Friday, October 15, 2010

Concerns Growing with ALL this Good News and Happy Investors

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

The financial markets have continued higher, almost unabated since the secondary low we saw in August. I’ve written several pieces about the short and intermediate-term direction for stocks since I turned positive at the July bottom, Time to Cheer or Jeer? and Explode Higher or Implode Lower? to name a few. Although I am more than pleased to get one right for our clients, even during that tenuous week in August to test our resolve, it’s hard to be as rosy after such a big rally.

Third quarter earnings season has just begun and so far, companies are not disappointing. Intel, JP Morgan and CSX are just some of the key reports that came in better than expected. Ben Bernanke & Co. have repeatedly stated that they are ready to take further action (print another trillion or so but who’s counting) if the economy sputters. So all should be well and good, right? Not exactly. Isn't this the same behavior we saw in April as the stock market was peaking before the 15% correction?

While I am not expecting an imminent collapse, my concerns are growing that stocks have rallied hard and fast for months right into earnings season. It makes you wonder how much of the rally is based on good reports that are already baked in the cake. Historically, we've seen at least a sharp pullback within a few weeks of good earnings news after such a dramatic rise.

Investors who strongly disavowed the rally started to believe late last month and that trend is continuing right now. It seems like most of my market emails are from investors who were negative, negative, negative, but are now turning positive after being beaten up for too long simply because price has gone strongly against them. I remember all too well how difficult it was being long and wrong during a correcting market. When bears throw in the towel and start buying, the end of the rally usually isn't too far off.

The popular indices like the Dow, S&P 500 and NASDAQ are getting ever closer to the April highs, which were the highest levels of 2010. In late August, when my forecast looked like a total dud, I offered the best case scenario for the bulls in this very early morning CNBC interview. 1200 - 1220 is almost here on the S&P 500 and while that could provide some short-term fireworks, I would have to believe it to be a better selling opportunity than anything else at this point.

The mid-term election is just weeks away and it certainly seems that along with earnings, some of this rally is based on a certain outcome in the election. If the Republicans do not take control of the House, forcing political gridlock, I imagine some hot air will be let out of the market in short order.

In 1994, when Newt Gingrich & Co. swept the Democrats in the mid-term election, it took the market another month to gather itself for the epic ride higher in 1995. Back then, we did not see a major rally into the election so for sure, some of the early 1995 move was based on the delayed election resolution.

Today, although much in the financial markets seems sanguine, I continue to worry. As I've mentioned before, the higher markets go, the more I worry. One good cleansing that restores some fear will go a long way. Even though we are very long, I would hate to see the market further accelerate to the upside in a final and terminal move that would be very difficult to exit at the right time and set up 2011 in a very bad way.

FYI, I am scheduled to be on CNBC's The Call today, Friday, October 15, at 11:05am.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

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