My Fingers Are Crossed

By David Moenning

Daily State of the Markets 
Tuesday, January 29, 2013

Good morning. Long-time readers of my oftentimes meandering morning market missive know that I consider myself a "market environmentalist." By this I mean that I am not a pure technician. Nor am I a fundamentals guy. And I am most definitely not a deep-thinking, global macro investor either. No, I prefer to focus on the overall market environment. My thinking is that if you can get the environment right, then you will, by default, get a lot of other things right along the way.

Along those lines, another key tenet in my investment belief system is that one should employ different strategies and/or tools in different environments. I know I've gone over this a time or twenty over the years, but in short, it is pretty obvious that the same pedal-to-the-metal approach that is effective in a bull market doesn't perform near as well when the bears start to growl. As such, I believe it makes sense to try to adapt to the market environment when the environment changes.

My point this fine morning is that the current market environment might be in the process of changing. Thus, anyone trying to stay in tune with the overall environment may want to start thinking about making some adjustments as well.

Cutting to the chase, the news/headline/rumor-driven environment that has dominated the market (and driven us all half-crazy in the process) for the better part of the last five years might just be morphing into something a little more manageable. Don't look now, but the wild swings of 1%-2% each day are gone. In fact, the intraday volatility in the market is just 0.42% so far this year, which is about one-half of what we saw when the various crises controlled the market.

To be sure, one month does not a trend make. And in all fairness, I need to recognize that we have seen interruptions before in the uber-volatile environment that has been with us so much of the time since the credit crisis began in 2008. I should also point out that those interruptions were rather short-lived and were usually tied to some sort of action either being taken or about to be taken by a central bank. So, I'm not sure this is the best time to run out and open up that margin account.

Yes fans, I may indeed be guilty of being optimistic here. But near as I can tell, the current market is being driven by (a) the idea that the global crises have faded into the background, (b) the recognition of the fact that the major economies of the world are improving a bit, and (c) the idea that some of the really big fund managers might starting to swap some bonds out of their portfolio in favor of stocks. As such, each and every dip is being bought these days (there hasn't been pullback of even 1% to buy into).

I know, I know the bears are just resting and there are any number of "issues" that could cause our furry friends to get busy in a hurry. And yes, I saw the close yesterday. But at the same time, I've also got to say that so far at least, the bear camp has been unable to do anything at all with the much ballyhooed overbought condition.

And frankly, the bears have had opportunities lately. Anybody watching the game closely knows that there have been intraday dips in 2013 - a bunch of them. Yep, almost every session sees at least one decline of 0.5% or more as algo-driven sell programs have most definitely not gone away. However, the difference right now is that each and every one of these bear algos is being met with either a bull algo or some good old-fashioned buying (which, of course, nowadays is executed by yet another kind of algorithm).

Maybe the intraday buying will stop on a dime when the next bad economic number is released. But another argument in favor of "the great rotation" is the action in the bond market. While the economic statistics have been improving lately, they most certainly are not painting a picture of a robust growth spurt. And yet, the yield on the 10-year moved back up over 2% for the first time in nearly a year