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WHAT’S DRIVING THE MARKET?

Market participants are extremely baffled by the 8.5% bounce in stocks in the last week.  This morning David Rosenberg addressed this topic:

“We’ve been asked repeatedly how the stock market has managed to bounce off the nearby lows with such veracity. Especially with the ongoing weakness we have seen in the incoming U.S. economic data due to the fact that the retail investor still refuses to participate and is solely focused on income-generating strategies. The answer is that the market may have been on the receiving end of another few jolts of liquidity. M2 money supply has expanded $38.5 million in the past two weeks and the M1 money multiple has risen from 0.839 to 0.862.

When we go to the weekly data from the Fed, we see that “trading assets” on commercial bank balance sheets expanded to $325 billion in the past two weeks from $297 billion. And, when we go to the Commitment of Traders report, we see that there has been a big swing in the net speculation position on the S&P 500 “E-minis” on the Mercantile Exchange (futures and options) to a net long position of 28,172 contracts from 15,155 net shorts just two weeks ago. That’s a big part of the bounce-back — prop traders and short-coverings. Nothing fundamental here, as far as we can see.”

See, this is the problem with economists.  They’re not traders.  They don’t know how to think like portfolio managers do.  The trigger for this rally was clear – State Street triggered a rally that made every short question whether they really want to be short into earnings season and it made every long (who has been looking for an entry point) wonder if they should not get long into what was likely going to be another good earnings season.  On that day I said:

“While banks are likely to report “better than expected” results (due to dramatic estimate cuts) they are unlikely to do what the rest of the market has been doing (cutting guidance or providing tepid guidance – because they don’t provide guidance to begin with).  That could be a bullish near-term theme for the banks.“*

I continue to believe this recent rally is a case of the banks dragging the rest of the market higher.  Anyone who owns banks has to feel pretty good about the cards they’re holding heading into bank earnings.  Estimates have been trashed in recent months and banks won’t guide lower (because they don’t guide).  So keep tabs on the next few weeks of earnings season as strong earnings are likely being priced in as we speak.  But more importantly, expect the weak economic data to take center stage as we get deeper into earnings season and bullishness returns….One thing Rosenberg nails is the simple fact that the macro outlook has not changed one iota.  For now, stay nimble.

*For what it’s worth I sold my bank position this morning….

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