This Government-Driven Market

 | Dec 05, 2012 | 8:17 AM EST
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Giving money and power to government is like giving whiskey and car keys to teenage boys.

--P.J. O'Rourke


Since the market bottom in March 2009, the nature of trading has undergone a tremendous change, and the action over the last week or so is a particularly good example: The market is being held hostage by politicians and governmental policy. The individual characteristics of stocks matter little, and there isn't much reward for stock-picking.

In the "old" days -- before the endless government bailouts, quantitative easing and stimulus programs -- we could often ignore the big-picture issues and focus on finding good stocks. Flat market environments, such as what we have seen these last few days, would often produce some of the best trading as traders would gravitate toward a number of key stocks and create some strong momentum.

The market no longer seems to work that way. While we do have some pockets of momentum in such names as Netflix (NFLX) or Facebook (FB) it seems to be mostly machine-driven and lacks the human quality that we used to see. For the most part, stocks are highly correlated and move in tandem. They all go up or down together, and on sessions such as what we've seen in the past week, they all do nothing together. Few things stick out, as everyone knows we at the mercy of the next headline to hit.

Since the market low in March 2009, there has been an exodus of individual traders and investors. A big part of that has been due to the lousy economy, but the big reason that people aren't showing any signs of coming back to the market is the nature of the action. We are now driven by government and machines to such a great degree that the average individual feels they have no edge at all.

The thing I always loved the most about the stock market is individual stock-picking. If you find a good stock at an early point, you will be well-rewarded as the broader market comes to embrace it. That, to me, is the heart and soul of what trading is all about.

Unfortunately the focus now isn't whether a particular stock is good. It's whether a "fiscal cliff" deal is going to be made, or if Greece going to be bailed out, or if the Fed is set to continue Operation Twist -- and so on and so forth.  Your great stock pick will do little if you are on the wrong side of the news headlines.

The first step in dealing with a problem is to recognize it. Once we have done that, we need to adapt and find a way to deal with the changed conditions. For many people, the solution has been to simply bet on news flow. Right now the focus is betting on how the fiscal-cliff issue will work out. If you are correct about that, it really doesn't matter what stocks you own, as they will all move together.

My approach isn't to give up on the individual stock-picking I favor, but to be very aware that it won't matter if we are fighting the big-picture news flow. We have to be on the right side of the news, and then maybe we can produce additional returns by finding the right individual stocks. I'd prefer not to be overly focused on market timing, but we really have no choice.

This morning, we will once again have to deal with this "fiscal cliff" issue. There was some positive news about continuation of stimulus in China, and Europe is seeing some green, but the endless fiscal-cliff debate will continue.

I'll be talking more about this issue of how the market is mainly government-driven. Simply being cognizant of that fact can help us deal with it more effectively, and I'm still hopefully that the quaint old notion of stock-picking will return to being favored.

We're seeing some positive action in the early going, but will remain very challenging to put much money to work.

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