“No way am I chasing this market.”
“There’s not enough good news to justify these levels.”
“It’s a fool’s rally.”
“I’ll buy on a pullback.”
Those are just a sampling of comments I’ve heard over the last week. As a contrarian investor, all of the above make me believe the markets want to move higher. I’m sticking with 900 on the S&P 500 index but I’m not ruling out further upside from there.
Those who think this powerful move up from the beginning of March is simply another market bounce (myself included) keep pointing to all the reasons why stocks should go down from here. They have been saying the same thing for five weeks now and I’m sure at some point they will be right. It’s just not now.
Most of the market-moving companies that reported first quarter earnings this week—Goldman Sachs, JP Morgan, Citibank, GE, Intel and Google–beat estimates. The bears would argue that estimates were so low that it was practically impossible not to beat expectations. Others point to the lower and diminishing volume of this rally where the higher it goes the fewer the participants. The CEO of NYSE Euronext, Duncan Niederauer, for example, said on Friday that traders and not investors are fueling this rally. That may be true but it has not stopped the indexes from continuing to climb.
As the markets climb however, it might also force the Big Guns–institutional investors– into the markets. These investors manage individual money, IRAs and other tax-deferred portfolios including pension funds. Unlike retail investors, they can only sit on the sidelines for so long before their clients begin to ask why they are not keeping up with the market. After inflicting deep losses on their client base last year, institutions are under pressure to make back those losses—or else. State Street Bank, which monitors the buying and selling of the $12 trillion that is managed by institutional investors, recently said that monthly institutional cash flows into the equity markets are at a 12-year high. So it appears that there may be more than just traders involved with this rally.
What may be happening, in my opinion, is that although the economic news, company earnings, and government statistics continue to point to steep losses, further declines and higher unemployment, the numbers are dropping at a slower rate. Take the unemployment numbers released on Friday. The Northeast where most of our readers live, lost less jobs then the nation overall in March and Massachusetts, Connecticut, New York and Vermont’s unemployment rates are still below the national average.
Market traders and some investors, desperate for any sign that the economy and the markets are bottoming, have latched on to numbers such as these and have used them like life preservers while swimming upstream against the torrent of depressing news.
That is a dangerous but nevertheless a winning bet so far. If the markets continue to move higher (and I think they will) more and more investors will jump aboard afraid of being left behind. Once we hit the 900 level on the S&P things could get really interesting. There could be a stampede into the market sending that index up another 40 or 50 points. It wouldn’t be the first time something like this happened. The Dow jumped 39% in the Thirties before rolling over and declining 50%, the same thing happening in 1966-68 and again between 1974 -76. The only difference this time is that we have compressed two years worth of gains into six or seven weeks. That fact gives me the willies so be careful out there.