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The Market's New Math

It's too soon to call the market's top -- but a new market order is clearly asserting itself.
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Is the selloff over? No. Is the rebound real? Yes. Has the crisis passed? No.

Huh? Isn't this internally contradictory? No. Let's define terms. Let's name the parts.

A crisis is a concept in mathematics with meaning much the same as that used colloquially to describe a political or emotional emergency. In short, it refers to an extremum, a climax. Dare I say, turning point?

The snap-back rebound in tech names indicates that unbridled buy-the-dip optimism has not been broken. That bullishness is a powerful vector tending to push prices higher. But working against it is another vector, one that I believe is gaining strength. It is comprised of, among other elements, the excessive valuation of much of the tech sector and the progressive withdrawal of liquidity from the market, which is now taking place.

The trend in place still, at least until proven otherwise, reflects the upward bias of the bullish vector. And yet, I think the balance of these two irresistible forces is shifting in favor of the downward vector. When the balance of forces shifts, the trend comes to an extremum, a crisis point, and the direction changes.

Is the selloff over? No. Liquidity has crested and is receding. The

Fed

is tightening relentlessly and will continue to do so because the economy is speeding, and the March

Consumer Price Index "surprise" raises the stakes for our central bankers. The IPO market has suffered only a temporary setback, so supply looks unlikely to evaporate. Last year's booming IPO market means this year's boom in lockup expirations. April's tax date marks the end of the fat season for the investment of bonus and IRA money.

Is the rebound real? Yes: The freight train momentum of this bull market will not be derailed by the first shifting in the liquidity cycle. For example, the 1997 Thailand crisis didn't stop it, nor did the 1998 Russian crisis and the

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catastrophe. Those were deflationary challenges that were met by policy actions that increased liquidity. This time it's different, different in kind. The risks are inflationary, calling for and resulting in tightening actions that relentlessly drain the bull market's life blood. But not all at once. So the money is still there to bid 'em back up when they hit an air pocket.

Has the crisis passed? No. Despite the amplitude of the decline, the selloff lacked the characteristics of a truly climactic event. Most of the major sentiment measures, such as those reported weekly in

Barron's

, have been nearly inert lately, as if nothing has happened, or can happen, to disturb the sang-froid of investors. Complacency and crisis don't go together. Volume has been heavy but not so far above trend as to suggest catharsis.

So if it's a crisis but it has not passed, what should we call it? Call it a jagged top: you can't much like the pattern of the

Nasdaq

over the past six weeks -- three sharp selloffs to progressively lower lows, each followed by a rally that falls short of the preceding high.

Or call it the New Market -- and get used to it. Why shouldn't a new economy have a new market? If the New Economy really kicked in about mid-decade in a market environment of undervaluation -- and through the interaction of fundamentals, liquidity, and momentum, drove to a condition of widespread overvaluation -- it should not be surprising that it would top out in a violently volatile way.

Like it or not, get used to it -- there should be plenty more of the same ahead.

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

GriffinJ@aeltus.com.