Sign, Sign, Everywhere A Sign. But Investors Disregard

The first week of December continued its bullish advance as “bad news” became good newsThe announcement by Pfizer (PFE) of supply chain problems was seen as good news as it means more demand for Government stimulus. 

On Friday, the dismal employment report, with no bright spots, was also “good” as it meant more demand for stimulus. 

The problem is that the stimulus does not create organic, sustainable economic activity. Stimulus only pulls forward future activity into the present, leaving a future void to fill. The size and scope of the stimulus discussed will not directly benefit consumers nearly to the degree seen previously. Such would leave the market very susceptible to disappointment. 

Nonetheless, as shown below, the markets did break out of its recent consolidation and have pushed to new highs. Such is not surprising, given we are in the midst of the seasonally strong time of year. (The following chart is a modified version from my colleague David Larew @ThinkTankCharts)

The bottom panel of the chart shows a “buying panic” is currently in process. Such does not come without risk. Furthermore, the analysis from Doug Kass is an excellent summation between the media chatter and fundamental realities. 

Group Stink

“There is a tendency for commentators, strategists, and others to believe ‘price is truth,’ and to respond accordingly in trading and investing. If one is consumed by the price, it is imperative to recognize the potential pitfalls to that approach and the artificial influences of that price action.

But to me, this is a failing, more so today than ever, and certainly when the market’s are less friendly as passive products and strategies are the tail that wags the market’s dog. One should always question the legitimacy of short term price action, stay independent in view, and avoid becoming overly self-confident and the “Group Stink.”

Currently, the market is extremely “one-sided” as investors chase markets. As I noted yesterday, the number of stocks above their 200-dma is at the highest level seen in several years. Such is not healthy, and previous peaks have consistently preceded “unexpected declines.” 

“Fear and greed ebb and flow. Fear, prevalent in March, has been replaced with greed in November.” – Doug Kass

Give Me A Sign

While we certainly want to be opportunistic and take advantage of the markets can give us, we also must remember that “crowds are wrong at peaks and troughs.” Importantly, whatever good news exists, it has already been well “priced-into the market.”

As Doug notes, the underlying fundamentals are likely not supportive of current expectations, which leave the markets vulnerable to disappointment next year. 

“As we look out beyond this year and into 2021-22, profit and economic expectations seem too optimistic as a number of small and large businesses have been gutted by Covid-19. The amount of private and public debt that has accumulated over the last year (and 10 years!) will serve as a governor to growth at a time in which the Federal Reserve has little ammunition left and is “pushing on a string.” Indeed, 2021 may mark a reversal of aggressive monetary easing which has been the straw that has stirred the market’s drink.” – Doug Kass

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