Sweeney Todd is dead on with his observation that "the history of the world, my sweet is who gets eaten and who gets to eat."
As far as investors go, they've been doing the eating, gourmet style, in fact, in recent months, what with the S&P 500 shooting up a stunning 40% from its March 9 low. But in recent weeks, investors have gone back on a starvation diet, as the market stalled and got bogged down in a narrow trading Dow trading range of between the low and upper middle 8000s.
So what's next? If this past week is any indication, look for a resumption of financial heartburn. The reason, and an inevitable harbinger of tough investment times: The market is starting to go down on good news, not up. Surprisingly, this is occurring just when it looks like things are getting somewhat better on the economic front and the investor mood is turning more positive.
Art Ricchold, a Los Angeles day trader who has e-mailed me a number of times in recent years, summed up this sunnier mood in an e-mail he sent me last Saturday. As a forecaster, it's worth noting Ricchold is batting 100%. I've never known him to be right. He's a super contrary indicator.
In his latest e-mail, Art wrote, "Dan, I know my forecasts to you leave a lot to be desired, but even boobs eventually get it right at some point and you can definitely bank on this one. We're off to the races. The stalemate is over and the stock market is ready to run again.
"Just look at the facts. The economy is looking better. Both Morgan Stanley and Wachovia are saying the recession will be over in the summer, Housing is getting healthier, corporations are able to raise money again in the bond market, the government is guaranteeing the stability of the banking system and the 40% rally we've had since March shows that many investors are aggressively returning to the stock market. What more evidence could any anyone want that we're in a for another upswing?"
Based on his track record, I guessed the market would soon be heading lower and I was right. The following three trading sessions after I received his e-mail were all down days, producing an overall loss in the Dow of about 300 points. Significantly, there was good news on two of those days -- the kind of news that should have pushed stock prices higher.
On Tuesday, for example, a day in which the Dow plunged 107 points following a 187-point loss on Monday, news came out of a 17% jump in May's housing starts, suggesting the much troubled housing market could be stabilizing. On Wednesday, when the Dow was tagged for a loss of nearly 7.5 points, we got another favorable revelation, notably that Goldman Sachs, Morgan Stanley and a number of other banks had begun repaying their government loans. Interestingly, the shares of both Goldman and Morgan Stanley were losers that day, as was Best Buy the previous session even though it reported better than expected first-quarter results.
The market rebounded on Thursday, thanks largely to a double dose of positive economic tidings, namely a sharp drop in the latest weekly jobless claims and better than expected results from the leading economic indicators in May. But the size of the Dow's advance that day, nearly 58.5 points was widely viewed as disappointing, given the 300-point loss that preceded it.
To a number of pros, this action suggested the market could be in for a bummer of a summer. One is money manager Raymond Stahler of London-based Stahler Dearborn Ltd. "I think the bloom is off the rose," he says. "We're seeing a June swoon in the market, but no one is saying it, and that could be a prelude to a bad summer."
"Investors," he believes, "have been sold a bill of goods that the economic decline is all but over, but that's open to serious debate, and investors buying this nonsense by increasing their equity portfolios could pay a stiff price for wearing blindfolds."
Wall Street's latest Dr. Doom, New York University's economics professor Nouriel Roubini, who called the current recession, continues to flash an economic S.O.S., noting in a recent Reuters interview that "aside from the green shoots (signs of improvement), there are yellow weeds threatening any economic recovery."
Some of these yellow weeds have popped up recently. Among them: Interest rates are on the rise; credit card defaults in May rose to a record level, which signals even growing weakness in consumer spending; industrial output has declined seven months running, the capacity utilization rate (factory output) hit a record low in May. In addition, it's noted, the number of foreclosures and abandoned homes (now totaling about two million) are still climbing, while incomes continue to decline and employers cut compensation and lay off personnel.
San Francisco money manager Gary Wollin minimizes the Dow's 300-point decline. "Nothing goes straight up," he says. "It's just normal profit-taking and it's no big deal because we're seeing more and more signs that the trend is still up."
Online investment adviser Mark Leibovit of VRTrader.com sharply disagrees. He describes the latest action in equities as unimpressive, suggesting the recent corrective action has farther to go. He also questions whether there's enough fuel in the tank to push stock prices higher. Importantly, Leibovit notes, the beaten-up financial stocks -- the darlings of the bargain hunters which have turned sour recently -- are acting like they could be in for a nasty correction. Another worry: The market is treating the dangerous events in Iran and North Korea like they're non-events.
Market guru Elaine Garzarelli also tosses in a note of caution, observing that her two-week average of bullish investment advisers is now at 65%. This is near 70%, which is her range for a correction.
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