Wait
for a sign, listen to the words, ignore the message, and instead sprint
for the record books—an equation that has been the ticket to success for
many during the past nine months of Fed tightening, but an equation that
also may prove to be the downfall for the many who have grown complacent
while ignoring the time tested wisdom of "don’t fight the
Fed".
In the short term, however, complacency
has the upper hand and to put it bluntly, only an idiot would attempt to
stand in the way of a market soaring to new records. In the longer term,
however, the odds are the history books will show that those who
remembered their history lessons and used the present time to take profits
and raise cash were the only ones left standing when the first rays of
reality finally poked their head over the not too distant horizon.
For a brief moment earlier this week,
our predictions of a tech rally lasting into mid-April began to look a
little shaky, but with every technology fund manager from New York to
Nunavut sitting on a growing mountain of incoming cash, and with the
public’s desire for a perceived guarantee of outsized returns fully
intact despite recent market volatility, the outcome was never in doubt.
The NASDAQ’s new economy stocks roared
back to life immediately following the Fed’s latest flyswats, and soared
for a third straight day today. The recent correction is already a fading
memory, and with 5000 once again within arm’s reach, a run to new highs
is more likely than not in the coming weeks. As we have said before, the
new term is bright but beyond the next month the picture darkens:
parabolic chart patterns, historically high valuation levels and soaring
complacency leave the market defenseless when the current seasonally
strong inflow of funds slows to a trickle and the reality sets in that the
anticipated May Fed tightening will not be the last.
The old economy stocks have continued
their recovery from last week’s lows as investors rejoice in the
misplaced belief that one more �% nudge will be enough to slow an economy
driven by consumers who have become accustomed to 25% plus stock market
gains. The rejuvenated Dow Industrials for their part, have warmed the
heart of many a technician this week with a series of flawless executions:
a MACD buy signal on Wednesday, a cross above (and a subsequent successful
retest of) the 200-day moving average, and today’s close above the
psychologically important 11,000 level.
With all three major averages being
pushed higher by an expanding underlying cushion of cash and complacency,
the air is growing increasingly thin and the safety net is shrinking,
leaving the market defenseless against the three ominous horsemen circling
in preparation for battle: head swordsman Alan Greenspan and his two able
sidekicks Blind Complacency and Rampant Speculation.
The presence of the top bearing twins
Complacency and Speculation suggests that the current rally marks the last
fling of a blowoff top before the roof caves in rather than the start of a
long lasting next leg up. The signs of building speculative activity, the
sort that normally occurs nearer the end than the beginning, are in plain
view and increasingly troublesome: from the twin bubbles of Biotech and
Internet to the record levels of margin debt and the public’s headlong
rush to get on board not miss a beat. Perhaps most worrying in recent
months has been the surge of interest in the market’s most speculative
and most manipulated sector: the OTC Bulletin Board stocks. Volume on the
OTC bulletin board has nearly tripled since the market’s parabolic rise
began in earnest last Fall, with 1.2 billion shares changing hands in
February—20% more shares than changed hands on the NYSE.
Add to this surge in speculative
activity a surge in complacency, and the ingredients for a troubled summer
are in place. The market currently believes that this week’s hike and
the expected hike in May will accomplish what four previous rate hikes
were unable to do: slow the economy to a sustainable pace. The outsized
stock market gains enjoyed by consumers in recent years and the wealth
effect that has accompanied them, when combined with the growing economic
importance of the less interest rate sensitive technology sector, suggests
that the Fed will need to sling many more arrows before it achieves its
goal of slowing demand—quarter point hikes in the New Era just don’t
go as far as they used to in the days when interest-rate sensitive
belching smokestack industries led the economy.
