I’m sure most of you recognize that once market sentiment gets extremely bearish, we rally powerfully. Well this is just the way markets work; they tend to revert to the mean. The S&P downgrades U.S. debt and people think the world is ending. Of course after markets rally people totally forget how fearful they were when the downgrade news came out. The S&P totally blew the housing crisis and their views are just not that important in the grand scheme of things. Their understanding of the crisis is limited, and if their recommendations were actually implemented, we would be in a lot of trouble.
Treasuries have fallen as stocks have risen, and this inverse relationship will be powerful in the next cycle. If you are bearish on the debt situation in the U.S. and U.S. Treasuries, then you almost by definition have to be a bull in stocks. Bonds are probably the number one variable that will drive stocks to new highs.
Better than expected retail sales figures may provide stocks the boost they need. The 75-day moving average capped the rally a couple of days ago, and it will be the next critical level for stocks. Investors will get bullish again and in their eyes the worst will be over (for the 100th time). After a period of relative calm, it will be time for another sharp sell-off. I’m not too sure we are at the ultimate base from which stocks will rally- there still may be some more downside.
These short-term fluctuations are important only if you are a trader. If you are long-term investor, they are more or less immaterial. The fact remains that Treasuries have been in a bull market for 30 years and it is time for them to enter a bear market just on a cyclical basis. The debt crisis is just icing on the cake on a trade that should be obvious to everyone, but for some reason isn’t. In the similar vein, stocks have consolidated for over a decade, and they are building up energy for the upside. Short-term fluctuations shouldn’t cause you to lose focus of these larger themes.