Do The Bears Have a Point (or Three)?

Good Morning. To be sure, those seeing the glass as at least half empty have had a rough go of it this year. And truth be told, it has been about eight months since the bears have been able to put any real fear on the table. In short, the S&P 500 is a little less than one percent away from sporting a 20 percent gain on the year while the NASDAQ, Midcap 400, and Smallcap indices all enjoy returns north of 20 percent so far in 2013. So, if you have been one of the folks espousing that end of the world is going to occur again this year, it's been an unpleasant ride.

However, as I may have mentioned a time or twenty in this space, two of the most important qualities an investor must have if they hope to succeed at Ms. Market's game over the long term are objectivity and flexibility. So, while it has indeed been enjoyable to ride the bull train for the majority of this year, history suggests that it is probably a good idea to keep an eye on the exits these days - just in case somebody decides to pull the punch bowl from the party prematurely.

While we are indeed card-carrying members of the market optimists club at our shop (remember, we DO live in the greatest country in the world and the stock market DOES tend to move higher over time), experience has taught us that it can be beneficial to take a peek at your opponent's cards once in a while. Therefore, we thought it was about time to take a stroll on the dark side and see what our friends in fur have to say for themselves.

One thing you can say about the players on the bear team is they are nothing if not persistent. Sure, stocks are up big this year and if history is any guide, the indices could easily tack on some additional gains before the bubbly begins to flow on 12/31/13. But anyone who has been at this game for any length of time knows that all good things come to an end at some point. And it is this thought that keeps the sky-is-falling bunch coming to work each day.

In chatting with the captain of the bear team last evening, I was told that his club was banking on two things to turn this game around - the TT and/or the BB. Impressed that he had already created acronyms for his thesis, I half expected a PowerPoint show to commence at any moment (after all, you can do an awful lot with a smart phone and a white wall these days!).

While there was no multimedia presentation forthcoming, the leader of the bear brigade was emphatic that it would be either another "taper tantrum" or "budget battle" that would put his team back on top at some point in the next few months.

Ever the optimist, I politely suggested that neither of these topics were entirely new. I pointed out that while stocks had pulled back about 5% the first time bond traders had thrown a hissy fit at the prospects of the Fed tapering their bond buying program, it hadn't taken long for the bulls to recognize that even a quick 100 basis point increase in rates wasn't likely to kill the economy at this stage.

With a bit of a scowl, my bearish colleague agreed that the bulls had indeed managed to dodge a bullet in June. "But Dave," he continued, "it will be the NEXT big spike in interest rates - and there WILL be a next big spike in rates - that will become a big 'ol problem for those thinking that the Dow is going to 20,000 anytime soon."

To be fair, this point made some sense. Anybody with an ounce of intelligence will agree that rates aren't likely to stay where they are indefinitely. Even the most ardent bull can understand that if the economy starts to improve, bond yields are going higher - maybe even a lot higher. And if rates do move up in earnest, they most certainly will begin to bite at some point.

The other big bullet point in what could have made for a very powerful PPT slide was short and sweet: The Budget Battle isn't over, it's just resting.

Anyone who recalls their market history will agree that it has been the governments of the world that have been largely responsible for the big, bad declines we've seen since 2007. Thus, the idea that the folks in Washington D.C. might be gearing up for another go round over the budget might cause traders to become more than a little uneasy in the coming months.

Although the calendar wasn't brought up by the bears' fearless leader, perhaps it should have been because the bottom line is September is coming. Lest we forget, September is the month most mentioned as the first time Mr. Bernanke will start talking taper. In addition, September is the month that the budget is supposed to become a problem again due to the fact that Washington is slated to run out of money again soon thereafter. Oh, and then there is the fact that the German election is being held in, yes, that's right, September. And last but not least, our cycle composite suggests that September isn't going to be pretty.

So there you have it. If you are looking for reasons to take your 2013 gains and put them in the bank (hopefully a very big, very sound bank) the bears may have a point (or three) for you. To be honest, even the guy that prefers to stay in line with what the market IS doing at all times, walked away from this meeting with the enemy wondering if the bulls have overstayed their welcome this year. Just a thought.

Turning to this morning...

Apparently Chicago Fed President Charles Evans got things started on the wrong foot overnight but then a plunge in Japan, some worry about monetary policy China, and the Bank of England talking about when rates would start to rise (unemployment rate below 7% - probably in 2016) has kept foreign markets on the defensive. Not surprisingly, U.S. futures are following suit and are pointing to a lower open on Wall Street.

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