People are getting skittish about this rising market. Index puts are more popular than calls now, indicating that people are hedging against a loss while buying into the rising tide.
Should they fear? The VIX volatility index doesn’t think so. It dropped below 10 last week, the first time it’s been that low since December 1993. That means options traders don’t think there’s much chance of trouble ahead.
As of Friday, there’s a new fear around the dollar’s imminent demise. A dramatically lower dollar would drive up the price of imported goods, thereby putting pressure on the already shaky consumer, thereby putting pressure on the ever-doubted health of the economy. A higher interest rate would make dollars appealing again, but the stock market doesn’t want to see that.
This Chinese puzzle box is hard to figure out. Is a lower dollar good for the U.S. stock market because U.S. multinationals will bring home bigger profits? Is it bad for the U.S. stock market because American consumers will be driven to the poorhouse by expensive Sony big screen TVs? For now, this fear simply bears watching because it’s been lurking for the better part of two years with no reportable consequences.
As for me, I’m hoarding yen for the possibility of a dollar meltdown. I’ll sell some to you for, oh, 90 per dollar? Anybody reading this is too smart to fall for that, unfortunately, but if you have any in-laws who irked you last Thursday whom you’d like to fleece, give them my email.
The U.S. economy is not doing badly. Consumer spending will probably proceed in modest fashion from here. It will not crumble, as the fear mongers are mongering, because wages are rising along with the number of jobs available.
Compared to European markets, the S&P; 500 has underperformed lately. Fund managers have indicated that they’re overweight the euro zone and underweight the U.S. This bodes well for U.S. markets because when that situation rebalances, inflowing capital will send the U.S. market higher.
Finally, all the merger & acquisition and stock buyback activity is providing a message from the smartest money managers: stocks are cheap. This year is not over yet, but it’s already the biggest in history for M&A.; Companies around the world are shelling out hard cash to buy other companies, and they do that only when they think the price they’re getting is a bargain. Similarly, companies are buying shares of their own stock back from the market, another thing they do only when they think it’s cheap.
Thus, I’m bullish. We could get a sideways or slightly down market in the near-term, maybe from the declining dollar story, but you should use such an event to put more money to work in the stock market, not less. This is a time to be getting in, not out.
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