The markets continued to grind higher during the week, although headlines would have you believe it was more exciting than the minuscule realized weekly gain, pointing out that on Wednesday, each index — DJIA, S&P 500, Nasdaq — marked a new high in unison for the first time since 1999.
Volumes were light as vacation schedules kicked in post the usual better-than-feared earnings season; the resetting of expectations so much more important than actual growth.
This was nowhere more evident than in the price action of the retailers which, for the last few quarters, have continually missed estimates and lowered forward guidance to a level they could surpass, squeezing shorts and driving the share price of Macy's and Kohl's higher on the day by 15 percent or so, an abnormally large move and arguably to levels of full valuation, particularly since underlying fundamentals are still deficient. There is no shame in employing this reset tactic since every financial instrument trades on expectations, although the most astute managements usually don't take numerous quarters to reset unless their businesses are deteriorating very rapidly, either of which is a cautionary signal.
Sometimes I wish I never knew how the sausage was made; then I would be a lot less concerned about the markets, believing that price is truth rather than just a moment in time, a sweet siren of temptation attempting to lure me into the momentum of further gains. But decades of being in the business and speaking to people with their years of experience keeps me from going all in. But in I am, because we will continue to move higher — for now — and I do see attractive issues. Then again, we are all prisoners of our experience, striving to forecast how this will play out, and our personal history tells us to be concerned. You see, there is no playbook for this market, not for stocks and not bonds and not currencies nor commodities. Who would have thought that long-duration gilts would move 50 percent in a month — that's sovereign debt, not a biotech stock! Clearly, something is amiss — or is it? Will this be the playbook that is written with the benefit of hindsight 10 years from now?