This market is a lot like Operation Barbarossa, Germany's
ill-fated invasion of the Soviet Union during World War II. That
attack also started against a complacent enemy.
Russia, after all, was completely unprepared and paralyzed by the
lightening blitzkrieg--just as the bulls were stunned by the
violence of the August collapse after Standard & Poor's
downgraded the U.S. sovereign credit rating. And just as the
Germans made huge advances and captured millions of enemy soldiers,
the bears have acted with impunity.
Also employing the tactics of doom and terror, bears have sold
every rally and knocked down good stocks regardless of earnings
quality or the state of the economy. They have ignored real
fundamentals and valuations to a point of delusion, dreaming up
nightmare scenarios of financial contagion--almost sickly hoping
for another 2008.
But then the tide begins to turn. After two years, the Germans were
deep in Russia soil but could advance no more. The bears started
this week in a similar boat: Their supply line of negative news was
running thin, while bullish partisans--strong Black Friday sales
and better employment numbers--took pot shots at their officers
before disappearing into the woods.
The Germans were bogged down in Stalingrad by late 1942. Instead of
attacking all at once, the Russians surrounded them with a giant
and invincible force that encircled and eventually destroyed
General Paulus' famous 6th Army.
Likewise, the bears were bogged down by the end of last week. They
couldn't get the S&P 500 to make new lows, while other metrics
of fear like the Swiss franc and the euro/yen pair refused to
confirm that the world was ending.
For the bears, this morning's announcement that central banks
around the world will print money to solve Europe's problems is
like the loss of Stalingrad. The Germans had to achieve total
victory over Russia or ultimately lose; in the markets, the doom
mongers could win only with a complete collapse of the European
financial system. It was a giant binary bet, and it's looking as if
they were wrong.
So where does that leave us? With the strongest bullish setup since
the summer of 2010. At that time, there was also extreme negativity
surrounding Europe, contrasted by persistently good economic data
and earnings. We have the same thing now, with an improving labor
market and good forward-looking data. Consider these headlines:
- Planned job cuts fall 13 percent in November from a year
earlier, according to Challenger, Gray & Christmas.
- Private-sector payrolls grew 206,000, beating the 130,000
consensus forecast, according to ADP.
- Chicago PMI surged to 62.6 in November, up from 58.4 in
October and well ahead of the 59 reading expected from analysts.
New orders were especially strong.
This follows a GDP report last week that appeared weak on the
surface but showed promise for growth. Labor costs remain low,
but workers are finding jobs. All of that paints an optimistic
picture for the future.
We're essentially getting what we've been predicting for months:
The U.S. economy is evolving back into something that's more
genuine and less reliant on government stimulus and unsustainable
The professional economists will continue to say negative things
because their models are built for another era. That made them
overly optimistic five years ago and forces them to be overly
So what's the trade? Just as the Russians built up momentum and
steamrolled to the west, I think this market has the potential to
do something similar.
That's especially true for steel and energy names, most of which
have gotten destroyed in the last year. I also suspect that
established leaders such as Apple will lag as investors focus on
other names that are far more beaten-down: Coal, industrials, and
emerging markets. "Risk on!"
Given how much we've moved so quickly, I plan to wait for the
10-day moving average on the S&P 500 starts climbing before
putting more capital to work. But that's just a short-term tactic.
I expect pullbacks will be shallow in coming weeks.
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of Nov. 30.)
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