Bulls Or Bears: Who Has It Right?

I've often remarked that retailers and financials are trading like a recession is already on, but industrials, techs and materials are trading like the global economy may be slowing slightly but is still holding up...who's right? The odd thing is that both may have it right.

The consumer is a bit weaker, housing is in a recession, but those factors are already priced into the market. The market, however, anticipates action by 6-12 months. And the action in the global stocks--the techs, industrials, and materials--suggest that while nominal GDP growth may slow down globally, the basic growth story is still intact.

In the short term, the most important point about market sentiment is how bearish many traders have become. We often get modest midday rallies (like yesterday); this is largely due to the market moving into oversold territory. As we all know, markets can stay overbought or oversold for long periods, so the fact that we have seen snapbacks like this shows there is buyers as the market drops to more attractive levels.

Longer term, bulls point to several factors that make a case for equities:

--stocks remain the highest yielding asset class in the world. The 10 yr bond has a paltry yield of 4.3%, but the earnings yield for stocks is roughly 8%. Take a look at some big stocks: Citi, for example, has a 4.75% yield...above the 10-year Treasury. The last time that happened was 1991 or 1992.
--the dollar decline is bullish for U.S. stocks
--stock market is at trough multiples (S&P at 15x forward earnings estimates)
--Fed cutting rates is not the time to be out of stocks

Many in the private capital business are realizing that the asset class is for sale. That's why you're hearing so much about funds raising money to buy assets in places like (gasp!) the debt market. For example, Carlyle Group is reportedly considering launching a fund dedicated to buyouts of financial-services firms.

The bottom line, at least for bulls, is that unless you believe a serious global recession is upon us, this is a good time to be looking at stocks.

What kind of stocks? Look for true organic growth stocks where earnings are expected to continue to grow, with multiple expansion. Who fits that bill? Technology, which has underperformed for nearly seven years. That's why there's been so much interest in the group recently.

As for financials, the case may be weaker, but a case can be made. Look at the positive slope in the yield curve. It's true that many banks have learned to make money by charging for services rather than collecting interest from their depositors and card holders. But don't kid yourself: banks traditionally made money by playing the yield curve, now that it's back they are ecstatic. And now that a lot of their competition is going out of business, they will have pricing power.

Questions? Comments? tradertalk@cnbc.com