While it sounds like we’re shouting into the wind, I have to say risk is high for multiple reasons.

We did do a good job of passing previous resistance of S&P 1420. We now approach the 200 day moving average, just about 1430. If the market blows through that point, then one must take the bullish stance I suppose.

Things that make me nervous

1. Amazingly we are just about at highs for the year (within striking distance) – despite a housing crisis and credit crisis for the ages.
2. All bad news is being ignored on hopes for the future
3. We’ve now rallied essentially straight up for 2 months
4. Retail stocks are the new darlings, one example JCPenney (JCP) 90 days ago was expected to do 80 cents in earnings… as the quarter went by analysts were slashing expectations and got expectations down to 50 cents. The company reported 54 cents so they “beat”, setting off a fireworks explosion in the stock yesterday and the lemmings applauded. Even though they missed what expectations were not 3 months ago by 26 cents. They say the rest of the year will be a challenge. No one cares. Buy stocks. Same for Saks (SKS), same for Nordstrom (JWN), same for Kohls (KSS). These companies are now reporting negative earnings growth year over year, yet people are paying higher prices for this. Why? And for how much longer? Are these the new housing stocks that go up no matter what bad news? As long as you believe a turn is coming in the 2nd half of 2008 you can buy these and say “yes you must buy when it is darkest”. I don’t believe in that thesis.
5. Commodities are ballistic. Look, I’m happy with it since we have some exposure there but some of these steel stocks and oil are parabolic. Just like fertilizer was 3 weeks ago when I went cautious. It is now out of the realm of sense and pure speculation in my opinion. Stocks like US Steel (X) now look like Potash (POT). I am very nervous about this group and am considering Ultrashort Oil & GAS (DUG) at least as a trade. Oil looks toppy to me here, and it is a most crowded trade…
6. We are now seeing real implications from high oil, steel (more on that this weekend), and commodities onto earnings of producers. Yet no one cares. Buy stocks.
7. The return of speculation in Chinese small caps. I am seeing some old favorites from last October now rising 30-40% in a day. When speculation fervor returns to the “worst of breed”, my antenna go up.
8. Complacency is everywhere.

Those are a few thoughts among many. While I do believe the Fed induced liquidity (read: inflation) is being pushed into the market and all commodities (including stock certificates) are being pushed to unnatural heights, we have to take 5 steps back and really ask – as earnings DEGRADE and stock prices continue UP, out the window goes the arguement that the stock market is cheap. This is clearly happening in retail now – we are seeing negative earnings growth, yet stock prices jump – same in financials, as equity holders are diluted massively (meaning earnings PER share are handicapped for years) but the stocks go up… so both groups become more expensive.

While our short exposure helped us last week to beat the market by a wide margin, it has evaporated all our gains this week. As much as I like the fundamentals of the commodities, things are now at a level where (in the short run) they are making less and less sense from a valuation perspective. I will say this again – if commodities do continue to increase at this pace, even the emerging markets will be plunged into slower growth and/or recession. And that’s been the bedrock saving us, along with the weak dollar. So at this point I’ve been wrong to turn cautious the past week or so, but I find risks to be very high, so I am holding my ground here. Again, this period reminds me of September/October 2007 when the market went to all time highs in the face of a deteriorating fundamental picture that it chose to ignore. The fallout after that was not positive. The higher we go, the more I am worried we might have a similar chapter ahead of us.

Last 5 posts by Trader Mark

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