Although market have advanced significantly since beginning of the year, the majority of market participants are frightened by the sell-offs in the second half of last year. Many investors have sold stocks near the bottom due to fear and prefer to hold cash. They have been waiting for market collapse to replenish the portfolio. Therefore the rally benefits mostly those long term investors with holding power and risk taking.
Market manipulators do not attempt to trigger a panic sell-off. Selling is mostly from day traders and speculators. There are also some profit taking since some buyers at market low want to realize part of the profit and wait for another opportunity. Institutional investors maintain the level of equity stock holding while performing re-allocation. There is also influx of capital due to increasing interest of investors in equity stocks. It would encourage further buying when market heats up. Individual investors also exhibit buying interest but are waiting for bargain while market is climbing a wall of worry.
As market participants have different speculation, market dynamics will change depending on global economic environment and capital flow. However, there is sign that investors are looking for higher return on investment and are starting to pour money into the equity stock market after three years of low interest rate environment.
Market manipulators do not use the panic sell-off strategy when traders are speculating a pullback. This would in turn increases the confidence of market participants and some impatient investors may start to chase stocks. Nevertheless, market participants are currently very cautious and herding behaviour prevails. Traders, speculators, and manipulators are competing for market movement.
Why small companies' stocks deserve a closer look
Underperforming money managers are losing their most reliable scapegoat.
Since the 2008 financial crisis, the nation's professional stock-pickers — who manage billions for pension funds, endowments and wealthy families — have said stocks were too stuck-together to build smart, market-beating portfolios.
Meanwhile, the Russell has been on a historic upswing, gaining more than 36 percent in the past four months, compared with 22 percent for the much-bigger companies in the Standard & Poor's 500 index.
"This should have been a period when stock-pickers should have done well, and unfortunately, it just didn't happen," says Lori Calvasina, the lead author of the Credit Suisse report. "It does feel like this was an opportunity that got missed."
So how did so many fund managers end up holding the wrong stocks? They were too cautious, Calvasina says.
Late last year, many were afraid that Europe's debt crisis would boil over, threatening the U.S.'s slow economic recovery. They set about buying "high-quality" stocks — bigger companies, often in industries that do well when the economy is weak. Traders also bid up stocks of companies that do most of their business here in the U.S., Calvasina says.
Those aren't the stocks driving the Russell index's gains. As the economic outlook has improved this winter and traders have grown less worried about Europe, stocks have gained the most in sectors that are sensitive to the economy, such as homebuilders, boatmakers and furniture manufacturers.
But this year's small-cap gains aren't merely a normal rebound from last year's overselling, says Doug Roberts, chief investment strategist with Channel Capital Research. He says they're also a result of the Federal Reserve's policy of keeping short-term interest rates near zero.
"It's the cheap money, or the liquidity, that drives up stock prices," he says.
John Fox, director of research at Fenimore Asset Management in New York state, says traders should look for companies that aren't already picked-over by Wall Street analysts.
"In small-cap world, you have many more stocks to pick from, and you can find companies that may have one analyst looking at them, or no analyst coverage at all," he says. "That's what's different."
Why Dividend Stocks Aren't the New Bonds
OppenheimerFunds portfolio manager Daniel Loughran explains to WSJ's Karen Damato how muni funds can offer a bigger payout than what Treasurys and some other bonds are providing, despite some risks.
For many investors who crave steady income, bonds don't look as good as they used to.
"People may not appreciate that moving from bonds to stocks is a major change in asset allocation," says Joseph Davis, chief economist and principal at Vanguard Group.
Investors should also remember that dividend-paying stocks don't always behave like other stocks, either. Dividend payers are often larger, established companies—which means they often aren't perceived to have the same potential for earnings and revenue growth as smaller firms. When the rest of the market is booming, dividend payers are often lagging behind the crowd.
To be sure, they often deliver better results than other stocks during market selloffs, since the income they provide makes up for some of the lost return. But investors can get the same kind of downside protection from bonds—with substantially lower capital risk.
For all the caveats in this category, investors have been plowing money into these dividend-focused funds.
If you're thinking of using dividend-paying funds as a source of income, here are some pointers that will help you make the most of your investment.
DIVERSIFY YOUR INCOME SOURCES. To limit stock-related risk and boost income, plan to get income from a mix of bonds, as well as dividend-paying stocks.
OWN SOME STOCKS JUST FOR GROWTH. Most investors—even those who already have entered retirement—need the capital appreciation that stocks can generate to reduce the risk of outliving their assets.
BE MINDFUL OF FUND COSTS. For many investors, mutual funds are the most practical way to get exposure to stocks that pay dividends. Unless you have several hundred thousand dollars to invest, you probably can't buy enough individual stocks to get reasonable diversification in your portfolio.
BE SURE YOU'RE COMFORTABLE WITH OVERSEAS EXPOSURE. One classic strategy for income-oriented investors—and the funds that cater to them—has been to blend U.S. stocks with European stocks, since the latter historically have had higher yields.
BRACE FOR STOCK-MARKET TURMOIL. While you are collecting periodic income distributions from a dividend-oriented stock fund, the share price of that fund will be moving up and down, sometimes resulting in periods when the overall return is negative. Look at a fund's total return over several years, rather than just its yield, to gauge its overall performance and compare it with peers. (With individual stocks, remember that a struggling company may cut or eliminate its dividend.)
It is important to hang in there, despite the market's ups and downs.
You can't fully benefit from owning equities unless you hold them for a multiyear period, says Quintin Price, chief investment officer for fundamental equity at BlackRock Inc. That means "you've got to have patience to withstand the volatility,'' he says.
Corporate profits aren't what they seem
While other parts of the economy struggled the past two years, large companies managed to rack up higher profits quarter after quarter.
At the start of the bull market in March 2009, when stocks hit 12-year lows, many professional investors worried that the weak economy would keep a lid on profits. But companies cut staff, squeezed more out of the workers who remained and made more money than nearly anyone expected.
Skeptics noted that companies could only cut so much. But companies kept cutting and squeezing and posted even higher numbers. Then, when domestic revenue didn't grow as quickly as expected, companies compensated by finding buyers abroad, and posted higher profits again.
For eight quarters in a row through last year's third, companies in the S&P increased earnings by double-digit rates. The average increase was a blistering 41 percent. By contrast, the average increase over the past quarter-century is 8.2 percent — not counting the fourth quarter of 2009, when earnings growth was astronomical but the comparison was misleading because of the financial crisis a year earlier.
Investors buy and sell stocks mostly based on what they expect companies to earn in the future, not on what they made in the past. And though dour in the short run, investors expect big gains as economies of the U.S. and some of its big trading partners pick up later in the year.
Forget Europe, U.S. Stocks Will Rise 10% This Year: Ablin
The news from Europe seems worse by the minute as negotiations between Greece and international lenders continue to drag along, leaving investors to wonder whether stocks can remain oblivious to the overseas situation.
According to Jack Ablin of Harris Private Bank, stocks are actually pricing the European crisis in, and that's the only reason we aren't up even more than we are. By Ablin's math, international turmoil masked a recovery story in the U.S. that should have pushed domestic markets to near double-digit gains in 2011.
"Economics is a social science; it's an allocation of resources," Ablin says. That being the case, more resources will be coming into the U.S. while the rest of the world struggles through the pain. It may not be a great bullish theme but it should be more than enough to keep the wheels turning over here.
Fink: Investors Should Be 100% in Equities
Investors should have 100 percent of investments in equities because of valuations and higher returns than bonds, said Laurence D. Fink, chief executive officer of BlackRock Inc., the world's largest money manager.
Investors who seek the safety of treasury bonds will have minimal returns and will not be able to meet their needs with the U.S.
"You need to take on more risk, you need to overcome all this noise," he said in an interview with Bloomberg Television in Hong Kong today. "When you look at dividend returns on equities versus bond yields, to me it's a pretty easy decision to be heavily in equities."
Is Market Volatility Gone for Good?
For investors who came of age after 2000 there's been only one way to make and keep money in stocks: Trade. Buy panic, sell fear. Lather, rinse, repeat. At least for the moment, 2012 has marked the rebirth of "buy and hold." Don't take gains, don't be afraid to chase, and for the love of all that is holy don't get short.
Stepping away from emotion and looking at companies both here and abroad Speiss wants to know "when are they going to start hiring again to drive greater economic valuation increases?" In English, when will global corporations start growing their businesses instead of hoarding cash and waiting for an all-clear signal that's never going to come.
Regarding stock valuations as attractive and not expecting the world to get less complicated, Speiss suggests clients stick to their knitting and invest in a way that makes sense to them. "Everyone's psyche is not the same," he says, and neither are their goals. That being the case get positioned for the long-term now and buckle up before the market snaps out of it's daze and resumes its dance between greed and fear.
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