With less than 4 weeks left in the third-quarter, the S&P 500 is up nearly 12% for the year. That's not cause for celebration in the hedge fund community where the average gain is 1.8% or individual investors who've been sitting on the sidelines waiting for some certainty to emerge in the global economy. If anything the headlines are getting worse but the market doesn't seem to care.
"It's almost like we're seeing two different stories," says Todd Salamone, Director of Research at Schaeffer's. One story is that of woeful fundamentals. Last week investors learned that from GDP in the U.S. getting revised and this morning's PMI data suggests the economy flat-out contracted in August. In addition, the situation in Europe continues to deteriorate and China's growth story is dead.
None of which helps the bears, in Salamone's view. When stocks refuse to break down in the face of bad news, the aforementioned under-invested money mangers and nervous individuals start holding their nose and buying stocks. More cash getting thrown at the tape creates a virtuous cycle, what's called the "Wall of Worry" where stocks go higher largely because they won't fall no matter what.
Making bears crazier still is what traders call the "Bernanke Put" (formerly the Greenspan Put). By this thinking bad news is perversely good since every negative data point brings us closer to another round of Quantitative Easing. Stimulus may not work in terms of jump starting the economy, but money printing has driven asset prices higher in the past as evidenced by stocks' 20% gains since last year's announcement of Operation Twist.
Salamone says the global economic weakness means bears are dealing with a Global Central Bank "put". Most any country on earth could justify launching its own stimulus program at a moment's notice. Fighting the U.S. Fed is a bad idea; fighting the world is tantamount to professional suicide for most market professionals.
Your bottom line is that Salamone and Schaffer's are playing the tape from the longside as Wall Street begins what it considers to be the homestretch for 2012. Whether or not a further rally seems or feels "right" is almost beside the point.
