A Tendency of No Tendency

If there's one thing to count on in the current market, it's a lack of conviction.
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I can't get a quote anywhere but there must be a bull market in conviction right now -- there seems to be so little of it around. At mid-year, the bulls are not raging and the bears are not growling. Those who have been steadfast in their commitment to either camp remain so today but seem to lack the fervor of times past. Some leading strategists, such as

Abby Cohen

of

Goldman Sachs

or Tom Galvin of

DLJ

, maintain or even boost their year-end targets in order to stay ahead of this market, while others, such as Byron Wien of

Morgan Stanley

or Rich Bernstein of

Merrill Lynch

, raise cash in their model accounts. When experts disagree, says a colleague of mine, the ignorant are free to choose.

Ignorance. There's plenty of that around, so it should be cheap -- but it so seldom is. It must be exempt from the laws of supply and demand.

Investor sentiment, at the moment, seems to be self-canceling. Surveys conducted by the

American Association of Individual Investors

and

Consensus Inc.

, have moved solidly into neutral territory, while the

Investors Intelligence

measure is near bearish terrain and the

Market Vane

approaches bullishness. The trends for each of these, moreover, are now reverting toward their means, i.e. those that were near -- bearish or bullish -- are now less so.

Complacency is clearly evident in the expected future volatility implied in market clearing prices of options: The

VIX

measure, mathematically extracted from trading in options on the

S&P 100

, is slightly below its average reading of recent years. The volumes of put and call options on stocks and stock indexes are somewhat less ambivalent: The ratio of puts to calls verges on flashing a bearish signal. Overall trading volume, meanwhile, is picking up, especially over the counter. Investors as a group may not be clear in what they're trying to do, but they're working fairly hard to get it done.

The market's backdrop offers plenty of reason for complacency. Earnings expectations have been marked up dramatically from the gloomy depths projected during last year's fourth quarter: An

Aeltus

metric now shows analysts' earnings revisions to be 2 1/2 standard deviations above the mean. Second-quarter earnings, as reported so far, seem to be backing up the newly ebullient analysts.

Last week's inflation reports were better than expected, and they were expected to be pretty good.

CPI

top-line inflation is running at 2% over the past twelve months and

PPI

falls between zero and 1%. There is a bit of mud in Joyville, though, with crude and intermediate goods inflation now beginning to stir in response to the upward movement in industrial commodity prices this year. Crude oil, after having nearly doubled so far this year, closed the week at price highs not seen since November 1997. Metals, such as aluminum and copper, have a long way to go to get back to the highs of recent years, but they seem to be giving it the old college try lately.

Industrial commodity prices have picked up roughly concurrently with other evidence of improvement in global economic activity. Stock market performance in so-called emerging markets has left all others in the dust so far this year. If these forward-looking mechanisms are on the right spoor, then we are likely to see a continuing, self-reinforcing recovery in global growth.

That improved growth outlook is reflected, closer to home, in a steeper yield curve and credit spreads somewhat tighter than when global meltdown fears were still fresh. But with the gruesome lessons of 1998 behind them and the uncertainties of Y2K ahead, with the

Fed

on a tightening tack, and with positive performance against their benchmarks already in the bank for this year, bond managers are unlikely to try to be heroes in the second half.

The new tack for monetary policy should predispose markets toward a bearish view of the future, but the

FOMC

pulled its punch by reversion to an intermeeting neutral stance. Together with the sterling inflation numbers reported last week, market participants have received encouragement in their hope that Fed tightening is a one-and-done proposition.

The market's shilly-shally indecisiveness is revealed in the rotation from investment theme to investment theme so far this year. The first quarter was all about growth; since global growth was to be in short supply, the idea was to buy the "reliable" growers, as well as the secular growth of new paradigm technologies. The second quarter woke up to the news that the 1997-98 financial crises were survivable; cheap stocks, small stocks -- value themes -- took the lead with a spectacular performance in April. But as the quarter ended that leadership change was muddied: Growth stocks and large-caps once again outperformed in June.

Meanwhile, the dollar flows into the market remain pretty good, if not quite as generous as earlier. Inflows to mutual funds of all sorts have slowed, perhaps in conformance with seasonal patterns; tax rebates and last year's incentive compensation have by now been committed. But equity mutual funds continue to do better than bonds or money markets. Corporate cash flow remains very strong and managements are willing to dedicate it to creation of shareholder value through market price appreciation: Mergers and buybacks continue to retire more stock than even eager-beaver investment bankers have been able to bring to market through new issuance. And foreign investors almost certainly are adding to their holdings, since they continue to generate record surpluses in their business dealings with the U.S., as indicated by our current account deficit.

How to resolve this ebb and flow of investor attitudes and market outcomes? I wish I knew. The best line through the maze that I can see is this one: If emerging markets economic growth continues to recover, in mutual cooperation with improvement in Japan and Europe, then it follows that commodity price pressures will increase and be transmitted down the pipeline; yield curves will steepen further; monetary policies will become relatively less accommodative or, in a few cases, even turn restrictive; and earnings results will exceed earnings expectations for more rather than fewer firms, negating the "scarcity of growth" theme and absorbing flows that would otherwise have gone to the nifty few. The market will try to advance across a broadening front, with the implication that it will advance more slowly, or not at all.

Perhaps my logic is too hydraulic here, but it seems to me that it will take more money to drive more stocks at the same rate, or the same money will drive more stocks at a slower rate. The ultimate sources of these flows, the easy-money Fed and eager-money foreigners, will both be less enthusiastic bankers if growth continues to spread.

And if it doesn't, well then, vice versa. It seems to me that the trajectory of global convalescence is the key call here. Stay tuned.

Jim Griffin is the chief strategist at Aeltus Investment Management in Hartford, Conn. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. Aeltus manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at

GriffinJ@aeltus.com.