There is one constant in the financial markets – emotions. All markets go through bouts of “fear and greed.” The length of these emotional ups and downs is different each time. It was only three weeks ago that we were receiving phone calls from clients who were very optimistic about the market. One client left the message “Don’t miss out on any of this good market action.” What a difference three weeks makes! We are now getting a handful of calls from jittery clients asking if they should cash out of everything. So what is THOR’s take on the current market? Before we review our thoughts, please remember that just a few weeks ago, when investor optimism was high, we were characterizing the market as overbought. In addition, we continue to have the lowest exposure to international stocks that we have had in our 18-year history as a firm. This continues to be a good strategy.

The main question is “Is this just a short-term correction in a bull market, or is this the start of a bear market?” In our opinion, this is just a short-term correction that is technically starting to reach an oversold condition. It is important at times like this to look at the facts and not make an emotional decision based on the current news on CNBC or other media outlets. Below are a few of the facts that we are looking at that cause us to believe this is not the start of a bear market:

• Banks are healed. In 2008, banks were significantly undercapitalized and many large institutions were on the brink of collapsing. Today, large banks are now overcapitalized and actually have more cash on hand than commercial loans.
• Interest rates. Almost all bear markets have been preceded by rising interest rates – especially short-term rates. Rates have not gone up. In fact, in the last few weeks, we have seen interest rates decrease with the yield on the 10-year Treasury note falling from about 4% to 3.26% today. The bond market also is very healthy. There are no signs of the liquidity crisis we suffered in 2008.
• Inflation. We do not see any inflationary pressures at this time. In fact, the problems in Europe are making the dollar stronger, which has a deflationary impact. Commodity prices are falling (in just the last 4 days, gold has come off the panic buying and is down over 4%). We don’t believe the Fed will raise interest rates anytime in the near future, which strengthens the prior argument about interest rates.
• Corporations are healthy and sitting on lots of cash (which can be used to repurchase stock, pay dividends or buy other companies). Please read the lead article in this weeks Barron’s which discusses this subject: click here.
• Put/Call ratio. A put is a bet on the market going down. A call is a bet on the market going up. In mid-April, there was significant call volume as investors were optimistic about the market. Today, the put ratio volume is significantly higher than the call ratio volume. In fact, the put volume is more than 3 standard deviations (occurs less than 1% of the time) from the norm. Even more striking, put volume is at its highest reading since 1995 – this encompasses the Asian crisis, technology stock collapse and the bear market of 2008. This reading shows extreme pessimism. This is a very good contrary indicator which says we are near the bottom of this short-term correction.

We know that many of you are concerned and we certainly understand. Please keep in mind that a short-term correction in an overbought market is actually very healthy in a bull market. Please don’t hesitate to call if you have any questions or concerns.

Sincerely,

Your THOR Team