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What's Been Driving The Buying?

Daily State of the Markets
Tuesday Morning - March 20, 2012

Good Morning. As I have mentioned on a couple of occasions recently, I believe that we are now in the throes of a new cyclical (or "mini") bull market. As such, we should expect our heroes in horns to keep their opponents at bay for quite some time yet as the median mini bull that occurs within the context of a secular bear (i.e. a move spanning a decade or more), lasts about 500 days while the average lasts about a year. And given that this bull started on 10/4/2011, history suggests that the rose-colored-glasses gang out to remain large and in charge for another 6 to 11 months.

In terms of what to expect from the total return standpoint, the bulls' current run for the roses has produced a return +28.2% as of yesterday's close. The good news is that the according to the computers at Ned Davis Research, the average gain for these mini bull markets that occur within secular bears is a hair under +66%. So, for anyone thinking that this rally can't possibly go any farther, you may want to think again.

However, history tells us that there may be some good news for the bear camp as well in the near future. You see, it is very important to recognize that even the strongest bull markets don't move up in a straight line. As such, a "pause that refreshes" would not be surprising in the near future. And given that the old Wall Street saw which tells traders to "sell in May and go away" has worked like a charm for something like six years running, it wouldn't be surprising to see things get sloppy again at some point soon.

While it is fairly easy to understand what to expect once a market like this begins, the underlying reasons for the market's abrupt costume change last fall are not. In fact, the question that I get asked the most lately is "What is driving the buying?"

Although we've explored many of the answers to this question in detail over the past few months, this morning I thought that we should put them down in one place. So here goes...

For starters, the success of the ECB's LTRO has taken the collapse of the Eurozone off the table. And with that, one can eliminate the worry that the Greece situation will bring down the global banking system. Speaking of banks, the bottom line is that the banks in the U.S., which many investors had left for dead, have done a good job at rebuilding their balance sheets and nearly all the major banks passed the Fed's latest doomsday-oriented stress test. Next, we must recognize that the U.S. economic data has been better than expected for several months now. And while on the topic of the economy, it is hard not to recognize that the labor market in the U.S. is improving. (Sure, there may be some holes in the unemployment numbers, but you can't dispute the fact that the economy has been creating jobs for the past 21 months.) Heck, even the housing market appears to be improving as we learned this week that the big hedge funds are looking to buy up hundreds of millions of dollars of single family homes to be used as rental properties.

In terms of what's driving the relentless buying, the easy answer is to point to the previous paragraph and say that things are getting better. But that doesn't really explain why nearly every dip has been bought lately - even on an intraday basis. From my perch, the answer is simple: the pervasive negativity that existed at the end of last year caused throngs of managers to come into 2012 with a defensive position. And what has that gotten them? In short, it has put managers far behind in the performance race. Thus, managers of all shapes and sizes have been scrambling to get in. And with no pullbacks to speak of occurring, managers have reverted to chasing the market higher.

Then there is concept of investors reallocating assets from foreign markets back to the U.S. and the idea that managers are moving from bonds to stocks. And don't forget about all the cash that is on the sidelines and the fact that the public tends to jump on a bandwagon after it is already rolling. And finally there is the calendar. Don't forget that the end of the quarter is fast approaching. And if ever there was a time for end-of-quarter window dressing to be occurring, this would be it. Oh, and then there's Apple.

To be sure, stocks are overbought and the market is ripe for a pullback. But to be honest, everyone's been saying that for a while now...

Turning to this morning... The bears are attempting to get back in the game this morning on fears that China's decision to hike fuel prices (in response to the recent increases in crude) will be inflationary and hurt growth in the world's second biggest economy. Asian markets as well as European bourses are lower and correspondingly, US futures are pointing to a drop at the open.

On the Economic front... Housing Starts in February were reported at an annualized rate of 689K. This was below the consensus for 704K. Howver, the January numbers were revised higher to an annualized rate of 706K from 699K.

Building Permits for February rose to a rate of 717K. This was above the consensus of 691K and last month's unrevised reading of 682K.

Thought for the day... As Confucius said, "Choose a job you love, and you will never work a day in your life"...

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: -0.36%
    • Shanghai: -1.38%
    • Hong Kong: -1.08%
    • Japan: NA
    • France: -1.31%
    • Germany: -1.35%
    • Italy: -1.01%
    • Spain: -0.92%
    • London: -1.18%
  • Crude Oil Futures: -$0.97 to $107.12
  • Gold: -$22.80 to $1644.80
  • Dollar: lower against the yen higher vs. pound and euro
  • 10-Year Bond Yield: Currently trading at 2.339%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -7.95
    • Dow Jones Industrial Average: -69
    • NASDAQ Composite: -13.71

Positions in stocks mentioned: none

For more of Mr. Moenning's thoughts and research, visit

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