Since the March 2009 bottom, Mr. Market has been very focused on only the good. In fact, the rebound in stocks is often referred to as the most-hated rally in history. Growth and unemployment concerns have been tossed aside in favor of Federal Reserve easing, apparently Mr. Market’s favorite medicine. Nonetheless, doubt is beginning to rise.
It is too early to tell if a larger pullback is underway, but stocks are feeling less certain about themselves than they did just a couple weeks ago. Cyprus stepped into the spotlight earlier this month by deciding to confiscate bank deposits to satisfy requirements for a bailout from international leaders. The small island in the Mediterranean Sea allowed its banking system to grow to roughly eight times gross domestic product, and now finds itself insolvent amid the euro-zone financial crisis. The decision to seize insured bank accounts with under 100,000 euros was ultimately reversed, but the damage is already done. Banks in the country have yet to reopen.
When confidence is lost, it can be extremely hard to regain. With capital controls and contagion fears spreading, Mr. Market appears to be turning a bit more cautious. Last week, the Dow Jones Industrial Average (NYSEARCA:DIA) finished in the red to break its four-week winning streak, while the S&P 500 (NYSEARCA:SPY) continues to struggle with making new all-time nominal highs. The decline is not even a blip in the bigger picture, but it is a clear contrast to pre-Cyprus movement.