This Week: Sideways Market? Got “Pair Trade?”

Stock market trend: Bullish Trend Turning Sideways

Market Pulse

These observations are consistent with the ongoing technical weakness that I have been noting now for almost a month in this newsletter. While sentiment is neutral, both momentum and strength measures suggest a bearish trend reversal.

On the other hand, the one-year chart of State Street clearly indicates the beginning of a strong downward trend in the stock in mid-October. Thus, going long State Street right now would be much more of a leap of faith.

My bottom line here is that this is a good pair trade to put on your watch list. If Kass is right, the technical indicators will begin to point in the right direction and greenlight this trade. It could be big.

"Frankly, it's hard to totally understand what has been propelling the recent market rise, both in scope and persistence. An obvious reason is the Fed's zero-interest-rate policy and its cheap-dollar initiative, which is creating a shortage of available credit domestically and a glut overseas. And while gold and equities rise, this is undercutting domestic economic growth. In a vicious cycle, capital is being deployed away from the US, small businesses and the consumer, and it's pushing our dollars abroad and wasting precious growth capital and assets in commodity bubbles. And renewed optimism in longer-duration assets such as stocks has, in part, resulted in a massive reallocation at large domestic pension plans and endowments. They have moved from fixed income to equities after allowing the ratio of bonds to stocks to rise dramatically by the time the US stock market hit the bottom in March of this year.

This Week: Grudge Trend

Stock market trend: Bullish Trend Remains Intact

Market Pulse

Grudgingly, I must admit that the market's upward trend remains in place. However, this remains a very difficult market to make money in while the risk/reward still looks more like a gamble on the long side rather than a solid speculation.

The upward trend is consistent with the philosophy of this newsletter. At least in my world, the stock market is a leading indicator of the economy. At least last week, market participants seem to have interpreted the economic news as relatively bullish. The most important data point last week was a sharp reduction in layoffs, indicating a strengthen him ing economy.  This expansionary signal simultaneously boosted the dollar and steepened the yield curve.

Still, all was not rosy. The ISM Manufacturing Index declined by 2.1 points, and this was the second decline in three months.  The significance of the decline in the ISM Manufacturing Index should not be underestimated. Much of the US recovery is being driven by business investment and inventory restocking. If consumers fail to follow through on this investment led recovery, the recovery will stall. That holiday sales have not been particularly robust should be a warning sign.

That said, one should never argue with the tape. What the tape continues to tell us, contrary to my prediction some weeks ago, is that the bullish trend remains in place.

The reason, however, that I am so reluctant to trade on the long side at this point in time is the disquieting jumble of technical indicators, many of which are clearly bearish. For example, of the 91 industry sectors tracked by Market Edge, only a third or rated strong or improving while the remainder are weak or deteriorating.

At this point, I think it is worth pointing out that if you made a bundle off the March lows, taking some of those profits before the calendar year ends and using this time for research and reflection may not be a bad strategy. In my experience, the best and biggest returns are earned in the middle of a bullish trend while most of the money is lost trying to pick tops or bottoms.

As a final comment, I believe that the ability to make money in the US stock market over the next several years will hinge on how market participants interpret a rate of economic growth that will likely be positive but still below potential output. To put this point another way, a recession is clearly bearish for the market and full employment output in a robust expansion is clearly bullish. However, that netherworld between of slow growth is very difficult to handicap. In this regard, we are entering a new phase in our economic history and in modern times, it has been extremely rare for forecasters to project extended periods of slow growth and high unemployment. Stay tuned.