'
MARKET SNAPSHOT
'Smart
money' starts to bail on stocks' rally
By
Nick
Godt, MarketWatch
Last update: 4:32 p.m. EDT May 4, 2009
NEW YORK (MarketWatch) -- After
more than eight weeks of a rally,
stock market behavior is close to
exuberance, say
"smart-money" strategists
who view factors such as rising
participation and positive reactions
to most news as tell-tale signs that
it's time to take money off of the
table.
"Just like when too many
participants bet on the same horse the
betting odds on that horse go down, the
'betting odds' of making money in the
short-run have been greatly reduced after
eight weeks into this upside skein,"
says Raymond James market strategist Jeffrey
Saut in his latest research call.
"We have made a lot of money over the
last eight weeks and continue to think the
trick from here will be to keep that
money," he said.
Saut has taken his trading account back to a
cash position, and has taken defensive
positions in case of a market correction.
On Monday, stocks received yet another
upward jolt, after upbeat reports on housing
and construction spending in March, along
with optimism that banks can raise capital
on their own, fueled ongoing hopes of an
economic recovery.
The Dow Jones Industrial Average
($INDU:
Dow
Jones Industrial Average
Last:
8,212.41+44.29+0.54%
4:02pm
05/01/2009
Delayed
quote data
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$INDU 8,212.41,
+44.29,
+0.5%)
gained 214 points, or 2.6%, to end at
8,426. The S&P 500 index
($SPX:
S&P
500 Index
Last:
877.52+4.71+0.54%
4:59pm
05/01/2009
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quote data
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$SPX 877.52,
+4.71,
+0.5%)
gained 29 points, or 3.4%, to 907, a
four-month high. The broad index, used by
investing professionals to benchmark the
market, is now up 0.4% for the year so far.
The Nasdaq Composite
(COMP:
Nasdaq
Composite Index
Last:
1,719.20+1.90+0.11%
5:15pm
05/01/2009
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COMP 1,719.20,
+1.90,
+0.1%)
gained 44 points, or 2.6%, to end at
1,763. The technology-heavy index is now up
11.8% for 2009.
After closing at a 12-year low on March 9,
the market, as measured by the broad S&P
500 index, has now rallied more than 34%.
The move has been largely fueled by optimism
that the free-fall of the financial system
and the economy has stopped.
But veteran investing advisors, such as
Pimco strategist Bill Gross, believe the
market's recent hopes over an economic
recovery might be overdone.
"Do not be deceived by the euphoric
sightings of 'green shoots' and the claims
for new bull markets in a multitude of asset
classes," Gross wrote in Pimco's May
outlook. "Stable and secure income is
still the order of the day."
Smart is as smart does
So-called "smart money" investors
tend to rely on contrarian indicators: Just
as a social trend often starts fading after
it makes the covers of magazines, too much
euphoria by too many market players often
leaves little room for further upside in
stocks.
As the financial crisis and global recession
drove stocks to 12-year lows, investor
sentiment got so depressed that the
slightest bit of better-than-expected news
became potential fuel for stocks to rise.
But after a two-month run, investors are now
becoming more demanding.
"Simply beating reduced earnings
expectations is helping in the short term
but in the long term, one must have earnings
and revenue growth, not merely
better-than-expected contraction," said
Dan Greenhaus, market strategist at Miller
Tabak.
"In light of the broader issues facing
the global economy, muted earnings and
revenue growth should be expected and with
it, muted stock prices cannot be far
behind," he said.
This time it's different
The global scope and the massive scale of
the recent downturn, however, and the
extra-ordinary circumstances that have led
to massive intervention in markets by the
U.S. government, has some strategists
believe it's time to dump the old guidebooks
on smart investing.
For starters, the usual progression in stock
rallies is for big institutions to provide
the original fuel. By the time retail
investors join the party, it's almost time
for the smart money to pack.
But this time around, anecdotal evidence --
such a trading data from online brokers
Etrade
(ETFC:
E*Trade
Financial Corp
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1.73+0.15+9.49%
4:00pm
05/04/2009
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quote data
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ETFC 1.73,
+0.15,
+9.5%)
and Ameritrade
(AMTD:
TD
Ameritrade Holding Corp
Last:
16.77+0.73+4.55%
4:00pm
05/04/2009
Delayed
quote data
Sponsored by:
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AMTD 16.77,
+0.73,
+4.6%)
-- suggests that retail investors
have been driving the rally from the start,
while institutions have remained very
cautious about the market, says Barry
Ritholtz, CEO and director of equity
research at Fusion IQ.
"The 'dum' retail money is leading the
gains," he said. At the same time,
while some institutional investors have
remained cautious, some are afraid to miss
the opportunity to make some money in the
process.
"After the strong gains we've seen over
the past two months, you'd expect to see
some sort of digestion of the gains,"
Ritholtz said. "But while bull markets
usually give you more than one opportunity
to step in, bear markets usually
don't."
And so the good news could be that
institutional investors, afraid to have
missed the rally, might step in more
forcefully and fuel further upside for the
market for some time.
But the bad news remains that, if this is
indeed still a bear-market rally, investors
will eventually see the recent rally just as
an opportunity to have made short-term money
before selling.
What will eventually guide investors will be
economic realities, Ritholtz says.
"In this type of environment, the
market is guilty until proven
innocent," he said. "We have to
assume this remains a bear market until we
see a more normalized economy, a recovery in
some employment measures, and real estate to
actually start improving - not just to stop
free falling."
Nick Godt is a
MarketWatch reporter based in New York.
