Wall Street and the investment community has been in a euphoric state throughout this year reflecting optimism on the outlook for the stock market. Bullishness can be seen everywhere: aggressive positions in mutual fund portfolios, historically low cash positions, and a consensus that the worst is over. Despite this general state of bullishness, the economy continues to contract. This morning the government reported that industrial production fell last month for the second consecutive month and that capacity utilization fell in March to 75.3 from 75.4 in February. This morning’s numbers follow yesterday’s reports on inventories stacking up in many sectors of the economy. Last week it was the ISM reports on the manufacturing and the service sector indicating that both sectors are heading back towards recession. Earnings reports, which are just now starting to come in, show that outside the financial sector earnings remains dismal. Top line growth remains elusive. Those companies that are improving the bottom line are doing so through cost cutting. From a macro economic perspective, job layoffs are contractive. Many companies who have reported or have issued warnings regarding earnings remain cautious on their outlook going forward. During Q1 as shown in this graph earnings expectations have been reduced dramatically. They have been reduced by close to 60 percent.
Despite the fears over war, the poor news over the economy and lack of stellar earnings markets remain positive. The Nasdaq, which still suffers from negative earnings, is up 4 percent this year and the Dow and the S&P 500 are up close to 1 percent or more this year. As the chart of the S&P 500 indicates, the markets have gone nowhere this year, or at least nowhere this last month. Investors may be surprised at all of the bad news why stocks gyrate back and forth between gains and losses this year. The main reason is that there is very little correlation shorter-term between the stock market’s ability to levitate and earnings improvement. Markets often move more on perception than actual reality."
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"The psychology right now is positive. This means that no matter what companies say or how bad actual conditions are there is a positive spin on everything that is reported. The Street and the financial community want to see a party this year and they are determined to get it. Therefore, we see stocks rise when they should fall. The market simply ignores what it wants to ignore and focuses on what it wants to focus on. Judging by a graph of the VIX and the VXN complacency in the markets is running rampant and at a point where markets can suddenly turn in the opposite direction.
Newsletter writers and the public have recently turned bullish again, which is another contrary indicator. All of this tells me that without further intervention the markets could be ready to head south again. It may take only one bad earnings report, an economic report, or some geopolitical event to turn the markets in the opposite direction. The VIX and the VXN are giving a major sell signal. I believe it is very likely that we could see one more major sell off before another longer-lasting countertrend takes place."
Só tenho uma coisa a dizer (mais uma vez):
"Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they." - Richard Rhodes :-)
E esta é para o Prodígio que não acredita em "trades do ano":
"Be patient. The old adage that "you never go broke taking a profit" is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade." - Richard Rhodes.
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