This is how technician, Ralph Acampora, frames the type of performance that might be ahead for the Russell 2000 and Nasdaq composite indices over the next few months. (Acampora interview–5/15/14) There is a part of me that finds his thinking very plausible, as the stock and bond markets have been acting very strangely of late.
Black Swans coming in for a landing?
This is a very tough post for me to write, as I don’t want to be too cavalier about the possibility of a real market meltdown due to some “black swan” event. On the other hand, I don’t want to give too much credence to the irrational fears (the wall of worry) that have plagued this market all the way from its 2009 lows. In my opinion the predominant emotion carried by most is ‘distrust’ and, at the extreme, ‘fear’. Save the bubblet in the momentum stocks (social media, tech and biotech), at no time have we seen “irrational exuberance” rear its ugly head. And, if you remember, when former Fed Chair, Alan Greenspan, first coined the term (Dec 5, 1996–S & P 500–744.38), the bull market of the 1990s had a full three and a quarter years left to run.
During that time in the late ’90s, we had some “black swans” glidding into the pond: the Asian Financial crisis of 1997 (Dec, 31, 1997–S & P 500–970.43), Long-Term Capital Management [LTCM] and the Russian Debt Crisis of 1998 (Dec, 31, 1998–S & P 500–1229.23). All were very scary, potentially market life threatening events, at the time…precipitating short term slides.
The way the bond market is acting right now, with investors willing to accept no principal risk (willing to take a sub-2.5% return on a 10-year U.S. Treasury) is a bit disconcerting. Maybe one of the very rare “black swans” is swimming in the pond; and, as usual, we will not see it until it is too late.
Having said this, we past these three previous 1990’s crises successfully (not to mention the more horrific challenges we face in the 2000s) with the end of the decade seeing the S & P more than double the level it stood at when Mr. Greenspan first cautioned us about “irrational exuberance.”
By the way, all three events were met by bailouts. In the case of LTCM it was a Fed-supervised bailout. The International Monetary Fund (IMF) supervised Russia and Asia. Although I’m not prepared to argue for or against bailouts in this post, they have become de rigueur and are likely to come about as a response to future “black swan” events. “What’s past is prologue.” And, if past behavior of this nature leads to inflation, it will benefit the owners of asset and hurt those who lend money (the 2.5% 10-year crowd).
“It’s a good thing!”
I guess my message is that our current skittish market, eerie as it seems, is normal and will be resolved. If there is a “black swan” out there, it, too, will be resolved after some pain in equity prices. The great thing about our current bull market is that we appear to be no where close to “irrational exuberance”: and, maybe we are a lot closer to irrational fear. And, like Martha Stewart used to say, “It’s a good thing!”
What do you think?
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