So why didn’t we get a real drop last week other than bears giving up? The housing and banking sectors remained strong with banking doing better. Housing is a little sketchy but our hypothesis that nothing bad happens to the market when banking stays good remains true to form. Its tech that got hit and in past pullback when tech gets hit and banking does not the market always turns higher, aborting bearish attempts to take it down.
So why is it the bears always seem to give up? Think about this for a minute. Our grandparents who struggled through the Great Depression were scarred by the event for the rest of their lives. Many of us are scarred by the financial crisis of 2008 although I really wonder about that since Wall Street hasn’t seemed to learn any lessons and no true reform has ever materialized. If we learned our lessons from 08 there would be no whale trade for JPM nor would there have been any scandals with MF Global or PFG Best. People have gone on as if it’s business as usual and any attempts to revamp the system for real have been met by serious opposition. That being said, bears got burned really badly during the European crisis of 2011 when they thought Greece was the next Lehman moment. Since that time they’ve remained gun-shy. That means they’ve exited early on just about every correction since then. I really think they could’ve done a lot more with the September/October pullback but it is the hallmark of a bull market for bears to be happy with smaller profits.
The other hallmark of a bull market is when it climbs a wall of worry. A market going higher despite lousy GDP numbers, megastorms, Obamacare, fiscal cliffs, debt ceiling struggles and threat of defense spending cuts suggests it is a wall of worry. Do you want another thing to worry about? How about the State of the Union speech this week? Last week was relatively peaceful on the political front but tempers could be flaring again as the President challenges Congress to pass at least a short term measure to deal with the defense cuts. The Republicans appear ready to dig in their heels on this one and even the Tea Party has its rebuttal to the President. I can’t remember a time when one political minority was able to exercise such clout. We haven’t seen anything like the Tea Party since I’ve been around and that goes back to the Kennedy era. Really, we probably haven’t seen anything like the Tea Party in over a hundred years. We don’t do politics here but we live in an era where the discussions of the day have an unusually large impact over the short term gyrations of the stock market.
Watch the Greenback, if it fails it’s a high probability outcome for the markets to get to higher projections which include a new all-time high for the Dow and the continued surge in the SPX. Then we could have some roller coaster type action in the middle of the week as traders sort out the accusations that are due to occur from the politicians. But the trend remains your friend until it isn’t.