Ping Pong Grand Champion

So despite having not played the game in probably 5 years, I'm still quite dominate at ping pong, I discovered the other night as I reeled off a 9-0 record to start the 2010 year. But the game also reminds me of the back and forth, momentum dominated market action of the year so far. So in fast action recap style, here are the two sides of the paddle or table if you will:

(1) THE MARKETS WILL FALL BECAUSE...

A. Institutions are accepting the controversial and debt laden atmosphere that is consuming headlines currently and have started to shift (for the next 6 months) to a defensive equity lineup featuring consumer staples and the like (this was identified by Merrill Lynch as a priority and communicated to asset managers last week).

B. The dollar rally (which is really the euro weakness) is causing a decline in commodities and all equities (remember that it was a dollar decline and liquidity drive that helped the market rally throughout the 2nd half of 2009).

C. Sovereign debt fears are undermining recovery hopes and confidence. While Greece, Portugal, Spain and Italy are across the pond, they are bringing to light the very real need for additional bailouts to large chunks of economies (and nations here).

D. Economic data is to peak by April, leading to a vacuum of strong or positive news to fuel a recovery.

E. Extremely high bullish sentiment was recorded in January. This is a contrarian indicator that usually predicts highs - the recent bullish sentiment was at a level similar to that in 2007, indicating that some degree of a correction is pending.

F. The markets priced in a V-shaped recovery and data is proving otherwise.

THE MARKETS WILL RISE BECAUSE...

A. Once sovereign debt fears are reassured (i.e. once we get confirmation that Germany and/or the EU will bail out Greece and the like) our confidence will be reassured similar to how the US financial confidence was reassured after the government's solvency/liquidity tests in March 2009.

B. The stimulus and its ripple effects will survive long enough through the middle of 2010 to last until the private sector can take over. That and the fact that we may experience real jog growth in the 1Q of 2010 = true recovery (more V-shaped).

C. No new taxes imposed upon investors, consumers, homeowners and businesses.

WHY I'M UNDEFEATED IN 2010 IN PING PONG AND WHICH SIDE WINS...

I don't see a double dip recession. The dollar rally is in large part not fundamentally based and the sovereign debt fears will eventually be reassured. Economic growth continues to be born out in the economic data being reported. However, I don't see strong economic growth either considering that the current growth is still liquidity, stimulus driven. And that despite bailouts to Greece, etc, bailouts dont FIX structural problems. That means that the underlying debt issues will remain. And there are more countries than Greece in trouble. So just as one gets solved, the question becomes, what about so-and-so. That's why I don't see "relief rallies" such as today's as a reason to believe the markets are going to reflect strong recovery.

Thus, I believe that the debt worries will dominate in the near term and keep the market relatively range bound without significant drops below 1030 or rises above 1100 in the near term. The ultimate determining factor will be the economic handoff - will the private market grow with strength. I'm skeptical but we'll have much more time and better information to make that determination as the year progresses.