Problems, issues, challenges, call them what you may. Nary a day has gone by when something, somewhere continues to put investors on edge. From the Straits of Hormuz to the infidelities of Republican hopefuls, the world appears to be full of surprises. Yet, the stock markets grind higher.
Why now? Haven’t these same issues been with us for months? Yet, the same news on Greek debt negotiations that in the past sent stocks into a downward spiral is now simply being ignored. The continued delays in EU progress toward a monetary and fiscal solution to their financial crisis are now greeted calmly rather than with horror.
Some of the market’s response can be attributed to a “no news is good news” read on events in Europe. That leaves investors to focus on the positive data coming out of the American economy, something I have been writing about for months. The data continues to improve. We are actually hearing some analysts who now believe the fundamentals of the housing markets are improving.
There is also the recurring story, first identified by me in a September column “What the Market Missed”, that the administration is planning a big mortgage refinancing operation with the Fed’s assistance. Anywhere from $1-3 trillion worth of U.S. mortgage holders will be able to refinance their high interest bearing mortgages at lower rates, injecting billions into home owners’ pockets.
However, all this good news has been quickly reflected in stock averages. Financials, which have been under constant selling pressure for well over a year, have suddenly rallied big in the last three weeks. Home builders have also jumped by over 10% in some cases in the same time period. Technology stocks overall are on a tear, despite some lackluster earnings announcements. The benchmark S&P 500 Index is already up over 5% so far this year and we are only now entering the third week in January.
Most indicators are flashing amber or red warning lights indicating the markets are overbought and due for a correction. I agree, although markets can remain overbought for a long time and still plow higher. When I look at the potential downside, I am not too concerned. Sure, we could drop a good 50 points or so in quick order on the S&P but that’s about the extent of the downside I see right now.
If I put that in perspective, there were days last year when that kind of decline was almost a weekly occurrence. All week trader talk focused on when the correction would occur and how much the averages would decline. Unfortunately for them, markets will typically do what is most inconvenient to the most number of players.
And that’s what happened this week. As traders positioned for a sell off, they were continually disappointed, the pullbacks were shallow and the markets grinded relentlessly higher, despite the worries.
Make no mistake, the good times will end but the trend over the next three months in the markets is up. So enjoy the ride short-term and don’t worry too much about the inevitable pullbacks, at least for now.