Kass: Dreaded Triple Top Approaching?

This column originally appeared on Real Money Pro at 7:25 a.m. EDT on Aug 14.

NEW YORK ( Real Money) -- What I learned in my investment career is market participants prefer the comfort of crowds rather than the company of the remnants.

Investors and traders, as demonstrated in recent years, seemingly prefer to buy strength and sell weakness than to address, anticipate and prepare for an inflection point or change in market direction.

That helps to explain the growing view in the business media and in other outlets that the recent low-volume market rise has been greeted with growing optimism by relatively complacent (accompanied by a 14.0 VIX) players.

That said, this chart of the S&P Index suggests (to this observer) that a possible triple top in the market might be in formation.

S&P 500 Index, Source: Bloomberg

But technical discovery and technical analysis is not my market weather vane. It is the fundamentals that move me.

And on the fundamental score, the outlook is stormy, with slowing global economic growth ignored by the hope of more Band-Aid policy initiatives (a global easing put) and the prospects that our leaders in Washington will begin to behave like adults as we approach the fiscal cliff.

Five Near-Term Market Challenges That Suggest a Top Is Near

  • The selection of Paul Ryan may be viewed as a negative regarding the implementation of more monetary easing and based on the growing enmity between our political parties that could steepen the fiscal cliff. The good news is that, unlike the 2008 election in which arguably the Republican ticket was seen as a Saturday Night Live parody, Ryan's candidacy will likely produce a more serious policy dialogue between the Republicans and Democrats than four years ago. In the interest of full disclosure, while I am a Democrat and disagree with his politics, I admire Ryan's rigor and commitment to policy. But there are three reasons I see downside to Romney's decision to pick Ryan, all presenting serious but different short-term market challenges. Ryan's extremely conservative views http://fivethirtyeight.blogs.nytimes.com/ and opinion of the Federal Reserve's mandate (and the waning influence of its easing policy) will likely steepen the fiscal cliff given the increasing ideological schism and division between the two parties. Moreover, Ryan's presence could weigh on and reduce the probability that the Federal Reserve will ease further in the weeks ahead. Ryan has previously stated that he would replace Fed Chairman Bernanke at the end of his term in 2014. Besides the stark differences in policy, Paul Ryan's austere budget views could raise concerns about the trajectory of domestic economic growth in 2013.
  • Gov. Romney remains well behind in the polls. Generally speaking, the Republican candidate is seen, by most investors, as a business and market positive relative to the Democratic candidate. While it is still early in the election process, the initial polls suggest the Ryan decision has not positively impacted Romney's election prospects as voters appear to have shown little enthusiasm for his pick. On Intrade, Obama stands at 56.6% compared with 58% last week. A USA Today poll found "42 percent saying Ryan, a Wisconsin Republican and chairman of the House Budget Committee, was either a fair or poor choice as Romney's running mate, while 39 percent called him an excellent or pretty good pick." This negative rating was the highest since a Harris Poll in 1988 followed the announcement of Dan Quayle's V.P. candidacy. An ABC/Washington post poll found 38% had a favorable opinion of Congressman Ryan, 33% held an unfavorable view and 30% expressed no opinion.
  • Europe continues to contract despite Mario Draghi's jawboning. Not only is Europe slipping more rapidly into a deeper recession, but the implementation of serious and effective longer-term policy responses remain uncertain in the eurozone. Band-Aid policy measures remain the operative palliative and will likely be for some time to come. A German court is scheduled to decide on the constitutionality of the ESM on Sept. 12. But the Dow Jones News Service reported Monday that the German Constitutional Court has instituted a new lawsuit which could postpone that decision.
  • China's landing might be harder than previously thought. This important regional economic growth driver continues to suffer from disappointing growth. Friday's report of punk Chinese exports and imports was particularly worrisome.
  • Geopolitical risks are rising and so are energy prices. The specter of increased hostilities in the Middle East served to raise crude oil prices recently. The price of gasoline has risen by $0.18 in the last two weeks alone.

So, rather than grow more constructive with higher prices (like many), I grow more cautious based principally on the blurring in the demarcation between economic progress and fantasy as well as the political and geopolitical issues raised above.

Price is what you pay, value is what you get.

I remain net short.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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