Where do We Go From Here?

As you know if you’ve read any of my postings, I am a skeptic when it comes to the economy.  I can not connect the dots to understand how these improved earnings can be sustained.  With that being said, I will be the first to admit I have not participated to any great extent in the recent market rally.  My exposure to stocks is probably about 40% of my portfolio with the rest in cash and a little in government bonds (which helps me sleep at night because these things have been on a tear since Aug 11’). 

The great thing about markets is that they don’t care what you think.  Just because I think the market is too high and should be priced lower doesn’t mean the market will actually go down.  Many times markets will move to unreasonable levels in light of current dismal conditions before correcting lower.  Or worse, the market continues higher because economic conditions improve and you finally have to admit something you don’t want to admit… that you’re wrong!

I am not at the point yet of admitting my thesis is incorrect.  But I am getting close.  The Dow Jones Industrial average is just several points from its high (12,876 high back in May 11’ vs. 12,870 on Friday/Feb 3^rd) and the S&P 500 is not quite as close, but getting closer every day.  If these highs are taken out, the market could see an explosive rally as short traders (people like me betting against the market) come in to buy stocks, which is how they close out their positions.

This to me is still a big “IF”.  As we approach the highs set earlier last year, the number of stocks contributing to this rally is less than before.  At the peak in May 11’, there were 493 stocks making new highs (actually hit 636 in April), and on Friday there were only 442 stocks hitting new highs.  So the number of stocks driving the rally is less.  If we look at the Nasdaq (generally technology related stocks), there were 189 stocks hitting new highs during the peak last year (240 in April 11’) and this time there are 235 stocks hitting new highs.  So from my point of view, this is generally a technology driven rally with less involvement from other stocks such as industrial, retail, energy, etc.

Now that we see technology is a driving force, let’s look at Apple specifically.  The following is an article showing that before Apple reported earnings, S&P earnings growth was 2.7%.  After Apple reported earnings, the growth rate jumped to 11.6%.  This market is a one-trick pony!

http://blogs.wsj.com/marketbeat/2012/01/26/apple-earnings-give-facelift-to-entire-sp-500/

And let’s not forget, Europe still hasn’t figured out what to do next.  Rumor has it (strictly rumor) Greece may be announcing their exit from the Euro in early March. 

This will be an interesting week coming up to see how the stock market responds as it tests the highs from early last year.  I remain a stubborn skeptic till death do us part.  Have a good week!

Joel Fink

Joel.fink@yahoo.com