Greed or Fear for the Rest of the Year?

Now that I am somewhat settled in India, I hope to recommence my commentary on the Stock Markets.

With the preponderance of articles available on the Indian market and my distance from the U.S. markets - I am now living in Gurgaon, India - I intend to focus more on the global macro environment as well as Indian stock market.

Having somewhat successfully timed the previous top 1150 and exiting in the 1085 range on the S&P 500, the same setup presents itself.

My three weeks in India have been illuminating in terms of the optimism that is driving this market.  But I fear that most - actually almost all - investors are naive about the markets and may end up learning some harsh lessons.  Even the supposed pros posting their views in the Outlook India magazine this month seem inexperienced to deal with the challenges of the current market.  One that impressed me though - Sanjoy Chatterjee.  I learnt something while reading his missives.

Coming back to the markets, global markets have moved in synchronized fashion since the March lows and each has been flirting with technical retraces.  It is striking how optimistic Indians are about the economy and their future prospects and in striking contrast to my experience in the U.S. (Florida, NYC).

The Indian story reminds me of the U.S. circa 2007, soaring and ridiculous real estate valuations, a consumer addicted to purchasing and an expectation of continued hockey stick progression.  One difference though is that the Indian consumer is spending within his means and not overextended, yet.  All that could change though, were the real estate market to correct as a significant amount of  wealth is being attributed to the mind boggling rises in property values.

Investors - particularly institutional - continue to ignore the ramifications of a market that is driven by huge amounts of liquidity pumped in by central banks.

In anticipating what  lies ahead, it will certainly not look like the consensus.  The consensus is a global economic recovery and improving fundamentals.  Certainly that is what stock markets are forecasting.  The risks are significant - particularly of the sovereign variety - but the catalyst for a surprise is lurking in the shadows.

Markets are beginning to see positive economic news.  It is precisely in this type of economic environment that the policy execution risk becomes elevated and a misstep could lead to unexpected consequences.

Given the overvaluation in equities, the moribund U.S. consumer, severe amount of monetary stimulus in the global economy and the weakening sovereign balance sheets, the risks look to outweigh rewards at these levels and this stage of the rally.