Hints of Risk Appetite Returning to the Stock Market?

As 2008 came to a close, many of the headlines recapped how bad a year it was for the stock market. Several market indicators, however, were showing interesting improvement. At Wednesday's close, we had 256 NYSE, ASE, and NASDAQ stocks registering fresh 65-day highs against 144 lows, the strongest reading since September.

On a shorter-term trending basis, we had 4 stocks from my basket in uptrends, 11 neutral, and 25 in downtrends at Monday's close. By Wednesday that had improved to 25 stocks in uptrends, 6 neutral, and 9 in downtrends.

When reviewing data from the Decision Point site, I was particularly interested to see that the advance-decline line specific to midcap stocks (top chart, click to enlarge) had bested its November peak, moving to a multi-month high. We're also seeing an increasing proportion of stocks--nearly half across the NYSE--trading above their 50-day moving averages (bottom chart, click to enlarge).

The low 900 area remains important resistance for the S&P 500 Index, but small cap and midcap stocks are already breaching their equivalent levels to the upside. That suggests a healthy degree of risk appetite among equity investors. That same appetite has been driving prices up for intermediate-term corporate and municipal bonds, as investors seek greater returns in a zero interest rate world. With a weak U.S. dollar and continued overseas conflict, we're also starting to see increasing signs of life in the commodity markets. Short-term Treasury prices, meanwhile, are hovering near several-week lows.

I will be following these themes closely as we start the New Year, because they will give us important clues as to whether deflation themes will morph into inflationary ones in the wake of unprecedented fiscal and monetary stimulus. Should that occur, we could see quite a shift out of safe assets (Treasuries) and into riskier ones (stocks, bonds, commodities).

Comments

[Archman Inv...:]

Hints of risk appetite returning?

Where?

Maybe in the high yield corporate bond market and muni markets.
Maybe.

In stocks? I hope the author is not getting overly excited about a no volume rally off a low in November.

This seems to be a "real recession" we have here, finally.

That means rallies, then givebacks, followed by more of the same.

S & P at "trend" (based on 25 year continuation chart) is 750.

The farther we go up above 750, the farther we have to fall back to be at trend. If our government, Fed, and it's "partner" trading desks would stay out of the way and let the market function normally, the S & P would be at 750 now, and we could have 10% (dividends included) total returns a year for the next 20 years. Instead we will keep getting up 20%, down 10%, up 15%, down 30% returns going forward for the next 2 decades. They just cannot leave well enough alone.

The trend seems in place for those who can see it: Buy the S & P when it is within 50 points of 750, slowly short the S & P when it is over 900.

Unless these markets go back to being truly "free" markets, expect big returns on the up and downside over the next 20 years, netting investors nothing, traders who do well a very nice return, and the asset gatherers everything (since they just collect a fee for lousy performance anyway)

Jan 02 09:20 AM

[1977°C:]

I see more and more investors are looking to various indicators for help, where all this indicators have been before "your" account went down 50-80%.
Don't believe in indicators, the stock market investing will be not in fashion for 10-20 years.
Forget about Wall Street, go for lowest yield CD's.

Jan 02 11:07 AM

[Stock Trade...:]

I would be careful to place too much weight on the fact that:
"We're also seeing an increasing proportion of stocks--nearly half across the NYSE--trading above their 50-day moving averages".
That is to be expected when coming off of historic lows in a market which has been trending down rapidly for the last 90-100 days.
It doesn't take that much money and greed that has been sitting on the sidelines for so long to reach the 50 day MA in a down tending market.
Take a look at the chart the last two times the same level was reached, in April and August of 2008. Those were short term tops in the market and quickly reversed.
Be careful out there!

Jan 02 12:35 PM

[{5U}:]

Well said.

Hedge funds are trying to reach to get over their high water marks and long only mutual fund managers are panic buying so they do not underperform the index.

We are in a panic to get long rally.

At any hint of weakness, the government will promise a bigger stimulus. Today the buzz was Obama boosting America's space program. Maybe he will put all the toxic assets on the bank's balance sheet into a rocket and launch it to the moon.

If the government's mantra is to spend spend spend the TBT is a good play and still be intellectually honest instead of trying to gauge the mood of the market every day.


On Jan 02 09:20 AM archman82011 wrote:

> Hints of risk appetite returning?
>
> Where?
>
> Maybe in the high yield corporate bond market and muni markets.<br/>May...
>
>
> In stocks? I hope the author is not getting overly excited about
> a no volume rally off a low in November.
>
> This seems to be a "real recession" we have here, finally.
>
> That means rallies, then givebacks, followed by more of the same.
>
>
> S &amp; P at "trend" (based on 25 year continuation chart) is 750.
>
>
> The farther we go up above 750, the farther we have to fall back
> to be at trend. If our government, Fed, and it's "partner" trading
> desks would stay out of the way and let the market function normally,
> the S &amp; P would be at 750 now, and we could have 10% (dividends
> included) total returns a year for the next 20 years. Instead we
> will keep getting up 20%, down 10%, up 15%, down 30% returns going
> forward for the next 2 decades. They just cannot leave well enough
> alone.
>
> The trend seems in place for those who can see it: Buy the S &amp;
> P when it is within 50 points of 750, slowly short the S &amp; P
> when it is over 900.
>
> Unless these markets go back to being truly "free" markets, expect
> big returns on the up and downside over the next 20 years, netting
> investors nothing, traders who do well a very nice return, and the
> asset gatherers everything (since they just collect a fee for lousy
> performance anyway)

Jan 02 09:31 PM

[Bryan_K:]

Hi. At the peak of the market...and for this exercise I will use the DOW , it reached 14200 or there abouts, and PER (Price Earnings Ratio) was at 22/23 times covered, after the recent fall to around 8150, the PER dropped to around 14, these are only approximations.. Traditionally PER's drop to 5-7 times covered in a recession, not a depression, a recession. Therefore, if we take the higher figure of 7 (assuming that profit levels are maintained) the DOW should drop to 4,000 level, of course, profits will deteriorate dramatically, let's say 50%, I'm feeling very conservative, so the PER could conceivably drop to the 2000 level, if conditions deteriorate further than anticipated by economists and brokers then the 2000 figure could be over optimistic and the DOW could go much lower
However, before this happens, I believe that the market will bounce back to the 50% fib level due to the Obama honeymoon. After a time, the public will realize that the very costly packages that are being touted at the moment will Fail. And Fail miserably, this will encumber the American people with massive debts that will never be re-paid,
Enter China, with it’s own problems, will the Chinese continue to finance not only the US, but many other countries in similar financial strife? That remains to be seen.
This crisis has only just started, they have finished playing the national anthem and the match is about to start, there is the question of $600 trillion of derivatives. Fractional lending ratios, Banks are all violating the Basel 2 accord. Which agreed, that a lending ratio of 8-1 would be adhered to, some Banks are out as far as 80-1, this is being exacerbated by falling asset values, especially property values, Banks were always above the 8-1 level but even the moderate Banks have a ratio of 20-1, this is why banks cannot lend, and cannot reduce their rates as much at the official rates when the Reserve Banks reduce them, their priority is to lower their lending ratio’s.
This whole debt problem started back during the Reagan and Thatcher years, but recent administrations have discarded all caution by showing their disregard for the rules,
They believe that they can resolve the problem by increasing the very thing that caused the problem, DEBT. These policies will assure a bad outcome.
On a personal note, I have no interest in stocks or indices what so ever, I trade currencies only.
Cheers bryan

Jan 03 07:40 AM

[BondGuy:]

Face it. It's over. Individual investors will not support equities for another generation. That includes index mutual funds, growth funds, value funds, and individual stocks in 401Ks. Trust has been lost, for good reason.Of course, not everything will stop. The hedgies will hedge, leveragers will lever, and prices will still go up and go down, but fundamentally, for the next 20 years, it's a zero sum game.

Jan 03 02:48 PM

[Moon Kil Woong:]

Yup, the above posters are right I think. It's mostly due to end of the year window dressing and mutual fund re-allocations. I surmise the trickle of liquidity stops next week for 2 reasons. 1) the market is already at the top of the 8,000-9,000 trading range so technical traders will be leery. 2) few people are willing to get suckered into a reading range rally that fund managers have been trading to fleece investors for the last 6 months.

It's survival of the fittest. The ones who buy on every false rally are pretty much tapped out by now. Now all that's left is the more wary and aloof investor. Am I giving investors too much credit?

Jan 04 03:44 AM

[Doomdog:]

Any comment on the Pound, Auzzi and Loonie? v. Dollar that is. If I increase the money supply from 10 Trillion +/- to 15 Trillion in 3 months, shouldn't that have an impact?

Jan 05 01:16 AM