A disconnect between Wall Street & Main Street?

For a year, market participants said that there was a disconnect between the perma-rally in stocks and commodities versus the economy. Stocks kept rising while the economy was barely stabilizing. But the game all along was to get the capital markets to convince the rest of the world that the economy was getting better. It was the great engineered rally–The Royal Scam as I liked to call it. I never thought it was true but cautiously played along. I was particularly fond of the market prognosticators that made appearances on Business TV saying how the stock market was telling us how well the economy would be in the future. Now, the vast majority of stocks have now pulled all the way back to where they were last July and everyone is miserable and bearish.

Is it possible that the stock market is now disconnected to what is really going on in the economy? Sure, real estate really sucks huge and much of the massive engineering job by the FED and Treasury is done for now too. The recent government statistics released show a downtick in many of the economic indicators. But is that so bad? Must we grow 4% every quarter? It’s a rhetorical question.

The stock market continue to suffer throught this vicious correction. And it’s no wonder, look at the 14 month move up. To the extreme! We are now paying for it, but we will also reach extremes on the downside. I doubt we will test the lower reaches in the 2009 lows, but certainly some individual equities will.

The market really went to the extreme yesterday with some of the worst market internals in history. But it means nothing in our one-way market. We can just as easily bounce with opposite internals. But again, look at your calendar and figure out why the action is so extreme. Is it because we’ve reached the end of the world? I doubt it. I am still looking to accumulate my ideas as we find our footing again, but before the next rally.

Look at your calendar. It is the end of the month/quarter/half. What gets done? Portfolio adjustment because its been a generally shitty quarter.

Is there deflation? Yup. Are we Japan? Yup. Are things tough? Yup, they never got much better for anyone except the recipients of the cash–the banks.

Will the government stop last year’s plan? For the moment they have. But if you think the game is over, you would be wrong. I’m not telling you to bet the ranch, but I bet we see SPX 1090-1100 before we see 950…

The 10 year Treasury (TNX) has yet to go into panic mode. That happens below 3%. But as I’ve said since 2007, we are Japan and mortgage rates will eventually be 2-3% before this cycle is finished…

This chart was drawn on June 8, 2010…

Here is a little chart-art of the SPX daily. Maybe it is, maybe it isn’t. Either way, the noose is again tightening around the necks of traders and investors are just too scared to do much of anything.

Haven’t you heard? There is a renewed 1979-style malaise, so drop your socks and sell your stocks…

Just kidding…

The bottom line for the markets is that we continue to bounce around, seemingly flailing in each direction without any real resolution. But I believe we are doing exactly what we should be doing from a technical perspective and I expect the flailing to continue. We may breakout or down marginally several times through the course of the year and that will serve to swing the market indices from support to resistance. It will continue to be very tough to choose market direction for longer than a week and perhaps it is finally time for real stock picking instead of concentrating on market proxies. Maybe I’m being anachronistic but there is always a backlash when things get too extreme and the market’s reliance on near-term direction and computerized trading could be ready for a change.