May 19, 2003
Welcome To the Matrix
Or the investment world that has been pulled over your eyes to blind you from the truth.

Despite closing lower on three different occasions last week, the major U.S. markets still ended the week higher. For the Nasdaq and S&P 500 this marks 5-weeks in a row of gains. It is difficult to argue that this week will be another up week, yet one never knows how investors will act inside of a dream world.


As the above chart shows, stocks and treasury yields ‘bottomed’ in unison on March 10, and continued to trace each others movements until mid-April.  However, in mid-April – as it was becoming increasingly clear that the economy was not rebounding as strongly as many expected – Treasury yields began to decline. For some mysterious reason stocks continued to rise.

Remember - all I am offering is the truth. Nothing more.

The bulls grip over the masses has become so profound that it is virtually impossible to look at bonds and conclude that stocks are due for a setback. Quite frankly, whatever happens to bonds, or so the market is telling us, this is good news for stocks. 


For example, the Dow broke into negative territory on Thursday at roughly the same time as the yield on the 10-year broke below 3.5%. However, as bond yields rose stocks rallied. With the action in bonds since mid-April in mind, the investor was told to ask:

- How can bonds be forecasting economic and stock market woe when lower interest rates feel so good?

- How can higher yields be bad for stocks if higher yields simply mean that the Fed’s number one concern (deflation) has been licked?

The truth is that in order to justify and forecast continued stock market gains die-hard bulls and momentum traders have been enslaving investors with easy reading mantras.  One such mantra that is being used is ‘The stock markets always look 6-12 months ahead’ (pay no attention to the fact that markets vision of the coming 6-12 months has been dead wrong since 1999).

As for equity investors being concerned with the bond market’s fear of deflation/economic weakness…well, ‘The stock markets always look 6-12 months ahead’.  Keep repeating this slogan until your bond market worries wash away…until you start to believe. 

Not ready to be Unplugged from the Mania

After leaving CNN at the height of the mania for Space.com, Lou Dobbs came back to the network soon after his internet dreams were not realized.  Upon encountering a mania flashback last week, Dobbs’ said that now is a good time for investor’s to start adding to their equity portfolios.  He argued:

“We've certainly seen encouraging signs in recent weeks. Retail sales hit a 17-month high in March. Oil prices have fallen from their prewar levels. Inflation remains in check. And consumer confidence surged in early April. Wall Street has responded with guarded optimism…To me, this all signals a solid recovery for both the economy and the stock market.”

One has to wonder what color the sky is in Dobbs’ world. To be sure, focusing on dated retail sales numbers, and using the moronic statement that Wall Street’s optimism has been ‘guard’ is as meaningless an analysis as ‘stocks always look ahead’. As for Dobbs’ comment that ‘inflation remains in check’ – regardless of the fact that Mr. Dobbs said this last Wednesday, (or before both PPI and CPI came in below expectations) – only someone that is out of touch with reality would attempt to reuse this 1990s mantra.  Did inflation not being in check have anything to do with stock market losses over the last three years?

Even the Bears are Delusional

Consider some highlights from ‘The bears' last stand?’:

- Douglas Fabian’s model recommends 100% cash. But if the S&P jumps above 954 he will turn partially bullish.

- Peter Eliades, of Stockmarket Cycles, says he will remain bearish until the Dow jumps above 9,149.20. 

- Richard Moroney, of Dow Theory Forecasts, is looking at 8931.68 for a D-Theory buy signal.

Astonishing – if prices rise high enough this is the time to buy? 

Yes, both bears and bulls sometimes argue ‘don’t fight the trend’, and trading with tight stops is something both animals have been known to do.  Nevertheless, let’s be honest: someone that was stubborn enough to move into 100% cash and is now planning to purchase stocks once any of the above resistance levels are breached deserves to lose all their money. Incidentally, the above individuals do not deserve to be called ‘bears’…it is sacra religious to argue that someone who is bearish on stocks wants to buy stocks if prices rally and threaten to become the greatest of fools.

What is the Matrix?

U.S. fund managers are 90% bullish, the sentiment readings (VXN, VIX) tell us that investors are complacent, hedge funds are bullish, and the Dobbs’ are a dime a dozen.  Believe it or not, the matrix is everywhere, it is all around us…

When bonds finally top out asset allocation switches will surely boost stocks (pension funds and institutions will pull out of bonds and some of this money will land in stocks). However, it is this type of logic – that ignores fundamental value and focuses on potential price – that forms a prison around the investor’s mind.

In sum, originally spoken in late 2000, the gatekeepers continue to offer the following mantra to justify their bullishness:

‘Sidelined capital is set to roll back into stocks’.

The moment you gamble away a single dollar based upon any variations of the above statement, they (Dobbs, Fabian, Eliades, Moroney, and countless others), have you in their grip…


This Week

Over the weekend Treasury Snow stated that the dollar’s decline has thus far been ‘fairly modest’. Accordingly, it is fairly certain that the ‘strong dollar’ policy originally coined by Rubin is now dead. What is not so certain is how low the dollar must fall before Snow changes his rhetoric. 

This week is a light week for economic reports, and volume should be slow towards the end of the week due to Memorial Day.  Leading indicators are due out later today (10:00 AM).

All data and information within these pages is thought to be taken from reliable sources but there is no guarantee as such. All opinions expressed on this site are opinions and should not be regarded as investment advice.
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