In spite of the Dow Jones Industrial Average pushing up to the venerated 10,000 level,investors have yet to buy in fully to the stock rally even though prices have surged more than 50 percent. But that caution has actually given rise to hopes that the rally still has legs. Call investors "skeptical", "disbelieving", but don't call them "late for dinner". After the bell on Tuesday Intel (Nasdaq:
INTC) came out with some surprisingly good numbers and that might help allay some worry.
This morning JP MorganChase (NYSE:JPM) impressed the markets with some very positive earnings numbers, but their was also an ominous side to their celebration.
JPM was the first of the big banks to report earnings for the July-September period. They reported a $3.59 billion profit but also said it roughly doubled the amount of money it set aside for failed home and credit card loans in the quarter.
Many analysts worry that between defaults on home mortgages, rising unemployment, and millions not able to repay their credit card loans that the recovery is "business based" instead of "consumer based".
But climbing a "wall of worry" is what bulls like, and at some point the money on the sidelines will end up overcoming their shyness just when they ought to be holding the line with patience and endurance.
As a recent CNBC story put it: "Though economists are proclaiming that the recession is over, investors are wary over how quickly recovery will occur and the continued pressure that high unemployment is placing on consumers. Moreover, there continues to be widespread sentiment that the rally can't go on forever-the Standard & Poor's 500 is up more than 60 percent since early March-and a pullback is in the wings."
Indeed, a spate of sentiment metrics indicates that rather than piling back into the market, investors are entering cautiously:
- BoA Merrill Lynch Global Research said its Sell-Side Indicator still shows that investors are below the normal 60 percent equity allocation in portfolios. "This gives us confidence that there is further room for sentiment and the market to rise before we would consider investors' bullishness to be overdone," the firm said in a note to clients.
- Just 35.1 percent of investors have bullish sentiment, according to the most recent reading from the American Association of Individual Investors. That's below the normal level of just below 39 percent.
- A TD Ameritrade survey showed 45 percent think this is a good time to invest, which the firm said is positive but still reflective of some hesitation.
The upshot, portfolio managers say, is that investors are getting more comfortable with the market but continue to look for safety rather than just an arbitrary technical level to capitalize on a quick rally.
"Healthy skepticism is a good way of saying it," says Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "They're actually looking at market fundamentals. They're getting away from the whole thing that drove (the market slump) which was fear of the abyss."
"It's tempered enthusiasm. There are so many people wary of a pullback in the market," says Andrew Wilkinson, senior strategist at Interactive Brokers. "A market feeds on its own momentum and that momentum is on the upside."
Traders believe the government will intervene [maybe with another bail-out package] to prevent any major moves lower, Wilkinson adds.
"I find it hazardous to be one of those people wanting to short the market. That kind of philosophy is entrenched at this moment and that leads people to keep buying the pullback," he says. "I find it tremendously hard to be bearish at the moment." Because there are still a lot of people who are unconvinced, this market rally might continue awhile longer.
My sources tell me that it wouldn't surprise them to see the DJIA get all the way up to 11,000 before the next big correction. Watching the volume and the tone of the media might be very telling in the days and weeks ahead.
