How Stocks Are Reflecting the
Structural Excesses of the World

It would seem that the stock market has just been a reflection of the structural excesses in the world that we live in. Mitchell explains.Now that the S&P 500 Index is below 1,300 again, it’s time to worry. This index has been trading in a tight range ever since the beginning of the year and it hasn’t been able to break out past 1,350 in any meaningful way. On the support side, 1,250 looks like an important technical barrier; if it’s broken, it would not be a healthy development for stocks.

The S&P has already broken its 50-day moving average and is poised to break its 200-day moving average at this time. Now, it’s important to remember that these statistical indicators are just those—statistics. Last summer, the S&P broke both moving averages, consolidated for three or four months, and then reaccelerated to its current level. Just looking at the chart of the index; it does look like it’s rolling over a little bit. At the very least, the trend shows that the market looks tired, which is a word I like to use to describe a lackluster, trendless stock market.

Equities seem to be maintaining their trading correlation with the spot price of oil. That remains a good, short-term indicator that really is reflecting the current state of investor sentiment. One thing’s clear; it’s a difficult time to be stock picking in a marketplace that’s so unsure of itself. Investors want to be buyers of stocks, but the economic data so far aren’t playing ball. This is why higher-yielding, large-cap stocks should continue to outperform, as institutional investors buy yield in order to generate some sort of return on investment.

As odd as it may seem, the stock market’s actually been in a “consolidation” for just over 10 years. We had a huge bull market in the 80s and 90s, culminating in the spectacular wealth creation of Internet stocks, followed by an equally spectacular correction after the bubble. Stocks recovered from the speculative excess in the technology sector, only to see the market completely melt down again due to the excess created by subprime mortgages. Again, the stock market recovered from this debacle, and it is now having to deal with the excess of sovereign debt. All of these events contributed to today’s weak economic growth. Somehow, it would seem that the stock market has just been a reflection of the structural excesses in the world that we live in.

The biggest worry in global capital markets is always currencies. When currencies start to experience big moves, entire countries can easily swing into major recessions. Right now, the Japanese yen currency is trading right around its record high against the dollar. The high valuation of that currency is hurting the very economic recovery that the country needs after the recent earthquake disaster.

Unknowingly, big currency moves can wreak havoc on individual pocketbooks. High levels of sovereign debt and debt ratings do matter to the marketplace and this is why investing in gold seems so attractive. As we all know, everything in financial markets involves risk. The key to outperformance is to always be aware of it and manage it as the marketplace changes. Right now, the equity market is not looking very healthy at all.