The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

The Miyagi Market

12/02/2010

Back in 1984, there was a popular movie called “The Karate Kid”. Mr. Miyagi was the mentor, teaching karate to a kid. Because karate moves are complicated, he simplified one move by telling the kid “Wax on, wax off”.

The stock market has become “Risk on, risk off”. Yesterday was obviously “risk on”, as investors flooded into the market, taking risk. All day, good economic news rolled out, and investors continued taking risk, driving the Dow up 249 points.

The ISM Index came in better than expected. The ADP report on jobs was much better than expected. The Fed issued its Beige Book showing 10 out of 12 regions of the country are growing economically. Even the automakers reported good sales increases. Cyber-mondays sales were up 16% over last year, which is a good indicator that the consumer is getting healthier, finally! And, there was a strong rumor that the European Union would start a quantitative easing program like the U.S. With all that bullish data, it is not surprising that taking risk was more attractive to investors.

Not so surprisingly, all asset classes rose, which shouldn’t happen under Modern Portfolio Theory.

For someone who studies the market daily, it is amusing to see it reduced to a simple rule-of-thumb like “risk on, risk off”. Even Mr. Miyagi would be amused!

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