Good Morning. The stock market has confused and confounded a great many investors so far in 2012. While the macro negatives are seemingly monumental and there are no easy answers available, the S&P 500 index is up +7.5% so far in 2012, +12.1% from the December 19th low, +16.7% from the November 25th low, and nearly +23% from the October 3rd low. This action has the bears crying foul and has left lots of folks scratching their heads.
Given that I have a call with some investors later this morning and I know I'll be asked to explain why the market doesn't seem to make sense, I decided I'd best put together my explanation for this seemingly counterintuitive action. So, while I'm sure I'll get some hoots and hollers from the bear camp regarding the remainder of this morning's missive, here's my view on why stocks are doing their best Energizer Bunny imitation right now.
First, in order for stocks to rally to the degree that they have and to do so in the manner they have this year (meaning there have been virtually no pullbacks and nearly every intraday dip has been met with buying), you've got to have demand. So, if you look around the room at the various players in the stock market game it becomes obvious that there is one contingent with the cash available to buy stocks. No, it's not the mutual funds as the cash-to-assets ratio amongst equity funds sits near an all-time low. It isn't likely the pension fund managers, who have more liabilities than assets coming in. And it definitely isn't the public as Mom and Pop were blown out of this market a long time ago.
However, it has been well documented that Hedge Funds had gotten uber-defensive in the latter stages of 2011 as the macro picture appeared to be getting uglier and uglier by the day. Thus, the fast-money crowd was likely caught flat-footed as the current rally began. And since a great many of the hedgie crowd subscribe to the church of what's working now, it isn't surprising to see stocks being chased higher on a daily basis.
The bears will argue that this type of demand is suspect as these managers can and will turn on a dime. Therefore our furry friends tell us that today's rally is likely to soon morph into tomorrow's nightmare. However, it is worth noting that there might just be something besides performance anxiety happening here.
Let's take a step back from the blinking screens for a moment. And just for fun, let's x-out the period from June through October on the charts.