Thursday, April 23, 2009

Curiouser and Curiouser

Let me say first that this entry is not about the economy. The economic backdrop remains quite abysmal at every turn. Unemployment continues to rise, real estate foreclosures are soaring, states and local municipalities are starved for tax revenue. The policy makers have successfully shown great confusion and poor communication.

Having said all that, markets are discounting mechanisms which judge the future not the past or even the present. To make things even more difficult, one of the major market participants is now the US government. If that is true for the equity markets, as we know it is for the fixed income markets, US strategic activity may diverge completely from fundamental value in the markets.

The news flow is stunningly bad yet the market shrugs it off. The question is whether this is a matter of the market judging that valuation is reasonable or something more nefarious. Earlier this week traders seeking to short the S&P discovered they could not borrow shares as needed to sell short. This is unheard of. In an efficient market, the index of the 500 largest public companies in the country surely could not be cornered. Inconceivable, but for a short while true? Could someone's finger be on the scale? The conspiratorial thoughts run wild.

Technically the market is working off its overbought condition benignly. It appears that a few more days of flat trading days would poise the market again to move higher. If only news wasn't so damn bad.

In a market that is fundamentally unknowable, the only strategy is to follow the money.

John Barnyak