Trivial Corporate Earnings, Not-So-Trivial Investor Buying
Stock-Markets / Investing 2009 Feb 02, 2009 - 07:09 AM GMTBy: Oxbury_Research
On Wednesday, after the markets closed, as well as Thursday before the open, the distinct majority of earnings surprises were positive. So, why on Earth did the Dow, Nasdaq, and S&P close down between 2.7% and 3.3%?
Because what is happening is exactly what I said was happening. Earnings and non-catastrophic news alone are not going to budge the market. The only event that will push or pull prices is the will of investors.
Inaccurate headlines broadcast such statements as “stocks retreat on poor home sales” or “new-home sales plunge as market still seeks bottom”, and I'm at my computer wishing a virus would fry these writers' laptops before they could send this crap in. Stocks aren't “plunging” when they fall or “surging” when they rally. Back in November, when we were experiencing 9% up or down days in the indices, there were plunges and surges. Right now, there is conscious, deliberate buying and selling in a healthy manner. Well… at least more healthy than the market has seen in quite some time.
The market retreated throughout the day on Thursday because it has gone up over 400 points in a steady, bullish manner over the past four days. It's perfectly normal, healthy, and promising for the market to pull back a little bit on these moves. From a technical perspective (and thinking longer-term than a few days), it's actually more bullish to see the market pull back after a run than it is to suddenly shoot up 500 points for no damn reason. Coupled with high volume, it implies that the buying was real, as opposed to a result of short covering or panic.
Oh, and tell me with a straight face that anyone is surprised about new home sales dropping. Why would someone buy a new home when people (possibly as a result of employment troubles) are so willing to sell their existing homes at a discount? Hell, I'd be worried about the troubled homebuilding sector skimping on parts and construction costs in order to save a few dollars. Hopefully, that didn't cost anyone who just bought a new home any sleep tonight.
People are too depressed to be pessimistic
You want a reason to believe we're putting in a bottom? How about the fact that pessimism is peaking? How do I know that pessimism is peaking?
Because pessimism implies that people have a negative outlook about the future. Currently, no one even wants to think about the future without a healthy prescription of Zoloft.
I, on the other hand, was elated yesterday afternoon when a friend of mine called me asking whether she should move all of her retirement assets to a money market fund. In her words, she was “just too tired of losing and couldn't take the stress anymore”.
Perfect.
I placed a few buy orders eleven minutes later. I also let her know that if she didn't need the money for a few years (and from what I know of her, she doesn't), then she might as well keep it and see what happens. She quickly challenged me, explaining that she wants to “get out of the market and just get back in when things look better”.
Being her friend, I didn't deride her in any way. Instead, I calmly enlightened her to the fact that she will not be getting a phone call prior to the major market rally that will eventually mark the fabled “turnaround” everyone is looking for. No one will allow her to drive her DeLorean up to 88 miles per hour, head back a few months, and buy everything she wants. In other words, if you wait till the market looks good, then you already missed the rally.
Which brings us to the sixty-four trillion dollar question.
Is this recent rally the turn we have been looking for?
I don't know. And that's not the answer you were looking to hear. However, what we know and what we think based on probability are two different things. I can provide scenarios that might play out, as well as the one(s) that have the highest probability of occurring.
Remember, just because you don't know that the sun will come up in the morning doesn't mean you should bet against it.
So, as the indices tested their previous lows last week and rebounded for four straight days, we should expect a pullback. In fact, if the market fell another 1% or 2% on Friday, it would not surprise nor worry me.
What we must understand is that you will not have all the money back that you invested when GE was trading at $40 per share. You will not see the Dow at 12,000 this year. The rules have changed, and the market as a whole is reevaluating itself. As a base forms (as I believe it is currently doing), there will be a sharp rebound. However, if we are thinking long-term, we must understand that slow, sustainable growth is what investors will be looking for in the next few years. In order to regain investors' trust, corporations must show that they can produce real profits, and must do so on a consistent basis.
While this is occurring, we will be fluttering, incessantly taunting the low-to-mid 8,000s in the Down and 800s in the S&P. We have come to the realization that our government is prepared to turn the dollar into monopoly money if that's what it takes to keep our domestic economy afloat.
You don't have to swim faster than the sharks, you only have to swim faster than the people around you… and we are realizing that we are in a better position relative to the rest of the world. Hence, we're entertaining the idea of disallowing imported iron and steel construction materials
So much for that G-20 agreement we made in November.
John K. Whitehall
Analyst, Oxbury Research
John has a solid decade of experience in the financial markets: from developing and implementing long-term investment strategies for high net worth clientele to intraday trading of equities, Exchange-Traded Funds, options and currencies.
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
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