"A round man cannot be expected to fit in a square hole right away. He must have time to modify his shape." – Mark Twain
The Bulls have grabbed the momentum by the horns and seem poised to ratchet the trend up a notch or two. As long as investors are convinced the EU sovereign-debt beast has been momentarily tamed, the next blast of positive domestic economic news could carry the equity market above its pre-subprime mortgage crash levels.
Provided, of course, that the next U.S. news cycle blast accentuates the positive.
Exactly how much momentum did the equity market assume last week? Quite a bit, as Friday saw the Dow Jones Industrial Average (DJIA) hit its highest level since May 2008, ending the week at 12,862, up 1.6%. The benchmark S&P 500 Index (SPX) performed even better, rising 2.3% over the course of the week's five sessions, which gave SPX a fifth week in a row of gains. And finally, the Nasdaq Composite Index (COMP), which has been on its own five-week tear, posted a 3.2% rise this past week.
[Related -The S&P 500’s Worrisome Downturn In Drawdown]
For many investors, over and above these impressive stats, was the fact that 2012 is off to one of Wall Street's fastest starts in 25 years. Year-to-date, the SPX is up 6.9%, and sits comfortably atop its 200-day moving average, as well as the psychologically important 1300 level. The 1300 mark could now become a strong level of support for the SPX, providing for a blast-off point for the next leg up.
Two key elements occurred that allowed the uptrend established this year to continue. First, the U.S. Labor Department reported Friday morning that almost a quarter of a million jobs had been added to the economy. This number was better than many economists had anticipated, and had the dual effect of dropping the unemployment rate to 8.3% and prodding investors to buy stocks after the report was released early in the trading day.
[Related -Deflation Warning: The Next Wave]
The other element that occurred or, more accurately, didn't occur, was the fact that nothing unexpected emerged from out of the EU. This is hardly to say that a wave of good news emerged from the beleaguered euro-zone. It was more a matter of there being no news that shocked investors.
So are investors now willing to shrug off EU concerns and focus on the current round of good domestic news? Well, they are willing, of course, but events could shift that sentiment quickly, despite the current Bullish momentum.
What could some of those events look like? For one thing, the Greek government seems to be thumbing its nose at the demands being made on it by the European Central Bank, the International Monetary Fund and the European Commission, collectively referred to as the "Troika." What the Troika wants is for Greece to sign off on a number of labor and fiscal reforms in exchange for receiving yet another round of loans necessary for Athens to meet some of its debt obligations.
If the Greek government fails to reach agreement with the Troika, it will have a domino effect of dark circumstances that investors may currently be convinced has already been baked into the market.
Sentiment, however, can shift on a dime, and even a New Year's worth of momentum could find itself running smack into a new wall of concern, followed by a reversal of that very same momentum.
What the Periscope Sees
With the EU crisis hardly resolved and the VIX (Chicago Board Options Exchange Market Volatility Index) sitting at a seven-month low, traders and investors alike should view this moment as an opportunity to latch on to what may be considered some severely discounted insurance.
It makes sense to ride the trend-train on its continued trajectory, but makes no sense to assume that all the potential issues that could arise from a euro-zone collapse has been adequately addressed.
Consider buying a volatility hedge via the VXX (iPath S&P 500 VIX Short-Term Futures ETN), one way to play the VIX right now.
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week's "What the Periscope Sees."
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.