If the economy were going off the cliff there would be no question the stock market would be in trouble. But the Nasdaq has just hit a 12 year high, and it’s even in September – historically the worst month of the year. For the first week of this month markets are up anywhere from 1.4%-2%, not the start many had expected after a ‘grind it higher’ August.
It appears that all the plans of a market collapse based on whatever reason have not materialized. The destruction of global economies (yes, predicted and hoped for by some out there) has been off the table now for – well, since forever! Even back in the dark days of 2008/09 when the SPX fell to the ominous level of 666 before turning higher there were countless calls for armageddon, the end game and terminal death of global markets. Bad move betting on that- again.
So, if we have a roaring stock market – don’t be fooled, there were over 200 names hitting new all time highs on Friday – yet the economic data does not seem to support it, then what gives? As I’ve said previously the market DISCOUNTS the future.
Hence, the stock market is looking out six to eight months and seeing an economy that is probably growing better than the current 2% GDP is showing. Does that make sense? Does the market care about the election and the results? Fiscal cliff? Europe or China? Actually, it is all in the mix but what is not accounted for are the unexpected or ‘black swan-type’ events. One can certainly protect against such disasters buying insurance but to expect something like to hit on time or on a regular basis is foolish, and to play for such an outlier is not productive.
There has been lots of talk about the euro currency lately and how vulnerable it may be to a big ECB bond buying plan. If this is to occur as most expect (and has been talked about by them) then there we are likely to see the printing press active. Yet, the expectation has not put pressure on the euro but seems to have strengthened the currency.
I suspect this is a function of too much gloom and doom, panic and fear – not understanding the entire situation clearly. There is no denying the Euro zone economy faces contraction (overall), but perhaps there is too much pessimism – markets are certainly saying it. Further, the Chinese have committed to support the currency.
The SPX chart is in breakout mode, and as mentioned earier the Nasdaq is at multi-year highs. Sentiment is still rather lousy but with each news event the volatility drops. Take a look at the charts below.
Bob Lang is the Senior Market Strategist for option trading newsletter Explosive Options