Last week, I claimed that the market is not yet overbought and that any corrections in the short-term will most likely be shallow. Without some specific and new catalyst, traders and investors, especially the ones who missed this latest rally, will treat pullbacks as golden buying opportunities. Moreover, I noted how, as expected, many analysts have interpreted the current bullish period as a prelude to even greater gains next year. So, I took more than the usual interest in listening to the contrary opinion of money manager Doug Kass as he argued on Fast Money that the market is over-optimistic.
Kass had some good points that should be posted on every trading monitor. However, for all the foreboding in the bearish tone, Kass’s forecast for 2011 is a market that ends the year within +/-3% of current levels. While the S&P 500 has only experienced such a performance six times since 1900, this hardly seems like a forecast to fear. If the market does trade sideways for the year, it will be a healthy consolidation of the 89% in gains from the March, 2009 lows. Such a setup will also create a trader’s playground given the well-defined highs and lows that would signal switches from bearish to bullish positions.
The rest of the panel on Fast Money did not provide much of a debate to Kass (in fact, they generally seemed afraid to debate him too strongly). The main objections were 1) the headwinds will not be as strong as Kass expects, and 2) the trend is still our friend and the current trend remains up. The trend is indeed up for now, and only a violation of the last low will change the current bias from bullish to bearish. I still think the short trading range in November carved out a relatively firm and sustainable base of support. A retest of that support would be a 7% correction from current levels, a worse outcome than anyone on the panel seemed prepared to consider, including Kass.
I posted the video from Fast Money below. Here are Doug Kass’s main concerns about the market that suggest the market’s rally is almost over:
- Current rally is just recession fatigue.
- Foundation of growth faces secular headwinds: higher marginal tax rates, fiscal imbalances, a housing market plagued by bulging inventories, political gridlock, and a structural increase in unemployment.
- Economy faces cyclical headwinds: increase in commodity prices, especially oil.
- Corporate profits are at 57-year highs and subject to mean reversion; companies will experience less top-line growth.
Be careful out there!
Full disclosure: no positions