It would not be out of line to refer to the last six-year market move in equities as the Rodney Dangerfield of bull markets. Nobody gives it any respect. It is not hard to see why. From the bottom of the credit crisis low in March 2009, the U.S. economy has been stumbling along with tepid economic growth and questionable job growth data.
It has been an article of faith by most analysts that this has been a Federal Reserve led bull market thanks to numerous quantitative easing programs and a zero-interest-rate policy that has provided investors with few choices other than the stock market to place their money.
Of course, that is not to say the move is not real. The move off of the low has been impressive and those smart and lucky enough to have gotten back in at that point have done well.
In an interview several years ago, industry stalwart Neal Kottke said the following: “One of the things that a very wise trader told me was a comment made during a market rally [when] somebody said, ‘Well I don’t like the quality of the buying,’ and this person said, ‘Sir, I would suggest to you that you don’t look at who you think is buying or selling the market, you simply look at where the market is itself.’ And I agree with that.”
Kottke made a good point. And that simply is, price tells. So it has been a strong market because that is what the numbers say.
In writing and commenting on this market for several years, we often have pointed out that the big question is: How will the market perform once the stimulus is pulled away and equities have to stand on their own?
Well, equities made new highs after the Fed completed tapering from its open ended quantitative easing (QE3), though it had a bit of a temper tantrum when tapering was first floated. Later this year, probably in September, the Fed will actually raise the Fed funds rate, though only marginally. When it is clear they will move, there may be a protest sell-off but that probably won’t be a reason for a larger downward move.
In our cover story, “10 reasons to sell stocks now,” (here), we present 10 reasons from an eclectic group of analysts for the possibility of a major market turn.
Our purpose is not to scare but enlighten, and these contributors provide something to think about.
In “Hedging the robot apocalypse,” (coming soon), The Alpha Pages Managing Editor Garrrett Baldwin discusses why you should not fear the next wave of innovation.
Perhaps it is easier for those of us who have spent most of our time on the futures side of markets. We assess moves on their merits free from the bias that up is good and down is bad.
In discussing the difficulty with the roll-out of single stock futures (see “The future of single stock futures,” coming soon), longtime contributor Howard Simons, who worked with NQLX (one of the two U.S. based exchanges that launched the product in 2002) pointed out how there is a general suspicion by securities regulators of any product that allows short exposure to equities. That suspicion of shorting, as perhpas an evil in the market, extends to the general business media as well. There were those willing to blame the entire credit crisis on short sellers, ignoring the massive leverage built up in the banking industry.
Speaking of Simons, in “Crude/dollar correlations, not causations,” page 38, he challenges common assumptions regarding the relationship between crude oil and the dollar. It provides a good reminder that some assumptions on market correlations don’t stand up to a detailed analysis.
In “Taking shelter from the storm,” (page 56) Randall Liss discusses several ways traders can hedge their equity exposure or play the market from the short side with options. Markets move in two directions and it is important that traders understand how to profit whichever direction the market is moving.
As counterintuitive as it may seem, it may be the very suspicion of this bull market that has kept it alive for so long. Many analysts say that when the last skeptics buy into a bull move, that is when a correction occurs. What we do know is that the current market trend has lasted longer than most such moves and the extraordinary stimulus from the Federal Reserve since 2007 may have unintended consequences.
All traders need to be prepared for whatever may come next.
Daniel P. Collins
Editor-in-Chief, Modern Trader