The Market Accentuates the Positives - 03/02/10

I feel more comfortable with shorting strength than buying strength.

 

As a consequence of the above expectations (importantly influenced by looming economic challenges in the last half of this year), I feel more comfortable in shorting strength as we move toward the upper end of the trading range, as contrasted to the many market participants (both on RealMoney and elsewhere) who appear to be at ease with buying strength.

You've got to ac-cent-tchu-ate the positive
Eliminate the negative
And latch on to the affirmative
Don't mess with Mister In-Between.

-- "Ac-Cent-Tchu-Ate the Positive," Johnny Mercer

The stock market is clearly disregarding (or putting on the back burner) the secular headwinds and nontraditional influences in favor of the near-term cyclical recovery in the world economies.

We start today's trading with the S&P 500 about flat for the year, which was the No. 1 surprise in December's surprises for 2010.

As I wrote in "Raindrops Keep Falling on Our Heads," my baseline expectations for the S&P 500's performance for 2010 remain unchanged (and I remain less optimistic than consensus):

  • In 2010, markets will have a limited memory from day to day, which can be frustrating for long-term investors but a great backdrop for opportunistic traders who are willing to buy the dips and sell the rips and for investors willing to sell premium.

    •  

  • I continue to believe that the U.S. stock market will show little movement during the first quarter despite far better-than-expected top- and bottom-line growth in fourth quarter 2009 and better sales and earnings guidance for first quarter 2010. Markets have discounted the recent earnings recovery and will now await clearer signs of sustainable growth.

    •  

  • The S&P will likely be stuck in a trading range between 1,025 and 1,150 over the next six to nine months, and I expect that we will end the year at the lower end of that range. Nine-month corrections often follow the first year of multiyear market advances (e.g., in 1994 and 2004).

    •  

  • For the full year, the major market indices will likely exhibit a high-single-digit loss (down 5% to 10%).