10.06.2009
Money Managers Rush in the Market Chasing Performance
original article written by Net Advisor™
Money managers may be getting more desperate and panicking to get in the market. Despite a wealth of data that still suggests high risks to the economy exist; this really does not matter if cash is entering the buy side of the stock market.
Just like in 1998-2000 when the FED raised rates the market moved higher, despite increasing risks to the very same stocks then eventually collapsed by 2000-2002.
This happened again in 2007 when M&A’s moved the market higher anticipating more and more take overs. This is spite two of Bear Stearn’s subprime hedge funds that collapsed in spring 2007, the market ignored this final warning sign of a pending housing and credit market collapse by pushing the market higher through October 2007.
The Marketing of Mutual Funds
Fund managers (specifically mutual funds) have lagged the market last 2 years for obvious reasons. Another down year in a net positive market makes it a lot harder to sell a mutual fund, and even harder for a fund manager to keep their job. Fund managers are desperate to get ahead of performance for the last quarter for 2009. So the solution is to take their billions in cash and start buying.
Are they buying because there are good values out there? No. in fact the market is overvalued and has been for some time. But like in the late 1990’s valuation went out the door, as massive new cash entered the market.
Cash Helping Drive Market
There is enough cash, some $3.5+ Trillion dollars on the sidelines that could enter the market, resulting in a higher market.
A lot of people argue that this money could come in the market. If it did all at once the market would soar like a 1999 .com stock. I disagree that most of this money will NOT enter the stock market. Most of this money is in money market accounts and people don’t all of a sudden take all their cash and dump it into the stock market.
Cash sitting in mutual funds is another story. That cash is going to work. The thing is that most mutual funds are fully invested all the time as their charter often dictates.
Understand that this rally since March 2009 has been largely technically driven. As long a support levels are upheld, the market seem more likely to move and test the psychological 10,000 level on the DOW.
If NASDAQ breaks and closes below 2040, that would a red flag for a near term decline. I would watch it over the following couple weeks at that point to see if the trend reverses or moves toward next support at around 1950.
Goldman Sachs (GS) is also a key stock to watch. The market (DOW) moved about 50 points higher AFTER Golden stock moved from being in the red to the green. I would also keep an eye out for Apple (AAPL), Google (GOOG), and Blackberry maker, Research in Motion (RIMM)’s stocks for indicators for market directions.
What Else To Watch
The 3rd quarter earnings come out 10-07-2009 beginning with Alcoa (AA). Mutual funds have their year-end in October. Most hedge funds have their year-end in December. Funds are likely to do whatever they can to protect their profits. Who knows what will happen after that. If Q3 earrings become a big disappointment, then that could impact the market immediately. If earnings are looking good, the market may just move higher.
As long as the Fed keeps rates down, and both the FED and the U.S. gov puts trillions of dollars in the economy to artificially drive it higher (“Reflation Trade”), the market may continue on its current trend.
Gold has continued to move higher on future inflation fears, and lower U.S. dollar due to the massive deficit spending, and pressure from China, Russia, and others wanting to use a currency other than the U.S. Dollar as the global currency.
It would not surprise me if gold and other commodities like oil, sugar, copper and steel, hits record highs for now.
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Financial Disclosure:
At time of post, Net Advisor™ and or client(s) has maintained a long position in gold.
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