The Big Picture For The Week of January 2, 2011

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So put another year in the books, it went by quickly didn't it? Don't they all? The S&P 500 had a good year going up almost 13% plus its dividend. No matter what is going on or what the bearish argument of the day is that is a good year. In fact most years are not as good as 2010 was; obviously very few years are as good as 2009 was. The way stock market cycles work (get a Trader's Almanac and look for yourself) is that returns are lumpy with a disproportionate amount of the positive returns occurring in just one year or maybe two.

We can debate over whether a real bull market started 21 months ago or whether this is some sort of, now large, sucker's rally but the market right here right now is up a lot and it started at a time when very few people expected and with very little fundamental justification (more on this later). Hopefully the above looks familiar to long time readers as I've been writing the same thing for many years--not in a near term predictive way but more of a this is how markets work way. Something very similar will happen on the next go around whenever that is.

It looks like we will lag the S&P 500 by a little in 2010 for having a little too much dry powder but it would be very fair to say we went along for the ride, same as last year. More important to what I am trying to do we went above our pre-crisis highwater mark a while ago which I think is a big deal.

Hopefully the post thus far is reiterating a point I've been making for a while about the difference between being skeptical versus completely missing a huge move. As I've mentioned many times before lagging a monster rally is much better than missing it. The media likes to point out that the "mom and pop" investors have missed this rally based on fund flow data with the implication being that these same people panic sold at very low levels. I have no idea how true that is but the notion of too many people being meaningfully underinvested is certainly plausible.

This is all the more difficult depending on how much Mish and Karl Denninger you read. The bearish argument is always compelling and both of them do a very good job of articulating the bear case. Understanding the bear case is very important, far more important than the bull case as it is bear case that can hurt you. But 2009 and 2010 should prove a point that are crucial to understand which is that the market can go up at exactly the time it shouldn't. You only get so many up 20% years in a decade (meaning 2009) and missing them makes the rest of the decade much more difficult.

The fundamentals in the US still stink. Many of the positives can be attributed to desperate measures taken by the Fed and the government and the actions taken thus far have fallen short of what was intended, indeed this whole thing has been made worse by trying to avoid a what would have been a pretty normal downturn eight years ago. Looking forward it is difficult to see how real demand will be stimulated, how housing can begin a natural turnaround anytime soon or how we will gain back anywhere near the 8 million jobs lost.

These things make the market relatively unattractive but are not new starting in 2011. The above were true in 2009 and 2010 and yet the market went up. We will continue to increase exposure where the fundamentals are better and where desperate action is not being taken and while I will continue to be skeptical I will stay long enough to at least capture most of the effect and will stay so unless and until the S&P 500 breaches its 200 DMA at which point we will take defensive action based on the then current conditions.

2010 was a great year here in the Nusbaum home and I hope 2011 will be too. The big event for now looks to be a pretty serious road trip this summer to Yellowstone and then over to western South Dakota and the Black Hills. We've both wanted to take this trip for a while and are finally getting to it. I hope you all have a great year as well and you leave enough time to have some fun.

The picture is from Honey Doughnuts & Goodies in Deep Cove which is just north of downtown Vancouver, BC. Not even close, the best doughnuts I've ever had, even better than Voodoo Doughnuts in Portland.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

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Roger Nusbaum

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