah, but nothing happens when it comes decision time. Oh yea, he’s not a voting member of the FOMC! The Fed does need to stop throwing money at this issue, hint… GDP was 1.7% for Q2. The $85 billion is not getting the results. Sometimes in the economic picture things have to get really bad before they can get better. Just like the housing foreclosures, we haven’t stopped them, we have only delayed them and the resulting drag on the economy. More than 70% of the restructured loans from the government actions are in foreclosure or default again. As Fisher said, we need to stop the madness.

Interest rates are creeping higher again. The market is doing what the Fed can’t seem to bring themselves to do. The impact is being seen in the mortgage origination and home sales. If rates remain reasonable, 4-4.5% on 30 year mortgages, sales will return as the buyers adjust their mindset to the new rates. The homebuilders (XHB) rose more than 3% last week showing some optimism in the sector. The downtrend off the May high is still in effect, but this is a sector to watch with a longer term perspective.

Bottom line… can the market continue the upside insanity (many headlines opinion)? That is truly the million dollar question. The problem with the question is it is stacked in favor of the answer. The assumption is the market has no good reason to move higher and is too high now. One thing I have learned in my thirty plus years of tracking and investing in the markets… they never make sense until history allows us to study them. I will be the first one to say that based on normal market analysis and parameters the market makes no sense fundamentally. However, since September 2007 nothing has been normal about the market due to government intervention of stimulus and regulation changes. As long as those elements are engaged there is no such thing as normal and there may never be again. You and I have to adapt our trading and investing style to deal with the new normal or at least the elements that are in play now.

This trend is still in play and until it is over keep playing the game. When the last out is recorded you can exit the stadium, until then the game will be played with our without you. Understanding and accepting that will get you further than fighting the trend. There is nothing wrong with holding cash and missing out on the market gains… as long as that is your decision. We are holding more cash than I would like, but that is by decision. If I could find things to buy that fit the criteria or risk/reward tolerance I would. But, I would rather miss out on the returns to sleep at night with what I own or don’t own. It is your money, manage it the way you feel comfortable. In the end you are the only one you have to answer to.