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 leverage.
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 pessimistic now.
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.)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.