“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”—Charles Dickens, A Tale of Two Cities

Today we’re living in “A Tale of Two Markets.” I was just telling a friend and long time trader about this article and using Dickens’ quote. Has there ever been a better opening paragraph? Most strikingly, I did not remember the end of the quote: “…in short, the period was so far like the present period…”

And indeed our current financial markets reflect the Dickensonian superlative and polar opposites. The financial markets are seeing one level of participation from institutions and another from retail investors. And credit markets are bending over backwards to issue corporate debt while continuing to shun retail borrowers and make credit tough to find for small businesses.

Let’s look a little closer at these two separate responses from the retail and institutional worlds.

With the market making an amazing recovery from the March lows, some amazing statistics accompany the 65%+ run that the market has seen. First and perhaps most interestingly, money market funds (where retail investors traditionally park cash) continue to be at a very high level, despite the markets’ strong bull run. Traditionally, when the stock market heats up, retail investors jump in with both feet. Analysts claim that this high level of money market assets reflects the fact that retail investors are still avoiding the equity market after being burned last year.

To be fair, this money on the sidelines could also serve as fuel for a further push up in the markets, if and when the retail investors decide it’s safe to jump back in with both feet.

But it seems, from consumer sentiment numbers, that Joe and Jane Six-pack are still playing their cards very close to the chest. University of Michigan preliminary consumer sentiment dropped significantly from October to November and was well below analysts’ estimates. This is ominous heading into the holidays. This is especially true given that the paper increase in wealth from the surging stock market typically loosens, rather than tightens, the purse strings.

Next week we’ll take a look a look at the huge differences that exist in the credit markets for institutions versus individuals, and we’ll draw some conclusions about where this two-market model might be taking us.

Until then…

Great Trading!
D. R.