The Never-Ending Argument Continues

I argue very well. Ask any of my remaining friends. I can win an argument on any topic, against any opponent. People know this, and steer clear of me at parties. Often, as a sign of their great respect, they don't even invite me.
-- Dave Barry

Over the last three days, the rally that began at the end of October has begun to struggle. After two days of no progress on Tuesday and Wednesday, selling became a bit more aggressive on Thursday. In view of how fast we moved off the low we hit on Nov. 2, the pullback is still very mild, but it is good time to step back and weigh the plusses and minuses out there.

If you pull up a chart of the S&P 500 going back a year or so, the bullish case is obvious. We have been in an extremely powerful uptrend since March, and there is nothing to indicate that the trend is shifting. Ever since the move started eight months ago, market players have been trying to guess when we would top out and have been proved wrong again and again as the bulls keep things jumping.

To a great degree, this move has been driven by a weak dollar and a huge amount of liquidity created by the numerous bailouts and giant stimulus plans -- there are lots of very cheap dollars out there with nowhere else to go. That is the fuel that has been driving us, and there is nothing to suggest that it is about to come to an end. In fact, Congress is now talking about trying to enact a new jobs bill before the end of the year.

The bulls are also optimistic about traditional end-of-the-year seasonality. Seasonality is just a tendency and not a certainty, but the bulls argue that with so many money managers struggling to keep up with the indices this year, there is likely to be some efforts to catch up by chasing stocks higher.

The bearish case here is more difficult to make. We have had fundamental arguments throughout this rally that just haven't mattered. We all know that the real economy is not recovering at a pace anywhere near what the stock market is reflecting. Unemployment and its impact on consumer spending and sentiment can't be denied, and the problem of unwinding the monetary accommodation is going to be tremendous.

It is far easier to make a negative economic argument than a positive one, but the market is just not buying the bearish case yet. At some point the market will fall hard and the economic arguments will be cited as the reason, but it just isn't happening yet.

But the bears aren't completely without ammunition. We've seen a few troubling developments recently. During third-quarter earnings season we consistently saw selling on good news. We kept coming back from those selloffs, but good news has not been the same driving force as it was.

Another negative is the underperformance of small-caps and the narrowing of the market. The indices have been driven to a great degree by a handful of big-cap technology stocks, namely Amazon (AMZN - commentary - Trade Now), Apple (AAPL - commentary - Trade Now), Google (GOOG - commentary - Trade Now), IBM (IBM - commentary - Trade Now), Baidu (BIDU - commentary - Trade Now) and a few others. There are few hot pockets of momentum, and we seem to be highly dependent on further weakness in the dollar as a catalyst for oil, gold and other commodity stocks.

The overall picture is still positive, but we have to watch carefully to see if the cracks begin to expand. We have a little softness this morning on comments out of China about some slowness in its economy. That is pushing the dollar up and causing some weakness.

No positions.

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James "Rev Shark" DePorre is the author of Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here.