Firm's morning comments

Markets look to open weaker this morning as investors worry stocks have come too far, too fast. The headline story on CNN.com reads, Stocks headed for sharp fall while on Yahoo Finance their lead story reads Stocks Futures Point to Plunge on Wall Street. All of it sounds a bit dramatic if you ask me, but that is what the media is about reporting what is happening not what may happen.

Certainly given we are in the late summer vacation season and stocks have had a good run in July there is the likelihood for a pullback, However is it anything more at this point than just a retrenchment of the recent rally or are we really headed for a plunge or a sharp fall ? Again it seems a bit premature and dramatic to say that at this juncture. Stocks ebb and flow. Traders overreact on the upside and the downside.

Under the surface of these silly headlines things still remain pretty much the same; liquidity is very strong, investors by and large remain under invested even after a rally of significant magnitude, sentiment while a bit more bullish is not a problem yet and valuations while richer than they were say a few months back still remain constructive.

Actually the headline that caught our eye this morning the most was CalSTRS (The California State Teachers Retirement Fund) is reducing exposure to equities into this rally. Now while we are sure there are many smart people at CalSTRS the fact that they are reducing equities actually makes us more comfortable that the bull trend will resume after a pause. After all CalSTRS like many pensions preached the passive BUY and HOLD strategy forever and got burnt in 2001/2002 and again in 2008 so they do not actually have a great history when it comes to making investment decisions. Now after all these years they are changing their investment mantra and trying to be proactive. Ironically this sounds like a reactive decision after years of making bad moves.

This headline just becomes another part of the sentiment puzzle which outlines how investors keep doubting the recovery and remain scared of stocks. While there are obvious issues about the tenure and durability of the recovery the more doubting thomases that line up the more likely the market is to confound them. There is a reason the old adage, the market exists to confound the majority and reward the minority has been around for a long time - because it typically holds true !

Expect some weakness near term - support on the S&P 500 remains below the market in the 950 area.

Look for a more detailed technical note tomorrow.



posted by Peter Greene