There is a lot interesting stuff going on in the markets. We’ve been seeing some classic sector rotation over the end of last week. Funds (both mutual and hedge) have been taking profits on the high-flyers and buying up the dogs.
You may have seen some weakness in stocks like Apple (AAPL), F5 Networks (FFIV) and NetFlix (NFLX) and wondered how the stock market was continuing to make gains when some of the leaders were down.
In my opinion, it’s because the institutional money is simply re-deploying in some other stocks. Bank of America (BAC) is one. The selling was overdone in response to the Wikileaks rumors, and the rebound for the stock has been easy money. Plus, there are dividends on the horizon and no fund manager can afford to miss out on that.
We’ve also seen strong buying in oil stocks. Kodiak Oil & Gas (KOG) has run from $5 to a high yesterday of $6.40. I recommended the stock around $4. Those are excellent gains, and there’s probably more to come. Oil stocks should look good until spring, when funds tend to rotate out of oil.
It’s tough to have missed the Chinese IPOs this week. Both Dangdang (DANG) and Youku.com (YOKU) have launched higher after their debuts last week. These stocks have been pitched as the Chinese Amazon (AMZN) and Chinese YouTube (GOOG). And when you think about the sheer size of the Chinese population, and the changes in discretionary income there, you can see why these stocks have done so well. There is huge growth potential, especially for Chinese companies that tap the domestic consumer market there.
But, a word of caution. When you hear that Dangdang is the Chinese Amazon, or Youku is the Chinese YouTube, please remember that these descriptions were created by the people bringing the stocks to market. They benefit from a successful IPO. I don’t mean to say I think these stocks are frauds, either. They could be great investments. Just do your homework. And have a look at Chinese search engine Baidu.com (BIDU).
Baidu.com went public in August of 2005, in the midst a fairly strong market. It traded between $5 and $7 – at the time $50/$70 - for several months before it finally took off. I expect there will be more attractive entry points for both Dangdang and Youku in the coming weeks or months.
For a little perspective on the sustainability of the current stock market rally, check out mutual fund flow trends. In the last 2 years, investors have poured $709 billion dollars into bond mutual funds and ETFs. And they've taken $100 billion out of stock funds.
Now, the total market cap of the S&P 500 is a bit more than $11 trillion. A leveling of these fund flow trends would provide significant buying support. And that’s not the only liquidity source for the stock market. Household wealth rose by nearly $1.2 trillion in the just the last few months. And we know there’s a heap of cash sitting in savings accounts and money market funds.
Of course, there’s no proven correlation that cash in savings eventually gets invested in the stock market. Still, as the economy improves, it’s encouraging that there is plenty of liquidity to support stock prices. Consumer sentiment is at a 6-month high. I guess a lot of people forgot how much fun Christmas shopping is…
Disclosure: No position
