By David Moenning
Chief Investment Strategist
We need to call a spade a spade here. So many analysts, managers, and pundits come on TV to tell us - with absolute certainty, by the way - (a) what the market is going to do next, (b) what will happen next to the economy, (c) what the Fed will do and when, and (d) what will happen in Europe. However, the bottom line is that nobody can predict any of this stuff because all of the above intertwined as well as tied to data that we don't have yet and events that haven't occurred yet. So, as investors, we all need to collectively stop pretending we know what is going to happen next.
I am a firm believer that the key to this game over the long term is to keep your accounts positioned on the proper side of the important trends as much as is humanly possible. The problem is that too many investors have unrealistic expectations about this concept. So here's a tip: You can't be in the market every day the indices are up and out of the market (or short) every day they are down. No, the best you can do is to try and get the big moves right.
Speaking of getting the moves right, the market once again finds itself joined at the hip to the goings on in Europe (yes, for the third summer in a row). But instead of pretending that we know what is going to happen in Greece, in Spain (EWP), in Portugal, and/or in Ireland (EIRL - btw, the Irish vote on the new EU referendum on May 31), we are going to attempt to understand what IS happening across the pond on a daily basis and do our darndest to interpret how the market reacts.
On that score, while an oversold bounce was to be expected after the extended bout of selling seen recently, we feel it is worth noting that the sudden bounce was not triggered by any specific news story or data. No, it appeared that stocks began to rebound on the idea that France (EWQ), Italy (EWI) and some others are going to try and present a united front at today's "informal" EU Summit in order to try and get Angela Merkel and the rest of the Germans (EWG) to agree to something besides more austerity.
Thus, we will submit that the recent improvement in the SPX can be attributed to the hope that France's new President will be successful in his pitch for new growth strategies (which, of course is econospeak for borrowing money you don't have and spending it on stuff to stimulate growth) in the Eurozone (EZU) and/or the introduction of jointly issued Eurobonds. The only problem here is that the Germans (who would be on the hook for the majority of any new Eurobonds and would see their own borrowing costs rise) are unlikely to suddenly and without warning flip to the other side of either one of these issues.
However, as long as traders can make the case that any of the above is possible, they can pretend that things will be fine and that it is time to buy - or at the very least, cover your shorts. They can then talk about the great values that have been created by the $100 decline in AAPL (ok, that one might be true) and all the other trader fav's. And since they are able to predict where the economy and earnings will be in the coming quarters, they can make very convincing cases that investors need to drop what they are doing and start buying what they are selling... like Facebook (FB).
Or... We could all simply stop pretending that we've got a fully functional crystal ball and instead work as hard as we can to manage risk on a daily basis and try stay on the correct side of the big moves. But then again, you don't get a lot of headlines or TV time without all the pretending!