Make This Schizophrenic Market Work For You

by Jon Markman | September 16, 2011 12:40 pm

The schizophrenic nature of investors has recently been on bright display, as 90% upside days give way immediately to 90% downside days, and then vice-versa.

Over the past seven weeks, you see that the picture that started off as decline has since become a bit more blurry:


— July 22 to Aug. 8: -16.8% over 11 sessions

— Aug. 8 to Aug. 15: +7.6% rally over 5 sessions

— Aug. 15 to Aug. 19: -6.7% decline over 4 sessions

— Aug. 19 to Aug. 31: +8.5% rally over 8 sessions

— Aug. 31 to Sept. 6: -4.4% decline over 3 sessions

Now just looking at the stretch from the Aug. 8 low to now we see an advance of more than 8%. So we have to ask ourselves: Is this rally the important part of this picture, or is the 17% decline to Aug. 8 the most important part?

The bullish narrative holds that the most important development in the past month is the series of tests of the Aug. 8 low that has resulted in a set of higher highs and higher lows.

On the other hand, the bearish narrative holds that the past month amounts to nothing more than a consolidation known as “bear flag” — a pattern that concludes with a move in the original direction of the market, which is downward.

Adding weight to the bearish point of view is that bulls have failed repeatedly to follow through significantly on any of their major advances, and even on the strongest days in terms of points gained, volume has been severely lacking.

Also, bulls have really failed to break out any of their big favorite multinational growth stocks, as Caterpillar (NYSE:CAT[1]), United Technologies (NYSE:UTX[2]) and Schlumberger (NYSE:SLB[3]) are locked in weak patterns under their 200-day averages.

Only hotshots like Apple (NASDAQ:AAPL[4]), (NASDAQ:AMZN[5]) and Hansen Natural (NASDAQ:HANS[6]) are consolidating firmly at high levels that show bulls still care, while the only other strong names are defensive names like McDonald’s (NYSE:MCD[7]) and Coca-Cola (NYSE:KO[8]), plus the gold miners.

Both sides have decent arguments, which is why the market can’t seem to get out of its own way.

Supporting the bulls going into the rest of the year is the potential for more deliberate monetary support not just from the Federal Reserve, starting at its Sept. 20 meeting, but also from other world central banks in Europe, Latin America and Asia. Moreover, while the economy is struggling, and may be in recession, it is not falling off a cliff — at least not yet — and could actually muddle through at this current modest level of activity for quite some time.

Supporting the bears is the plain fact that any serious shock — a Greek default, a Spanish or Italian debt blowup, a Middle East conflict, another major natural disaster or massive terror attack — would push the global industrial machine and markets over the edge. Strong economies can withstand shocks, but weak ones cannot.

While the big picture is muddled, the little picture is fairly clear. If you are invested in high-quality staples producers (MCD, KO), tech innovators (AAPL, AMZN), and gold and gold miners, and high quality corporate and sovereign bonds, there is plenty of liquidity to maintain a positive posture.

Most markets offer a differentiated set of choices to investors. As an example, the 2000-2002 bear market was of no consequence to people invested in small-cap banks, REITs and energy producers, which did fine during that whole period. And even in the 1970s, the “lost decade” of my youth, was fine for investors who stayed with energy companies.

Conditions like 2008, where everything went down together due to the terrible combination of tight money and credit implosion, are very rare in market history.

There are no certainties in investing, only probabilities. For now, the high-probability case is that investors who stick with the stronger sectors and asset classes and avoid early bottom-fishing in the weaker groups and asset classes will be able to weather the rest of this year in style.




  1. CAT:
  2. UTX:
  3. SLB:
  4. AAPL:
  5. AMZN:
  6. HANS:
  7. MCD:
  8. KO:

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