If this action last another two weeks, the Santa Claus rally will be indistinguishable from the summer rally. Buyers were at it again today, pushing several major indices to either multi-year or all-time highs. I am certainly glad I unloaded a big chunk of my shorts on Friday, but I came into this week hoping the move would prove to be a mistake. Apart from yesterday's diatribe on the lack of risk aversion, I see no impetus for the market to keep rolling like this.
Another example of the perversity of risk emanating from the market came with an earnings report from Toll Brothers. The home builder reported a 10 % revenue decline and 42% earnings decline versus the same quarter last year. Toll stated contracts slipped 56%, and they experienced a higher-than-expected 585 cancellations. Their 2007 forecast came in well below consensus. Oh, and by the way, they feel that "certain markets" may be bottoming. The word "bottom" was all speculators needed to hear to drive TOL up 3% in the face of all the other bad news. Does no one remember the rosy forecasts emanating from this company a year ago while its CEO was shoveling his own shares back into the market? Why would anyone believe them when they say the market is bottoming? Hey, but why stop there? If Toll's market is "bottoming" then all the other home builders must be turnaround stories, too. As a group, the homeys were up 2% in today's session. Insane.
The bulls seem to have more than simple momentum on their side. The risk psychosis is so perverse at this point that most big players perceive the most risk in not being long this market. Valuations and economic outlooks are not pertinent if your neighbor is outperforming you this month. Perhaps performance anxiety explains why a plunging dollar has not been a strong enough catalyst to spark a sell-off... at least not yet.