"... know when to fold 'em ... know when to walk away ... know when to run." (
should be running money in this market. Sing along with him.) "You never count your winnin's ... when you're sittin' at the table ... there'll be time enough for countin' ... when the dealin's done."
Volatility is a killer; a 2% daily move now constitutes a quiet day. The market is setting records for hairpin turns and switchbacks and is shaking even the toughest pros out of long-held habits. Byron Wien last week decided to fold 'em, citing as his reason a practical flexibility, a risk-averse, survivable, even humble willingness to bend to the prevailing wind. He argued his case well, but
did it more elegantly in the
fable of the willow and the oak. The willow doesn't fight the tape, and springs back to enjoy the passing of the storm. Kenny Rogers' gambler says you gotta know when to fold 'em and walk away.
Volatility doesn't play fair -- it even messes with the arithmetic. If the market drops by 20%, it's got to rally by 25% to get even. The
sank by 35% in the two months to May 23 and has rallied by 24% since. Net result: down 20% -- still in bear market territory if that's your preferred metric.
Is it a bear market? I say not yet. The negative returns haven't lasted long enough to change attitudes and behaviors. When those are altered, it will have been a bear market. When a guy like
Wien puts cash to work in his model account because he thinks the June rally may have legs, you know that volatility is a powerful force to foreshorten perspective.
We have some evidence of economic slowdown: weak, ambiguous evidence that follows an extended cascade of data indicating that the U.S. economy is roaring. The statisticians at the Bureau of Economic Analysis or the Bureau of Labor Statistics don't employ the concept of an oscillator; they don't say the economy is overbought or oversold -- but that doesn't mean I can't. After a six-month screaming run, shouldn't we expect a slowdown? Won't the data show that the consumer, in classic overbought fashion, has to pause sometime to draw a breath?
The May data were soft. That's one month in a row. That's good enough, apparently, to establish a trend. The market doesn't need a reason to do what it's going to do, but it likes to have an excuse. The slowdown story creates a veneer of a case that the
Fed has pulled off a nicely modulated landing -- not too hard, not too soft -- which brings Goldilocks back out to take a bow. Byron has plenty of company in choosing not to fight the tape.
The Fed, in contrast to the market, does need a reason to do what it's going to do. I think it's going to keep on tightening. After its 50-basis-point hike and its tough statement following the May 16 meeting, the
FOMC will be liable to the charge of daytrading if soft numbers -- one month of soft numbers -- causes it to fold 'em. The hiring of Census workers has rendered the April and May employment reports suspect. How do you seasonally adjust for a decennial phenomenon? I don't know, and I'll bet the statisticians at BLS don't either. The Conference Board
consumer confidence survey for May indicated that respondents still see jobs as plentiful and easy to get; consumer confidence came within a whisker of January's all-time high.
In any case, a slowdown in U.S. domestic demand is a necessary but not a sufficient condition to get the Fed off the market's back. A slowdown here may remove the big fundamental -- a differentially faster economic growth rate -- that has supported the U.S. dollar on the foreign exchanges. The one real alternative to dollars in a tripartite world of money is the euro. It rallied again last week and looks increasingly like a genuine threat to the dollar's dominance as a global reserve currency. Any weakening of the dollar in the current context, with the U.S. current account deficit in record territory as a share of
GDP, will collect the Fed's attention in a compelling way.
The Nasdaq went down by 35% and the IPO welcome mat was pulled. Result: The calendar dried up so, presto, more buyers than sellers. So the Nasdaq rallied by 24% and the welcome mat was once again laid at the door. The result is likely once again to be more sellers than buyers. Sentiment plunges and soars with the market; for the past couple of years it has been about as good a means as any to trade this market, if trade it you must.
I'm inclined to hold 'em in here -- my opinions, that is. I'll hark back to the
Wagnerian leitmotif I outlined in this space on Jan. 9. The year ahead, it seemed to me, would be marked by
sturm und drang
as two powerful forces staggered back and forth across the stage vying for dominance. One is the momentum-driven dip-buying vector: It has been right and profitable to buy the market, especially the tech sector, whenever it gives you the chance to get in.
The second vector is new this year. It is the irresistible force of monetary restraint. With the spread of global growth beyond the bounds of the dollar bloc, the world's central banks are swinging from a decade-long stance of accommodation -- sometimes aggressive accommodation -- to a policy of restraint. It didn't shape up as a year in which to sell volatility, and indeed so far there has been a bull market in volatility.
So it's don't fight the tape or don't fight the Fed. Choose your bumper sticker; choose your strategy. The timing is extremely tricky, but the ultimate outcome is foreordained. The tape is fickle. Don't fight the Fed.
Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at
TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.