Market participants watch market recovering from sell-offs to current peak and is approaching historic peak. Few would anticipate such a strong market movement due to lack of confidence and widely spread pessimism. On the other hand, in the course of market advancement, it attracts hot capital on speculation. Also, economic activities generate a lot of wealth. Since households remain risk averse, these surplus capital are swirling in the financial market looking for investment return.
The financial market is flooded with hot money. But investors remain cautious in equity stocks. On the other hand, stock valuation is attractive and market participants are unlikely to dump the core portfolio as in the panic sell-offs. There is speculation that equity stock market will fall hardly after reaching year high. Market cycle in previous years has a much larger decline than the pullbacks in this year. Therefore market participants are waiting for the opportunity with plenty of cash to pick up bargains. The missing condition is the need for sellers to dump stocks desperately for cash. Market manipulators appears to be afraid of short selling the market. Long term investors are unloading portion of the portfolio but selling is limited. Institutional and individual investors have abundant cash and are not willing to dump stocks. Although market is likely to continue to climb on a wall of worry, market participants on speculation should track the flow of hot money for sign of fleeing capital from equity stock market.
Investors Are Still in Hiding
After a summer of low volume and high gains, the stock market soon will face the challenge of whether it can sustain a rally once the crowd comes back from vacation.
"The individual investor is still not in," said Keith Springer, president of Springer Financial Advisory in Sacramento, Calif. "At some point there could be some panic buying by some individuals if they gain confidence. But the average investor doesn't believe in this."
In Lee's scenario, the late-year pullback will come not from concerns over Europe's debt crisis or the perils of Congress failing to hit deficit-reduction targets and sending the economy over the fiscal cliff of tax increases and spending cuts. Rather, he said the market likely will retreat if President Obama wins re-election.
Springer is advising clients to buy stocks but to move carefully, as he sees the market coming apart next year after central banks are no longer successful in stimulating the market.
"It's not a rising tide raises all boats in this case," he said. "They're being very selective generally, in large-caps, interest-sensitive stuff. It tells you there's very selective buying, which is not what bull markets are made of."
Cramer's 5 Rules for Becoming a Better Investor
Investors can avoid some of the most common and money-losing mistakes in any environment by following five easy rules, "Mad Money" host Jim Cramer said Friday.
"If you follow my rules, you should be able to recognize an opportunity when you see it and to manage to avoid losing money when you don't have to, no matter what the circumstances, including a collapse in Europe or a slowing in China or even a skyrocketing oil price," he said.
Rule No. 1: "Don't dig in your heels when you're wrong"
The late, great economist John Maynard Keynes always said, "When the facts change, I change my mind." Cramer has adopted the quote as his personal mantra. After all, he said one of the easiest mistakes to make is refusing to change your mind when the facts are in and you've been proven wrong. It's one of the most difficult things for the most emotional investors and traders to do, but also crucial to be a good investor.
Rule No. 2: "Price matters"
Price is so important, that if it could go low enough, investors are willing to buy stocks of companies they don't even like that much. Cramer will never recommend a stock when he thinks the fundamentals of the underlying company are deteriorating and normally there's a lot of space between a "best of breed" company and one that's uninvestable. In normal circumstances then, if a lowly company's stock falls to a certain level that makes it just too darned cheap to pass up, Cramer thinks it's perfectly OK to buy when you merely have a low opinion of the underlying company. That's when price matters.
Rule No. 3: "Don't take your cue from an inferior company"
When a "worst of breed" name says things are bad for the entire sector, don't just take it on faith, Cramer said. Weak players always seek to pin their failings on the entire industry, he explained. It's important, then, that investors are able to recognize the excuses.
Rule No. 4: "Don't believe the hype"
Not all upside surprises are worth getting excited about, Cramer said. If a company reports quarterly results that show its earnings-per-share are higher than what the average analyst on Wall Street had expected, then all of the headlines will describe it as an upside surprise.
Rule No. 5: "Be critical of commentary"
One of the most natural and misleading mistakes, Cramer said, is to assume that people on TV criticizing the market must be telling the truth. Don't fall victim to this. People who dislike the market are not any more honest or less self-interested than those who talk up the market and/or individual stocks.
Investors should be just as skeptical of bears as they are of bulls. But to most people, expressing a critical view of the market and/or an individual stock automatically bolsters the commentators credibility. But Cramer said the people criticizing the market in the media aren't necessarily trying to help you.
'Most Hated' Stock Rally Has New Non-Believers
I said a couple weeks ago that this was the most hated stock rally in years; looks like everyone else is jumping on the bandwagon.
The problem is two-fold: 1) The U.S. economy is chugging along with, at best, anemic 2 percent growth, but the U.S. stock market is near a four-year high; and 2) U.S. big-cap indexes are near four-year highs, but the Chinese market is near a four-year low.
The Chinese market is closed to foreigners, which is an issue, but you can see the main problem is the strength of the U.S. markets. No one believes it. The reason stocks are higher, the skeptics insist, is because the Federal Reserve continues to dangle a third round of quantitative easing in front of the market. Without it, the markets would collapse.
There is no doubt that there is a "Bernanke put" operating under the market, but how great that put is remains to be seen. I think stock prices are higher because of it, but I don't think it is preventing the market from collapsing.
No, the reason stocks are stronger is that, while earnings growth has slowed this year, it has not evaporated. S&P 500 earnings are expected to increase 6 percent in 2012...that is slower than the 14 percent growth in 2011, but still respectable.
Maybe that's why so much foreign money continues to find its way into the U.S., for stocks as well as real estate.
No, we are near multiyear highs in the stock market because corporate earnings are near record highs, and that's what matters. It's true that revenue growth is flat, and that is a real problem, but absent that growth corporations continue to find ways to cut costs and stay profitable.
Why Cramer Doesn't Hate This Market
As U.S. stocks eased off their worst levels to end mostly flat Monday, the stock market managed to remain around four-year highs. Nevertheless, Jim Cramer noted that many on Wall Street still object to the rally.
"Right now we've got a first class hate going against this market," the "Mad Money" host said, adding that light volume, reports of subpar corporate revenues and an uncertain political environment have left some investors worried about the sustainability of the market's gains.
"Hated rallies don't stay hated. They tend to gain adherents and the trick is to recognize when that starts happening before the adherents overwhelm the sellers and the sidelined players become anxious to get in and have seller's remorse."
Can Stocks Shake 'Sell in May' Summertime Curse?
Stocks are breaking a recent pattern, shaking off their summertime blues and recapturing four-year highs, and there are even reasons why those gains could continue for now.
Many investors are skeptical and are waiting for the market to get crushed in September, either from sour news out of Europe, potential disappointment from the Fed, or just the political noise that comes with the election and Washington's failure to act quickly on the fiscal cliff.
They are also watching the escalating rhetoric on Iran's nuclear intentions.
In an eerie pattern, the S&P 500 has, in each of the past three years, hit highs in late April or early May then sold off into the summer in a perfect "sell in May" pattern. In 2010, stocks recovered the summer's losses by November, and last year it wasn't until February 2012. But this year, stocks hit the low ground in June and have now quietly climbed back to the four-year high the market was flirting with in April.
While investors find plenty to hate about the market rally, Maxim Group technical analyst Paul LaRosa says there are some signs the rally has legs for the time being. But in the very short term, it will have to be confirmed by a close above 1,422, and then by gains in other indexes. He pointed to the Russell 2000 which is just joining the rally.
"This is a key juncture we're at in the market here. We're going to determine whether this is the tip of the iceberg, and we're going much higher," he said. "Or we'll see the market won't confirm." At that point, a selloff would bring a buying opportunity.
"This is taking people by surprise, which is what a good intermediate term rally does. You start to see more sectors come out on good, bullish bases. We're seeing that in financials. We're seeing in some of the commodity-related issues. Energy names are looking pretty good here," LaRosa said. "I think some of the money sitting on the sidelines is starting to come in."
"While the market may look overbought here, historically, investors have been very willing to jump back in and drive the market even higher once they've been assured that the correction is over and the bull market has resumed," Bespoke analysts wrote.
Stay Bullish Until 2 Signs Say Otherwise: Pro
On Tuesday, pros were watching the market melt up take stocks to four-year highs, with the S&P now more than 3 percent higher in August alone.
Trader Stephen Weiss shares the outlook. "I remain a buyer of the market," he says. Weiss feels that US data has improved and Europe's crisis appears to remain ring-fenced. However, he also suggests watching these market influences tirelessly. "It could all change in the blink of an eye."
Goldman Sachs: Dump Stocks Before Fiscal Cliff Hits
You can sense almost an air of desperation from David Kostin, Goldman Sachs chief U.S. equity strategist, in his latest note to clients as he pleads with them to take money out of stocks before they fall off the fiscal cliff.
In the note, Kostin vehemently defends his year-end S&P 500 target of 1250 despite the benchmark's recent rise to above 1400. The strategist still sees a 12 percent drop ahead, believing that Congress will fail to address the fiscal cliff before the election, and maybe even before the end of the year.
The worst case scenario this year is that a lame duck Congress does absolutely nothing after the election - not even kick the can down the road by voting in a short extension of the tax breaks and spending plans. Under that scenario, 2013 GDP would actually contract, according to Goldman Sachs economists.
Is ‘Maximizing Shareholder Value’ No Longer the Goal?
Joe Nocera, an op-ed columnist with The New York Times, took a shot across the bow of conventional business wisdom in his article earlier this month entitled, "Down with Shareholder Value." The column notes the rise of prominent voices calling to question the wisdom of the shareholder wealth maximization norm as the operating principle of corporations, and Nocera is genuinely curious to see if the movement has legs.
First, we can advance the conversation far more rapidly by clarifying two common misconceptions about corporate law. Many of us have heard that corporations are legally required to maximize shareholder value. Guess what, they are not. The law in the United States does not require management to maximize shareholder value (except under rare circumstances such as when the company gets put up for sale). This may surprise you because you've also probably also heard that shareholders own the corporation. That's not true either. The law is quite clear on this issue and shareholders do not own the corporation. The law is actually ambivalent about the purpose of the corporation, leaving society and business leaders the discretion to make choices. It's up to us to think critically about what purposes we want corporations to play in our society.
Yoshikami: The Markets Will Not Drop 25%
Recent headlines have suggested that the fiscal cliff and continuing struggles in the US economy will cause equity markets to drop in the next few months by 25%.
The case is compelling as the US speeds towards mandatory budget cuts, undoubtedly more gridlock, unemployment that seems not to be healing as fast as the Fed would like, and the uncertainty related to Federal Reserve policy.
. Fundamentals suggest that stocks are fairly valued. While some may debate current valuation levels, cash flow and earnings suggest that the market is not massively overpriced.
. Stimulus efforts will continue on a global basis. While there is uncertainty as to the level of efforts that will be taken by monetary agencies, it appears likely that action will occur in an attempt to move the economy forward on a global basis. The United States, China, Japan, and Europe will all likely continue on an easing path that will lubricate risk assets.
. While unemployment is high and negatively impacts millions of workers, the net result for companies is greater efficiency providing a corporate profit tailwind.
. While emerging markets have struggled, increased personal and business wealth is a reality. Consumption will be positively impacted as markets in emerging economies evolve towards a more balanced economic model.
. Interest rates remain low providing investors a phantom tax rebate. While real estate prices are disastrous, monthly payments are not and low payments provide greater dollars to spend on other goods thereby stimulating economic activity.
Decide which type of investor you are before you invest and make sure they are overall strategy reflects your view of the world as well as the degree to which you can afford to be completely wrong.
What Bubble? Bond Pros Still Betting on Junk
Plunging yields and surging supply has triggered a scare in high-yield bonds, but bubble hunters may be looking in the wrong place.
Average yields in the junk market recently slipped below the pivotal 7 percent mark, while global issuance hit its highest July ever last month. With economic growth slowing, some pros are speculating that the aggressive run in high yield is about to end.
But those fears come as cash remains around record levels on corporate balance sheets, defaults remain low, and the stock market continues to rally.
Still, the fears persist that the flock to junk, spurred by extremely low yields in government debt, is creating a bubble ready to pop.
"People wanted more yield than the United States Treasury was willing to give. So they went to other places to get it, and that's a risky situation," says Kevin Ferry, president of Cronus Futures Management in Chicago.
Cronus's Ferry adds that the investors who are betting on a junk bubble must reason that "then the stock market is a bubble."
Even banking analyst Dick Bove at Rochdale Securities echoed the theme, saying the drop in junk yields shows that "investors feel a need to get a higher return on their cash hoards. Simply seeking safety in Treasury securities is not meeting the need of investors."
Global issuance for high-yield bonds hit $24.6 billion in July 2012, a staggering rise of 88 percent over June and the biggest July on record, according to Dealogic. Yet issuance for the year, at $210.5 billion, is 19 percent below the same period in 2011, suggesting that the risky rally in fixed income could continue, and spread elsewhere.
"It is a short step from there into common stocks," Bove said. "In the case of banks, if investors choose to look, profits are very high and valuations are very low."
Happy Days May be Here Again: Economist Mark Zandi
The Congressional Budget Office said Wednesday that the U.S. economy could slip back into recession if Congress fails to act before a total $8 trillion worth of tax increases and spending cuts are due to take effect in January — the so-called fiscal cliff. The same day the Fed signaled it was prepared to act fairly soon if growth doesn't pick up substantially and on a sustainable basis.
The aforementioned are two very big ifs, but Mark Zandi, chief economist at Moody's Analytics, has a rather optimistic outlook.
Zandi attributes his rosy sentiment to deleveraging throughout the economy.
"The banking system is on much more solid ground, households have done a very good job of reducing their debt and most importantly American businesses are in very good financial shape," he says. "They've reduced their debt, got their balance sheets in order and are very profitable."
Light Volumes Turn Wall Street Into Ghost Town
A summer August is typically never that active on Wall Street. However, this month's volume is on track to be extraordinary light, calling into question the legitimacy of the recent rise in stocks and threatening the profits of some market's participants.
"It's only likely to get worse in the next two weeks," said Richard Repetto, the firm's exchange and trading analyst, in the report. "Despite rising equity markets, investor confidence remains low."
Despite the run at the new high this week, equities have basically stalled this month in a small trading range. And retail investors continue to shun stocks for bonds instead.
S&P 500: The War for 1,400 Has Begun
From June 4th through last Monday the S&P 500 rallied over 11%. The move was like floating down a lazy river; slow, steady, and just a little bit boring. Dropping from an intraday high of 1,426 to 1,400.5 was less than a 2% loss, but it was enough to remind traders that even mild rivers have their waterfalls and rapids that demand respect, if not fear.
Eric Wilkinson, co-founder of Blue Group Trading says that for bulls to keep the upper hand they need to hold the line at 1,400. "That's where the most amount of trading has happened over the course of the most amount of time," he says.
Either the bulls or the bears are going to get start getting very uncomfortable depending on the next 1%. Of such discomfort are sharp and expended moves born.
Stocks are right near 1,400, right now on Friday morning. Ignore the level if you like, but be aware that billions of dollars is being wagered on which way the tape is going to move next. Short or long, it's game on. Ladies and gentlemen, place your bets.
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