Rocky Balboa and the Stock Market
Dec 15, 2010
Posted by Jody Eisenman | Filed under Uncategorized
In the Oscar winning movie Rocky, there is the big fight scene with Rocky battling Apollo Creed. Rocky is taken a fearsome beating, but still remains on his feet. Near the end, the fight announcer exclaims, “What is keeping him up”? When I look at the stock market, sometimes I feel the same way. The market has shrugged off every piece of weak economic and political move inexorably higher. In the last two weeks, we’ve learned the following:
1. The housing market, which had a major effect on the decline two years ago, continues to be weak. The Case-Shiller index has dropped in each of the last three months. There is probably two years of unsold inventory left and it is estimated that over 25% of all mortgage holders are under water, meaning that their mortgages are larger than the equity in their homes.
2. The stated goal of QE2 was to lower long term interest rates. However, since it began, the ten year treasury yield has actually risen substantially. Since November 4, the yield has gone from 2.53 to 3.49. This is pretty incredible considering the circumstances. Generally, as bond yields rise, bonds become more attractive via a vis stocks.
3. Today, the Fed announced that the economic recovery continues to be too slow to bring down the unemployment rate. As such, they are going to continue their purchase of long term treasuries. There was absolutely no mention of the rise in rates since the Fed started the purchases.
Despite all this, stocks continue to melt higher. For the month of December, the S & P 500 index has risen every day except one, when it dropped a miniscule point and a half. The index has now risen over 60 points for the month. In addition, it seems that every “big name” analyst from the large banks are forecasting higher prices going forward. Investor sentiment indices are at or near record highs. Although this isn’t a perfect indicator, markets tend to be at or close to highs when this happens. As such, I have been peeling off positions as the market rises. Could I be wrong? Sure. However, I personally think there is more risk than reward short term, and I would feel a lot better about equities if we got a pullback.
