So, When Will This Rally End? 21 comments
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It’s the question on every investor's mind…when will this rally end?
There’s no easy answer here. There is a way to tell though. But you probably won’t find it in the mainstream media.
The Times in the U.K. proclaims:
“Optimism Races Through Markets After Show of Harmony at G20 Summit.”
Forbes ponders whether:
We can catch a glimpse of an economic “Light at the End of the Tunnel…”
The New York Times prominently warns:
“U.S. Bank Rally Looks Fragile” and goes on to add, “Operating earnings are going to have a hard time outrunning credit losses, making the massive rally in bank shares look ready to be marked down.”
Any help?
Didn’t think so. There is actually a much better way to get a sense of when this rally will end. Here’s how.
Buying High
The herd mentality of the markets never changes. When some sector heats up, the herd buys big.
When oil is at $100, everyone is talking about and buying oil. No one wants it at $40 a barrel, but they can’t get enough at $100. Even though the upside potential and downside risks are completely in your favor at $40 and against you at $100.
Also, when corn and wheat prices started to make the headlines, everyone wanted in. ETFs were created to make it easier to buy into agriculture commodities (remember, ETF sponsors make money by providing products investors want rather than those that will necessarily be good investments at the time). Fertilizer stocks were heating up. The eventual impact of “Peak Soil” was being priced into agriculture immediately.
Again, when I first wrote about the best way to make money in ethanol back in 2006, only a few people cared. When Jim Cramer was touting fertilizer stocks and the Wall Street Journal had feature stories on a global land grab for farms, everyone cared.
The herd mentality never changes. They love to buy high and sell low. It’s almost like they want to be more entertained than to make money. But to each his own.
For my investment dollars though, I’d much rather look to see what “the herd” is up to when it comes to this rally. Of course, there is no perfect indicator of the herd. There’s no way to tell exactly when the last buyer buys. If there was, we’d all be retired and never have to work again. That’s just not the case though. So to follow the herd, I like to keep a close eye on what they’ve been doing with their money.
Given the strength on consistency of this rally so far, what the majority of investors are doing with their money may surprise you.
Waiting Patiently
Last September, when most investors got a crash course in investment terminology including “forced selling” and “margin call”, we were keeping a close eye on where investment dollars are flowing.
When you see new money flowing into equity funds, bond funds, or sticking on the sidelines in money market funds, you can get a good idea of how much money is left to flow into different financial markets. You can see how long it will take to get there and how much money is left to flow in.
An average investor with cash in a money market fund is like a teenager with a car full of gas. They want to get somewhere quickly, they’re not sure how to get there or where they’re going, but they’re not going to wait around.
Our research for September’s, What to do During a “Market Adjustment”, uncovered:
As a whole, mutual fund investors put money in and pull it back out at the worst possible time. The tech bubble is the perfect example. In 1999 and 2000, money flowed into technology-focused mutual funds. At the peak of the tech bubble in March of 2000, about 80% of all money in mutual funds was in the technology funds. All of that new money pushed the NASDAQ to a peak of more than 5,000.
When the downturn came, which it always does, the leading technology mutual funds lost 60% to 80% of their value as the NASDAQ plummeted back to 1,000. And most mutual fund investors weren’t selling out along the way.
Mutual fund investors waited and waited for a rebound to come. In typical fashion, most were unwilling to give up hope and take a loss at first. However, after the NASDAQ slid lower and lower each day over the next two years, they began to sell out.
As usual, they were selling at the worst possible time. In 2002 and 2003 when the major market indices were bottoming, mutual fund outflows were at their peaks.
Now, we’re seeing this cycle happen all over again – only in real time.
Selling Low
As you can see in the chart below, retail investors just haven’t gotten their risk appetites back…yet. The chart shows net outflows stock starting last June and continuing through February. Meanwhile, mutual fund investors sought the safety and reliability of quality bond funds in January and February:
This means most investors haven’t jumped back into stocks yet this year. Very few mutual fund investors are believers in this rally so far.
The trend continued into March. According to TrimTabs, a firm which monitors mutual fund inflows and outflows, mutual fund investors pulled out more than $45 billion out of stock mutual funds in March. Meanwhile, they pumped $12 billion into bond mutual funds in March.
Despite the 20%+ upturn in March, investors still primarily stuck to the sidelines. Stefane Marion, chief economist and strategist at National Bank Financial Group, points out:
“Stock funds now account for only 34% of the total assets of mutual funds, the lowest proportion since 1992. As shown, money market funds (which yield nothing currently) account for about 43% of total net assets, the highest share since 1991.”
Basically, that means there is still a lot of money left on the sidelines. And that means this rally could climb much higher in the weeks ahead.
The Panic Stage of a Rally
In the end, stock prices move due to supply and demand. Stocks go up when there are more buyers than sellers. Stocks go down when there are more sellers than buyers. When you consider the massive amount of money still left on the sidelines (on a percentage basis, the most is sitting in money market funds since 1991!), there is plenty more cash out there which could easily come back to the market.
For now, we still haven’t seen anything close to “panic buying”. Panic buying is the inverse of panic selling. Panicked sellers dump stocks at any price because they think they’re all going much lower. Panic buying, on the other hand, is when investors rush back in because they’re afraid they’ll miss the rest of the rally (the dot-com bubble is the perfect example of this). If that starts, watch out. Dow 10,000 or 11,000 – followed by a sharp downturn – will shortly follow.
For now, the best thing to do is stick to your plan. Stick to shares in high quality companies where the upside potential far outweighs the downside risks when it comes to buying stocks. And don’t hesitate to eliminate a position that goes against you.
That strategy performs well in any market. At the Prosperity Dispatch, we’ve found that if you are able to stick to it and avoid all the mistakes of the “buy high / sell low” herd, you’ll be a much more successful investor.
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I seem to recall reading somewhere (Lipper Research, perhaps? ) that bond funds are seeing some inflows. Its possible that between keeping higher cash balances, and allocating more to bonds might well trim the amount of cash available to keep fueling the rally.
Just something to keep in mind.
The lawn mower, when purchased, will not lose 90% of its value in 3 months, while WAMU and other banking stocks did just that. So we trust our judgement on the lawnmower while we want the security of the herd when buying stocks.
Our education system is based on reading, studying, and then coming to a conclusion. Often times, our conclusion is based on what we have determined is the consensus opinion. This approach works well in politics and business. As we read, learn, and become educated, our decision making improves.
I have yet to see this approach work well for making investments. The more we read, study, and listen, the more we assimilate ourselves into the herd. We may be at the front of the herd, but we are still traveling with the crowd.
Even though many on this site have proclaimed the death of "buy and hold," it is the only strategy that an average investor can hope to win with.
Look at the recent market activity. When the Dow hit 6500, didn't you have that fear that everything was going to hell and you better get out before it went to 1000? Later, when we recover to 8000, greed kicks in and we are looking at buying in before it is too late.
Or take a particular stock. You hear about it. You start to research it. Someone recommends it. Your ears perk up. More research. Then you hear about it again. Time to buy! Then Cramer recommends it. Well that stock is now a herd favorite and the sharpies are all unloading.
But the last two years have been fairly simple when I look back at my own personal buy and sell decisions. When I bought I was proven to be an idiot, and when I sold, I was a genius ( at least in terms of preventing additional losses.)
And Cetin is right, too...a pull back is normal. But, it's rather large correction, eh? To go with the rather large rally? The fundamentals are still not quite right to sustain a rally.
On Apr 07 01:20 PM Cetin Hakimoglu wrote:
> After a 24 percent rally in just 4 weeks a small pull back is normal.
> 1500 points gained and only 200 lost so far since the peak. No too
> bad.
You've confused me. You start out by saying the rally will continue "for a while", and then towards the end, you're saying your "smart money" buddies, the hedgies, are looking for 666, or lower for the S&P. Given the trouble the market seems to be having breaking and holding past 850, I'm thinking the 666 (or lower) looks like a surer thing than S&P 900 and north.
On Apr 07 05:28 PM Mad Hedge Fund Trader wrote:
> Not for a while. Today I spoke to my old Morgan Stanley boss , Barton
> Biggs, who is so bullish that he believes we are only one third to
> one half of the way through the current stock market rally. Barton,
> voted best international strategist for seven years, and one of the
> founding fathers of investment in emerging markets (with some pushing
> from me), now runs Traxis Partners, a major global macro hedge fund.
> This earnings season will be a disaster, with forecast S&P 500
> earnings at $40-$55 or lower. But hedge funds are still net sellers
> of assets, according to well placed prime brokers, and most still
> expect a retest of the lows at 666 in the S&P, or new lows in
> the 400’s. The capacity for the industry to take on new risk is therefore
> huge. Also encouraging is three consecutive monthly improvements
> in the Purchasing Managers Index (seekingalpha.com/symbo...).
> He sees this year as a replay of 1938, when a huge rally ensued after
> a long bear market, with 1938 valuations to boot.
Best,
G
On Apr 07 10:39 AM mr freddo wrote:
> The author brings up an interesting question about human nature.
> Why is it that we (the herd) love a sale price on lawn mowers, but
> turn our heads away when stocks are on sale?
>
> The lawn mower, when purchased, will not lose 90% of its value in
> 3 months, while WAMU and other banking stocks did just that. So
> we trust our judgement on the lawnmower while we want the security
> of the herd when buying stocks.
>
> Our education system is based on reading, studying, and then coming
> to a conclusion. Often times, our conclusion is based on what we
> have determined is the consensus opinion. This approach works well
> in politics and business. As we read, learn, and become educated,
> our decision making improves.
>
> I have yet to see this approach work well for making investments.
> The more we read, study, and listen, the more we assimilate ourselves
> into the herd. We may be at the front of the herd, but we are still
> traveling with the crowd.
>
> Even though many on this site have proclaimed the death of "buy and
> hold," it is the only strategy that an average investor can hope
> to win with.
>
> Look at the recent market activity. When the Dow hit 6500, didn't
> you have that fear that everything was going to hell and you better
> get out before it went to 1000? Later, when we recover to 8000,
> greed kicks in and we are looking at buying in before it is too late.
>
>
> Or take a particular stock. You hear about it. You start to research
> it. Someone recommends it. Your ears perk up. More research.
> Then you hear about it again. Time to buy! Then Cramer recommends
> it. Well that stock is now a herd favorite and the sharpies are
> all unloading.
>
> But the last two years have been fairly simple when I look back at
> my own personal buy and sell decisions. When I bought I was proven
> to be an idiot, and when I sold, I was a genius ( at least in terms
> of preventing additional losses.)
>
>
The fat lady ain't singing the recovery song, she may be in the green room, though. Makes me wonder about some contributors/readers to this forum. Maybe it's just emotion kicking in...anger, specifically. Maybe some fear. Hope that it isn't over, maybe?
Scary...I should be a billionaire, but I trade currencies...LOL
For the first time in almost 80 years Americans are truly worried about where they will live, work and how they will scrape together enough money to pay for their next meal. True, YOU may not be there yet but many are. Their credit cards are maxed out or have been taken away and they may have lost a job.
People are losing their homes and jobs at an ever increasing rate and even those with good jobs are likely in debt up to their eyeballs.
Long term thinking is changing...HAS changed. People are saving instead of spending and this is likely to last for a long time. The next generation sees what we have done and is likely to grow up like our grandparents who shunned debt and saved for a rainy day.
This is not a doomsday scenario, it is simply the truth, albeit one that may not fit in with what you and I have seen in our lifetimes.
As we have so often heard but so often ignore: "Those who ignore history are doomed to repeat it."
> You know what amazes me? I got 6 thumbs down for saying the rally
> ended a few days ago.
I gave you a thumbs down just for complaining about the thumbs down. :-)
> Not for a while. Today I spoke to my old Morgan Stanley boss , Barton
> Biggs, who is so bullish that he believes we are only one third to
> one half of the way through the current stock market rally. Barton,
> voted best international strategist for seven years, and one of the
> founding fathers of investment in emerging markets (with some pushing
> from me), now runs Traxis Partners, a major global macro hedge fund.
> This earnings season will be a disaster, with forecast S&P 500
> earnings at $40-$55 or lower. But hedge funds are still net sellers
Wow, $40-$55 or lower? Do you know that earnings for the S&P 500 were $15 for 2008 and that the current P/E ratio based on GAAP are about 60?
Read this from S&P:
www2.standardandpoors....
The likelyhood that earnings will be even $30 this year is between zero and none.
Many people are mad at bankers and politicians; I am mad at people like you who continually pass on bad data as basic as earnings and P/E ratios. If you can't get such basic data right how can you expect to have a clue what the stock market will do? YOU CAN'T!
I used to be a to 50 contributor until I began defending the dollar in gold bug threads...silly me. Ah, who cares...I am "out standing in my field." :-)
Look, if this rally isn't over, wasn't over...then when do those who think it ain't over think it's gonna be over? I'd like to hear this one. I don't even have to check the ticker, we're gonna open down, again.
Fred, last earnings I saw was $59 with one projection down at $41. But, like every projection these days, well... One day oil is rising on inventory concerns or demand, the next it's falling on either inventory surplus or waning demand.
Sometimes I wonder if anyone knows, or if there is a bit of misinformation being spewed...excuses passed off as reasons, I mean.