Investors are supporting equity stock market with risk appetite. However, the buying pattern is different from the beginning of the year. During the period from February to May, individual investors are waiting on the sideline with cash in the safety of money market. Institutional investors are slowly buying up the market unanimously. The stock market chart shows a uniform upward trend during that period until the flash crash in May. Now at the end of the year, institutional investors have realised some of the profit and sit on both equity stock as well as cash and reward themselves with year end bonus. Individual investors watch themselves missing the 2009 rally and the growth of wealth of equity stock shareholders. Feeling the wealth creation effect, they finally start to re-enter the market in October.
Unlike institutional investors early in the year, individual investors are extremely cautious in buying. As a result, market moves in an upward trend but with bumps, supported by strong desire of buying and minimal selling pressure. It appears that individual investors have not stopped buying yet. With less sellers than buyers, broad market index is constantly making record high of the year. Mutual fund managers have secured this year's bonus and seek relief from portfolio performance pressure. Hedge fund managers are planning for the next move and is watching the market for opportunity. The herd of individual investors are busy looking for stocks to buy as well as to take profit to avoid potential dip in market. Thus there is increased day trading activities.
The buying driven rally may last longer until beginning of earning season or another event such as the flash crash. The wealth effect as well as fear of inflation helps to increase the risk appetite of investors, shifting portion of the portfolio from treasuries and bonds to commodities and equity stocks. Market participants are creating a regenerative cycle of wealth creation, in other words bubble. Although economic growth is less than the rate to support current fast pace of wealth creation, the regenerative nature of asset appreciation can sustain until market calms down, or economic growth catches up, or overly priced.
Equity stock is gaining strong support from optimistic market participants despite moderate economic outlook. Short term market performance may not correlate directly to longer term economic condition.
"Investors enter 2011 in bullish mood: Reuters poll" Investors are entering 2011 in a relatively bullish mood, raising equity holdings to a 10-month high, increasing exposure to high-yield credit and cutting back on government debt, Reuters polls showed on Wednesday.
A combination of improving economic data and a belief in future, robust, corporate earnings has lifted investor appetite for equities over the past few months.
"People are coming off the sidelines and buying stocks," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati.
There was also sign of risk appetite in an increased exposure to riskier, higher yield bonds.
"Does a Low VIX Signal Danger?" Remember all the way back to April 2010? Spring was in the air, the Mets were still mathematically alive in the National League East race, and the VIX (the Chicago Board Options Exchange volatility index) was near 15. The singing birds obscured the approaching clouds, and before you knew it we had Flash-Crashed our way into a Fear blitz.
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