The Market Is Not the Economy

 | Sep 23, 2011 | 10:30 AM EDT  | Comments
  • Comment
  • Print Print
  • Print

I received a comment Thursday from a reader who made a great point about the economy and the markets:

"Yesterday you said the (market) was (at) potential breakout levels (and) today it's (at) support levels. If you are a technician that's fine but the macro data supports recession and lower prices not higher ones."

It's true that I pointed out that we'd reached a key resistance level on the S&P 500. I'm irritated with myself because I didn't close out all of my long positions at that point. Think about it: We'd had a tremendous run up to the 1220 area on the SPX, and huge event risk was looming in Fed chief Ben Bernanke's announcement Tuesday afternoon. In hindsight, what a perfect time that would've been to take profits.

Why keep the trades open at that point? You could say that Bernanke surprised me by neglecting to provide additional stimulus to the markets beyond Operation Twist. As you can gather if you've been reading me regularly, I'm not a big fan of these stimulus programs. I don't think they solve the underlying problems, but treat the symptoms instead. 

While I'm not a fan of central bank intervention in the markets, especially if it leads to the dilution of the currency, at the same time I have to deal with reality. Prior to Tuesday, everything about Bernanke's actions, past and present, indicated to me that further stimulus was on the way. That's the way I played it, but I was wrong.

When our reader states that the macro data supports recession, I can't disagree. But the economy is not the stock market, and you can't simply assume that a weak economy translates into lower stock prices. Just think back to early 2009: the SPX traded in the 660 area. Two years later, the SPX had doubled in value due to a raging bull market.

If the stock markets were synonymous with the economy, one would have to assume that during the period from March 2009 to March 2011, the U.S. economy made a complete recovery. Yet during this time, housing prices continued to fall and the official unemployment rate remained high. You'd be hard pressed to find anyone in the U.S. who considered those two years to be a time of economic renaissance. In fact, if you'd simply bought and sold stocks based on the state of the economy, you probably would have been short the SPX as it doubled in value.

Yet the chart does look precarious; we've been focused on support of 1123.53, and that support has served us well. The next level down is the recent intraday low of 1101. If the SPX goes below 1100, and especially if it closes below 1100, then a bearish scenario becomes much more likely.

Source: StockCharts.com

I'm not a perma-bull. If support breaks, I'll become bearish. But if I do become bearish, I won't become a perma-bear. Perma-bulls and perma-bears view each other with distain, but I view both as equally silly. Having a drastic view in either direction can be harmful.

Everyone has an opinion, including me, but I'm not married to my opinions. As a trader, I've had to admit many times that I was wrong. That's probably the only thing that's kept me in the game for so long; I've seen too many people go down with the ship because they believed too strongly in either the bull thesis or the bear thesis. Markets are simply too unpredictable. I'm trying to be objective, so I'm going to let the markets decide for me whether my next move is bullish or bearish.

Columnist Conversations

FB is trading $75.88, up 6.4% with IV30™ down 33.4%. This is a follow up to the post yesterday: FB - Ear...
Bloomberg reporting around 2pm ET Zillow for Trulia...Z declined to comment, TRLA won't comment on spec. Few t...
With just over 40% of S&P 500 components having reported 2Q earnings, 158 of them or about 77% have surpri...
DHI is the biggest loser in the S&P 500 today. The homebuilder is off over 10% on its heaviest downsi...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.