Musing on the Markets

The Head and Shoulders Rorschach Test

Vinny Catalano, CFA — Wed, 08 Jul 2009 12:32:00 GMT

In case you hadn't noticed, there’s a big head and shoulders debate brewing. A bona fide bulls versus bear story. One side (the bulls) sees the stock market world from a decidedly more optimistic perspective with the potential of an upside breakout and a stock market run to new recovery highs. This view is exemplified by the first chart with the neckline somewhere around the 950 level (S&P 500).

Then there is the more pessimistic crowd who see the glass half empty with the threat of a downside break below the 880 level and the potential retest of the lows of early March (second chart above). The same price data but seen from different time perspectives.

In both cases, old school market technicians will tell you nothing can be concluded UNTIL the pattern is complete, meaning that the neckline has to be broken and the ensuing move underway. It is most interesting that all this is occurring just as the markets enter the all-important earnings season and the fundamental justification for higher (or lower) prices, the answers to which we will receive in the coming weeks.

Investment Strategy Implications

Anyone who has read the technical analysis side of my work these past years knows that I am not a big chart pattern guy. No doubt there are those who have found a way of producing a better than 50/50 chance of predicting future price actions via chart pattern analysis, however, I am not one of them. In my experience, the vast majority of chart patterns are like a Rorschach test – you see what you want to see. Frankly, the only consistent justification that I have found for paying any attention to chart patterns is the simple fact that many others pay attention to chart patterns, which then moves chart pattern analyses to the behavioral science realm – the study of your fellow investment rats and how they run the maze.

From the more bullish perspective (which is where I sit), the completion of a market bottom would be signaled by an upside break above the neckline. As I have written several times before, that would be the sign for the old school technical analysts to ring the bottom-has-been-seen bell. BUT, as noted above, that cannot/should not be done before the fact.

Or, to quote that investment sage, Yogi Berra, “It ain’t over ‘til it’s over.”

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Beyond the Sound Bite: An Interview Dr. Neal Soss

Vinny Catalano, CFA — Thu, 02 Jul 2009 21:36:00 GMT

My interview with the Managing Director and Chief Economist with Credit Suisse (recorded Monday, June 29) includes the 2Q09 end to the US recession, expectations of a sub par recovery of 3 1/2%, a sustained level of relatively high unemployment, and a potential compositional shift in the US economy. The length of the interview is 16 minutes 58 seconds.

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Four Steps to 1050

Vinny Catalano, CFA — Wed, 01 Jul 2009 13:01:00 GMT

The Fourth of July is just a few days away. So, how about a four step process to investment fireworks for this summer?

The media is attributing yesterday’s stock market swoon as being driven by the disappointing report on US consumer sentiment. No doubt it is a contributing factor, however, a single data point does make a trend, for when one expands their time horizon beyond the day a decidedly bullish trend has emerged over the past 8 weeks as the above table clearly shows.

Investment Strategy Implications

The investment implications for the above consensus results rests in the likely upward adjustments economists will make to their forecasts, which will in turn produce increased earnings expectations from bottom up analysts. As noted previously, this would occur for the following reason:

Earnings (cash flows) are one of the key fundamental-analysis inputs upon which valuation (and therefore investment) decisions are made. The fundamental premise is that, in the aggregate, current earnings expectations incorporate the consensus view. Therefore, whenever macro economic reports come in above or below consensus expectations, economists change their outlook, which in turn cause individual company analysts to adjust that macro economic component of their industry and company forecasts. However, since this process occurs with a meaningful lag, investors can gain a competitive advantage by anticipating changes to earnings forecasts as the above or below consensus reports are filtered into the forecasts.

In regards to current earnings expectations, consider the following statistic from contrarian value investor and behavioral finance expert, David Dreman (from last week’s NYSSA conference): from 1973 through 2008, the average analyst forecast error is 39%. That means that 2Q09 operating earnings for the S&P 500, currently estimated by bottom up analysts at approximately $14, may actually come in as high as $19.50 or as low as $8.50.

In light of the above consensus data noted above, the lag component of the forecasting process, along with an increasing number of economists estimating that the trough of the recession was reached this quarter, it would not surprise me if the 2Q09 earnings reports tilt more toward the higher number. Should that occur, then all the angst heard over the past few weeks re low volume would dissipate rather quickly as some of the $3.5 trillion still sitting in money market funds moves off the near zero percent interest rate sidelines.

And if that were to occur and stocks made a strong move to the upside, then old school market technicians will ring the bullish bell as completed bottoms and moving average signals will abound.

So, here is how a major bull market begins in earnest:

1 - Above consensus macro economic readings produce
2 - Above consensus earnings reports which
3 - Moves funds moving out of money market funds which produce
4 - Bullish readings by old school market technicians which results in

1050 or higher in the S&P 500.

Let the fireworks begin!

Marking Time

Vinny Catalano, CFA — Wed, 17 Jun 2009 17:57:00 GMT

As dramatic as yesterday’s market decline was, there are several reasons to conclude that a market that was clearly fully valued (see last week’s June 9 postings) was one that was susceptible to any signs of economic and/or political areas of concern.

On the economic side of the equation was last week’s negative reading in my Macro Economic Consensus Trend indicator (see accompanying table and description below). After many weeks of net positive readings, last week’s negative -3 net contributed to taking some of the positive froth out of the fully valued market.

As for the political dynamic, more than a few areas of concern – Iranian election results, the loose screw in North Korea, and the US President and media Star in Chief with his major government initiative du jour – was more than the market could bear.

However, as important as all these factors are, it does appear that the more significant event that will determine sustainability of the cyclical bull market will be the earnings reports, which begin next month. For 2Q09 earnings will provide the most direct sign that the above consensus economic data generated over these past months (noted above) has interpreted into higher corporate profitability. And it is higher profits that will be needed to justify the expected 1050 for the S&P 500 that current market levels imply.

Investment Strategy Implications

Investors can hoop and holler, wish and hope, and stocks can surge and plunge, but the proof will be in the 2Q09 pudding as to whether the anticipation of economic stabilization and higher corporate profits imbedded in a fully valued market come to pass in the form of higher stock prices. Until then, marking time is the more likely outcome.

*Earnings (cash flows) are one of the key fundamental-analysis inputs upon which valuation (and therefore investment) decisions are made. The fundamental premise for the above analysis is that current earnings expectations incorporate the consensus view. Therefore, whenever macro economic reports come in above or below consensus expectations, earnings forecasts will adjust accordingly – with a lag. As economists change their outlook, the individual company analysts, taking their economists’ changed outlook, will follow suit and change their forecasts accordingly. By monitoring the data in real time, an investor can gain a competitive advantage by anticipating changes to earnings forecasts as the above or below consensus reports are filtered into the forecasts.

Note: To learn more about the "Sectors and Styles Strategy Report" newsletter, which contains the market beating Model Growth Portfolio as well as other subscriber benefits, click here.

Beyond the Sound Bite: An Interview Phil Roth, CMT

Vinny Catalano, CFA — Wed, 10 Jun 2009 12:24:00 GMT

In yet another excellent and insightful interview with the Wall Street veteran and Chief Market Technical Analyst for Miller + Tabak we explored the prospects for a completed market bottom, the absence of public participation in the equity markets, investors sentiment, which sectors, size, and styles look attractive and which look unattractive, and some thoughts on the fixed income market, the US dollar, and the strong chart pattern of Gold.

The length of the interview is 12 minutes 17 seconds.

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To learn about "Sectors and Styles Strategy Report" newsletter and other subscriber benefits, including the market beating Model Growth Portfolio - click here.

A Fully Valued Market

Vinny Catalano, CFA — Tue, 09 Jun 2009 13:27:00 GMT

excerpt from this week's "Sectors and Styles Strategy Report":
The huge disconnect continues. As noted in last week’s report and in several blog postings, the financial markets are signaling not just economic stabilization but a robust (V shaped) recovery. Whether this comes to pass remains to be seen. However, very supportive at and above consensus macro economic reports strongly suggest that earnings expectations will do more than stabilize – they should rise in the coming weeks and months. While such action will provide the real economy results to the markets’ expectations, much of the value has been realized as noted in the three valuation models used (page 2).

The plus side of the equation is the anticipation of more Mega Trend bullish signals (pages 4 and 5). However, unless one believes that a P/E greater than 15 is appropriate, then stocks are likely to enter more of a trading range with rotation and sector selection being key.

Here’s how the full value argument plays out:

15 times $70 = 1050
1050 minus 940 (current S&P level) = 110
110 divided by 940 = 11.7%, which is right around the historical return for large cap stocks of 12%.

Hence, fair value has arrived. Unless, of course, higher earnings and/or higher P/Es are expected. Such a view is not held here.

Note: To learn more about the "Sectors and Styles Strategy Report" newsletter, which contains the market beating Model Growth Portfolio as well as other subscriber benefits, click here.

Beyond the Sound Bite: An Interview with Marty Fridson, CFA

Vinny Catalano, CFA — Thu, 04 Jun 2009 14:42:00 GMT

In light of the strong rally in high yield bonds, my podcast interview with the CEO, Co-CIO, and high yield bond guru at Fridson Investment Advisors is a timely one. We explored some of the topics to be discussed at next week's New York Society of Security Analysts' 19th Annual High Yield Bond Conference, his views on the trends and directions of the high yield market since our interview one year ago, quality issues in the high yield market, and the trend toward activist government.

The length of the interview is 14 minutes 20 seconds.

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To learn about "Sectors and Styles Strategy Report" newsletter and other subscriber benefits, click here.

Quotable Quotes: Faith

Vinny Catalano, CFA — Fri, 29 May 2009 14:58:00 GMT

As equities close in on a third up month in a row, a few words on investors' faith that better times lay ahead.

“Faith means not wanting to know what is true”
Friedrich Nietzsche

“Skepticism is the beginning of Faith.”
Oscar Wilde

“I know God will not give me anything I can't handle. I just wish He didn't trust me so much.”
Mother Teresa

“Faith is taking the first step even when you don't see the whole staircase.”
Martin Luther King, Jr

"...at the beginning of new bull markets investors are driven more by faith than fundamentals, as they seem to prefer Billy Graham over Ben Graham."
Sam Stovall

Have a good weekend.

When To Ring The Bullish Bell

Vinny Catalano, CFA — Wed, 27 May 2009 15:55:00 GMT

Driven largely by short covering and a portion of the mountain of cash sitting on the sidelines, stocks have been on a tear since the beginning of March. Many investors have, in the process, bought into the idea of the reflation trade as sectors and countries associated with it (e.g. emerging markets, basic materials) have led the parade thus far*. In the process, valuation levels have become quite stretched on the concern that the next 12 months will produce sub par earnings that do not justify currently lofty P/Es.

For the bears, there is high skepticism that S&P 500 operating earnings will reach a $70 number, which would justify not just where the market is today but be supportive of a run above 1000 (S&P 500). The bulls, on the other hand, argue that corporate profits are on the cusp of a major rebound mainly due to recession-necessitated cost cutting. Accordingly, any economic rebound in our globalized economy will produce the $70 number – and then some. Who will be right?

To gain insight into who will win this fundamental analysis debate, a peek at the technical analysis side of the equation can be most enlightening.

Convergence

Many of the technical analysis patterns and indictors I follow are flashing very constructive longer-term signals. Mega Trend bullish reversals are on the horizon for just about every index tracked**, along with chart patterns that bear more than a glancing resemblance to head and shoulder reversals.

On a short and near term basis, however, equities are faltering as momentum – the lifeblood of near term market power – is eroding (see second and third indicators in the above chart). On the surface, the fundamental analysis debate appears to playing out in the technical analysis space as well – longer-term things look promising, short and near term not so much. So, where’s the enlightenment?

The missing ingredient is the completed bottom – that point at which stocks have built a sustainable base from which higher prices have a greater chance of becoming an actuality.

Such a bottom has been formed in leadership areas, such as emerging markets (see above chart). Breaks above previous tops formed in multi month trading ranges signal a (mostly) completed bottom. This is not quite the case, however, with developed economy markets, as they have not made such a move. Yet, as constructive as the emerging markets patterns are, only when a mega trend reversal has occurred (which looks like it needs only a few more weeks of positive trading action) can the bell be rung.

Investment Strategy Implications

Old school market technicians will tell you that it is always better to wait until a major pattern has been completed and give up x% of the early move just to be sure that you are on the right side of the trade. Given the fluid nature of the real economy environment, this piece of advice will produce more than its value in peace of mind.

The bullish bell looks like it only needs a few more weeks of positive action. Then again, the Cavs were a slam dunk to make it to the NBA finals.

And Now, Another Soapbox Moment

By blending both fundamental and technical analysis, an investor can see how market participants are interpreting the fundamental stories in the real economy. This occurs on both a macro and micro level, with sectors and industries reflecting the prospects on an individual company level. This also involves Soros’ reflexivity, the feedback loop from the markets to the real economy in which changes in market values help produce the very outcomes they measure.

Fundamental analysis tells you what should be. Technical analysis tells you what is.

*While the stats do show Financials as having the sharpest rally since the early March lows, it is arguable that the profound changes the sector (to profitability and growth) will undergo does not auger for a leadership role on a sustainable basis. Therefore, the powerful rally come from a deep oversold condition that will likely dissolve into mediocrity once the bull phase gets underway in earnest.

**Price above moving averages, 50 day above 200 day, both 50 and 200 day upwardly sloped. See chart above for an example, as well as numerous previous blog postings.

Vinny Catalano is the editor of the Blue Marble Research newsletter, "Sectors and Styles Strategy Report". To learn about the newsletter, which contains the market beating Model Growth Portfolio, and other subscriber benefits, click here.

How to Beat the Market WITHOUT Even/Overweighting Financials

Vinny Catalano, CFA — Wed, 20 May 2009 15:02:00 GMT

The stock market parade in the US has been led by Financials (see first chart). As a result, many investors with well-diversified portfolios may have struggled to produce alpha since the bull rally began in early March, especially if they were underweight Financials - as many no doubt were. In the process of the rally and in an effort not to fall too far beyond in relative performance, these same underweight Financials investors have been forced to plunge headlong into that sector to try and keep pace.

For investors (as opposed to traders), part of the problem with even or overweighting Financials is the high degree of uncertainty facing the sector. With the US government forging ahead with new legislation and regulation designed to steer the financial services industry toward a more managed future (see recent articles on the credit card legislation, executive pay caps, mortgage regulators, and Gillian Tett’s (Financial Times) excellent article on derivatives) no one can confidently predict the future shape of the sector, let alone its sustainable growth and profitability. Therefore, what investments should/could the well-diversified investor consider that can generate alpha AND avoid the issues and uncertainty even/overweighting Financials bring?

One approach would be to increase the equity exposure in those areas where sustainable growth and profitability appears to be more assured AND will benefit from themes that will likely play out for many years to come. Two such areas are emerging markets and global infrastructure.

As the second chart shows, while not matching Financials in the current rally, having a sufficient amount of money in several attractive emerging markets (EEM, EWZ, FXI) and global infrastructure sectors (IGF, PHO), as well putting some funds in the higher beta small cap growth area (IJT), a well diversified portfolio can produce alpha while simultaneously reducing the aggregate beta in a portfolio AND avoid investing in a sector that is fraught with uncertainty.

And Now, For Another Soapbox Moment

For well-diversified portfolios with a longer-term time horizon, it's a relative performance game. This is what "diversification with a tilt" portfolio strategy is all about. The underlying assumption is that stocks have a longer-term upward bias and investors should exercise sound asset allocation and modified market timing principles (along with a healthy dose of patience) to achieve alpha. If this stocks-have-an-upward-bias assumption is correct, even a modest 2% per year outperformance will produce exceptional long-term results.

Note: Walking the talk is what you see in the second chart as it represents most of the larger holdings in a small fund run my firm and in the Model Growth Portfolio, both of which have year to date alpha of 293 and 484 basis points, respectively. Needless to say, past performance is not a guarantee of future results.

9 ½ Weeks

Vinny Catalano, CFA — Tue, 12 May 2009 18:31:00 GMT

Time flies when you’re having fun. For it was a mere 9 ½ weeks ago stocks were as desirable as a hug and a kiss from a Mexican lover, a point President Obama made note of just a few days ago re he and Hillary. For the bulls, these 9 ½ weeks were like the movie of same name – hot. However, the bulls (including many new converts, especially from the land of momentum lemmings – the hedge fund world) should not forget that in the movie the lovers (Basinger and Rourke), drawn by the heat of the moment, have something as substantive and sustainable as a chimera.

At the historical average P/E of 15 times an optimistic $60 operating earnings number for the S&P 500 for 2009, stocks are projecting a robust earnings rebound into 2010, a point made by my “Beyond the Sound Bite” guest from last week, Subodh Kumar, with a $75 call for next year. Only if that occurs AND/OR only if one accepts the talk I hear from some institutional investor circles that a P/E above its historical average is fitting for the times courtesy a low inflation rate (18 times is the number I hear), can an investor find fundamental support for the fragile technical analysis base stocks have built. However, it does give one pause when the leadership for this market is the same leadership that existed before the great tumble. Generally that is not how new bull markets get started and sustained, as the more common occurrence is for new leadership to take the helm. Rather, bear market parades are led by those who led before.

Investment Strategy Implications

9 ½ weeks ago I argued that stocks were grossly undervalued. Now, 9 ½ weeks later, stocks, while not grossly overvalued, are more than fully valued. Built on the sand of a fragile technical analysis bottom led by those who led before make it more than justifiable to take some money off the table – most conservatively done by maintaining whatever the current equity percent of one's total investible assets at the current level, which in accounts that I manage is in the low 90% range.

In many respects the movie 9 ½ weeks was a study in extreme behavior devoid of real meaning and lasting substance. So, it is interesting to note that the stock market movie of these past 9 ½ weeks has brought out these qualities of extremes, including the expectations of more than a few investors with calls for more upside surges or great plunges. Therefore, allow me to offer an alternative view to this edgy thinking with a reference to another character from Tinseltown – George Costanza. Perhaps what investors will get in the coming months is a stock market movie not about heat but about nothing. A drifting, sideways, mini range-bound market where selectivity matters more than trend following, lemming-like momentum investing as investors digest what has occurred and guesstimate what 2010 has to offer and the appropriate P/E.

In such an environment, you can keep your (slightly bearish) hat on.

Note: Vinny Catalano, CFA is the publisher of "Sectors and Styles Strategy Report" is a weekly investment newsletter for the independent investor. To learn about the newsletter and other subscriber benefits, click here.

Beyond the Sound Bite: An Interview with Subodh Kumar, CFA

Vinny Catalano, CFA — Thu, 07 May 2009 12:51:00 GMT

My interview with the Chief Investment Strategist of Subodh Kumar & Associates includes his cautious equity outlook at the top end of the trading range, the low quality aspects of the recent equity markets' rallies, the coming powerful earnings benefits from cost cutting, a 2010 S&P 500 operating earnings view of $75, and the emergent era of managed capitalism.

The length of the interview is 15 minutes 43 seconds.

(Please visit the site to view this media)

Beyond the Sound Bite is a podcast interview service of Blue Marble Research, publisher of the "Sectors and Styles Strategy Report", a weekly investment strategy perspective which includes the outperforming Model Growth Portfolio.

To learn about "Sectors and Styles Strategy Report" newsletter and other subscriber benefits, click here.

Sinko de Mayo

Vinny Catalano, CFA — Tue, 05 May 2009 16:14:00 GMT

For many, today’s date has a special social significance. For prudent investors, however, today is a day that this year marks a point of caution – unless you buy into one of two arguments being passed about: stocks warrant a higher than average P/E or stocks have made their lows as certain trading patterns say the bottom has been formed.

Fundamentals First

For those who favor the first point, the arguments I hear reference inflation and the appropriate P/E for stocks. Historically, when inflation runs in the low single digits P/Es have tended to be in the higher teens – above the long-term average of 15 times. All well and good provided other conditions in the economic and financial arena are balanced - which they are not. What makes the low inflation=higher P/E argument more than a touch suspect is, frankly, a blind faith in the ability of the Fed (and other central banks) to time the withdrawal of monetary stimuli BEFORE inflationary pressures begin to build – which, if unsuccessful, would thereby blow up the low inflation leg of this fundamental stool. More importantly, given the highly fluid nature of the global economic and political environment (can you say "nukes and Pakistan"?), ascribing an above average P/E during above average times of risk(despite whatever may be possible - not probable - in the inflation end of the equation) seems to require an above average degree of faith and a below average degree dispassionate logic.

Now The Technicals

As for the technicals of the market, certain technicians of the chart pattern stripe note the various breakouts as reasons supporting the “bottom has been formed” argument. There are others, however, who are purists in this chart pattern field who would counter argue that only when a completed bottom has been made in the major indices can a bottom-has-been-formed view be agreed to. Since I am not a chart pattern guy, I will leave this debate to those in the two camps. What I will put forth is something readers of this blog are very well aware of – the Mega Trend.

The Mega Trend is the Investor's Friend

Only when price is above both moving averages AND the 50 day has crossed the 200 day AND both the 50 day and 200 day have turned up can an investor confidently declare a Mega Trend change has occurred and a new market cycle is underway. Let’s look at the performance record in this regard using two indices as evidence – SPX (S&P 500) and EFA (Europe and Asia).

As both above charts* show, when a Mega Trend occurs that trend tends to stay in place for years. In this longer-term context, you can see that considerable improvement has occurred recently, HOWEVER, neither index is fulfilled the requisite conditions to warrant a Mega Trend signal change. Price is not above its 200 day moving average and the 50 day has not crossed the 200 day. Therefore, while the 50 day has turned up and the 200 day has begun to flatten all conditions have not been met and should not be anticipated to do so until they do so. (Or as Yogi Berra would say, "It ain't over 'til it's over".)

At present, to achieve all facets of a bullish Mega Trend stocks must build on their 30% plus rally thus far and rise significantly further from here, which, unfortunately, will produce a set of overbought conditions that are unlikely to be sustained. Moreover, any further near term rally would put both indices in a sharp near term uptrend, which is not indicative of the bottoming process that precedes a Mega Trend reversal. In this regard, there are several near and short term technical analysis reasons (momentum and MACD, Slow Stochastics, respectively) that argue against stocks making such a move anytime soon.**

Investment Strategy Implications

To be clear, Sinko de Mayo does not mean Plungo de Mayo. It simply means equities have gotten more than a touch ahead of themselves and some contraction, a healthy contraction, would be best. Since articulating cyclical bullish sentiments in early March, readers of this blog acting on the views expressed have enjoyed a very healthy boost to their portfolios. Now, however, we seem to be at the opposite end of that spectrum for exactly the same reasons - only in reverse. Therefore, when both fundamental and technical analysis flash the yellow caution signal, it is advisable to, at a minimum, maintain the equity percentage of a portfolio through selective selling.

Going forward: Sinko de Mayo will likely be followed by Drifto the Summero leading to Uh Oh the Fallo. Enough with the bad rhymes. Let’s go make some money.

*click images to enlarge
**for more information on this, see yesterday’s complementary report offer. If you have not received such an offer, simply send me an email at vinny@bluemarbleresearch.com.

Beyond the Sound Bite: An Interview with David Kotok

Vinny Catalano, CFA — Wed, 29 Apr 2009 14:46:00 GMT

My interview with the cofounder and Chief Investment Officer with Cumberland Advisors includes a cautious equity outlook made more so by the potential flu pandemic, an asset allocation mix that favors high quality bonds over equities, uncertainty re earnings outlook for 2009, and a few thoughts on financial innovation.

The length of the interview is 14 minutes 20 seconds.

(Please visit the site to view this media)

To learn about "Sectors and Styles Strategy Report" newsletter and other subscriber benefits, click here.

In a Pig's Eye

Vinny Catalano, CFA — Tue, 28 Apr 2009 14:48:00 GMT

Money has no soul.

There are times when investing is a very callous business. Such times are now when investors must dispassionately assess the investment consequences of the swine flu disease. In this regard, it is advisable to recognize that the economic (and thus investment) impact of the virus as being more systemic than specific*. While selected areas of the global economy will likely be impacted more than others – such as travel, the more significant impact to the markets rests in a rising risk factor via the uncertainty element. Therefore, whenever risk goes up, certain valuation model inputs also rise thereby pushing valuation levels lower. Hence, price declines.

Investment Strategy Implications

Right now, fears of the economic impact from a pandemic are more systemic than specific. In a fragile economic climate with most valuation readings at fair value and technical analysis readings neutral at best, it didn’t take much to tip the stock market balance to the downside. The equation is rather simple – risk (in the form of uncertainty) went up, prices go down.

In a larger context and on the assumption that a pandemic does not emerge, there is every reason to conclude that stocks are close to the end of their short-term run anyway. The tired, old adage “sell in May and go away” will likely be the case this year leaving only the boldly bullish to find the fundamental valuation and technical analysis justification for what has all the hallmarks of a bear market rally and proclaim the return of the bull. Therefore, the coldhearted investment effects of the pandemic fears are more one of timing the ensuing market pause (dip now, rally a bit, make a non confirmation high, then generally flatish for the summer) rather than precipitating a new down wave in stocks.

Now, For Another Soapbox Moment

Once again, like clockwork, the media seems to have concluded that the recent stock market decline is attributable almost exclusively to fears of a pandemic. For those less informed investors, this is what I call the “media mantra” – new news always explains why stocks go up or down on any given day. The accepted media logic to this is thus – professional investors (who dominate the trading activity) with their large research budgets and extensive experience are so naïve that they twist and turn with the news cycle. It’s as though a portfolio manager wakes up each morning prepared to make important investment decisions on the assets he/she manages based on the surprise (news) factor of the day. In my three decades on Wall Street, I know of no asset manager who acts in this manner, yet the media mantra beholden to the news cycle (and, more importantly, advertising revenues) sells this bizarro logic to the general public.

Obviously, there are times when news does move markets – but not without the fundamental and technical analysis underpinnings in place. Therefore, thenews becomes the catalyst for the investment circumstances already in place. Otherwise, how does one explain that the media regularly reports that stocks rise and fall for the same reason? (ex. “Stocks rose today because of good news.” “Stocks declined today because investors ignored the (same) good news.”)

*This point is also made by tomorrow's Beyond the Sound Bite guest, David Kotok.