Newsletter | February 2012

February 21, 2012 – DJIA = 12,949 – S&P 500 = 1,361 – Nasdaq = 2,951

“You’ve Just Won the Super Bowl.  What Are You Going to do Now?”

When we watch the market’s recent price action, we can’t help but think of Eli Manning.  For those who are smart enough not to care about the NFL (an intelligence level many Jet fans pray for), Mr. Manning is the quarterback of the New York Giants.  Earlier this month he dramatically led his team to a Super Bowl victory over the New England Patriots and was given the honor of game MVP.  He walked the walk after earlier in the season he had raised eyebrows by saying he was among football’s elite quarterbacks.  This victory seemed to confirm his statement and naturally his stardom spread beyond the football world. 

In a classic “What have you done for us lately?” moment, Eli Manning’s renown appears to be measured in a few short days.  Within hours after the street sweepers got done cleaning up the confetti from the streets of lower Manhattan, the city as well as the country catches a severe case of “Linsanity”.  Eli who??

Similar to Mr. Manning, the stock market’s recent noteworthy achievements are underappreciated.  Last week the Dow Jones Industrial Average closed at a 52-week high at the same time as Apple finished above $500 per share for the first time.   While the S&P 500 has a little more to go to match the Dow’s high, the Nasdaq Composite made a 52-week high on Thursday. 

Regardless of their relationship to their 12-month high, stocks have had a good stretch.  The rally from the October lows now exceed 25% while S&P 500 is up over 12% when measured from the December lows.    Here are the year-to-date numbers for the major averages. 

    Last Week 
Dow Jones Industrial Average    +6.0%  
S&P 500   +8.2%  
Nasdaq Composite   +13.3%
Russell 2000 +11.8%

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

Ironically, the capital markets’ surge has taken place despite a steady stream of bad news.  A list of examples includes:

  • Greece got bailed out (again) but default rumors won’t go away – in fact they get louder. 
  • Iran threatens to close the Strait of Hormuz.
  • Unleaded gas is up over 20% since mid-December.
  • China appears to be avoiding an economic hard landing but is experiencing slowing growth. 

Yet beyond these gloomy headlines, some good news has gone unnoticed.  According to research firm ISI, there have been 20 weeks of positive economic data in the United States.  Weekly jobless claims fell to 348,000 or the lowest level since 2008.  Even the housing industry has stabilized and January’s housing starts were better than expected.  It would seem that much of the bad news is priced into the stock market for now and traders are more focused on the positives.  

Perhaps higher prices will ultimately increase stock market interest, but until this takes place, it seems that the move is stealthy.  Trading volumes have been falling for many months.  The NYSE daily average for January 2012 is 25.4% lower than January 2011.  This is somewhat expected as it represents only trades done on the exchange floor and does not include the growing computerized volume of NYSE listed stocks.  But the Nasdaq volume has dropped 10.84% for the same period and this better confirms the lack of widespread participation. 

In addition to machine handled trades, there are other contributing factors.  The reduction of propriety trading operations at the large investment banks could be a reason.  Furthermore, the simple fact is that Wall Street is getting smaller.  So far this year Ticonderoga Securities, WJB Capital Group, Susquehanna Financial Group, and Kaufman Brothers have closed operations.  The summation of these events results in fewer market players and less volume. 

Public apathy combined with a general distrust of Wall Street has also helped to lower volumes.  That CNBC is largely re-runs and infomercials during non-trading hours is a clear sign that the public’s attention is not focused on the markets.  Unless Jeremy Lin gets his broker’s license, this is going to take time.

As mentioned, stocks are at yearly highs and the economy appears to have some self sustaining momentum.  As usual, looking forward gives reasons for both optimism and caution.  Stock valuations remain reasonable and corporate balance sheets are strong.  On the ursine side, this has been a historically long stretch without a pause let alone a correction.  Nevertheless, just because we haven’t had a correction does not mean we have to have one.  But with 73% of money managers now bullish, perhaps the easy part of the rally is behind us. 

We are reminded of two market adages – “Don’t fight the Fed” and “Don’t fight the tape”.  The Fed’s recent announcement of the continuation of ZIRP (zero interest rate policy) through the end of 2014 undoubtedly points to an accommodative monetary policy.  Furthermore, the trend of the stock market has been pretty well established as it has moved from lower left to upper right since October.  The lack of trading volume and the bullish sentiment are bothersome but not enough warrant bearish decisions – at least not yet.