Investors lose interest in buying due to fear of market crash. Trading volume remains low. Day traders contribute to a large proportion of daily volume. Although individual investors have a growing portfolio value, only a small portion is allocated to equity stocks. Institutional investors and hedge funds see a lag in performance to broad market and are struggling to catch up. In this strong market, market manipulators cannot find opportunity to make profit from market collapse as in last year. Market is performing well in the year but the majority of market participants under-perform due to low exposure to equity stocks while the return from money market is low.
Although market cycle repeats, each cycle may have different behavior. Last year, market manipulators executed a very successful strategy to make profit from market crash which is not anticipated by many market participants. The surprise created panic selling from investors with little confidence. Today, investors are flooded with cash or equivalent. It is unlikely to have panic investors dumping stocks for cash because investors are already seeing trouble to find investment opportunities for the cash.
In this highly manipulative market, events may be unimaginable. In last year, it is expected that the end of Federal Reserve bond buying program would not cause market collapse because the demand for treasuries is high as investors are staying away from stocks and moving capital into fixed income market. Therefore despite market manipulators' continual liquidation of stock holding, equity stock market dropped only slightly in the few months around program expiration. But market participants was shocked when market manipulators used the insiders information of US debt rating downgrade and short selling to create market panic. Investors stock holding was trimmed to current low level despite swelling in overall portfolio value.
Currently investors are holding the core portfolio of stocks because of the attractive dividend and potential for further appreciation. But the desire for purchasing stocks is low especially among individual investors because the purchase price would be a lot higher than the price when stocks were dumped last year, not to mention the bottom in 2009. Therefore although market participants are sitting on mountain of cash and waiting for market crash, there are not enough sellers to drag down market. Long term investors would be the potential sellers in future sell-off for profit taking. But currently there is no sign of heavy selling yet. Market would move slowly higher and maybe set new all-time high as corporate earnings are improving. However, market manipulators may come up with surprise to shock the market again. Thus investors remain cautious despite the extended market rally since beginning of the year.
Why Stocks Might Go Higher After the Election
The U.S. is the best house on a bad block, and investors should stick with U.S.-focused stocks, Alec Young, S&P Capital IQ strategist, told CNBC on Friday.
"The overriding theme is that we want to be more domestic," Young said. "We think most of the risks out there are global."
He also said investors should hedge against more bad news from overseas by going long on the consumer discretionary sector while shorting materials.
With pent-up demand and ongoing corporate productivity enhancements, S&P is "less worried about a negative surprise within tech," the strategist said.
S&P 500 Will Finish the Year Near All-Time High: Schoenberger
With the first 3 quarters in the books, 2012 has been much stronger than expected for U.S. equity markets. Despite a soft finish, the S&P500 is up more than 14% YTD and the Dow Jones Industrial Average clocking in with slightly less than a 10% gain.
Schoenberger only has two real concerns for the next 10 weeks. The first is the familiar Fiscal Cliff. No one's thinking much about it now but it's "out there" and could become a more acute concern in the likely event that no progress is made by politicians before the new year.
The other rally stopper would be Mitt Romney winning the Presidential election. While a long shot according to the polls, there's still more than a month before the election. If Romney wins, he's said he'll get rid of Bernanke in January 2014 when the Fed Chairman's term ends. A new Fed head would have to be tighter on monetary policy, if only because it would be impossible to be looser.
Hedge Funds Lagging: Is 'Enormous Unraveling' Near?
The more stocks rise, the further behind hedge funds fall-with the industry now lagging market returns by double-digit percentage points.
Though hedges actually have attracted more investor cash this year, the bulk has gone to bond funds and away from equities, even though the Standard & Poor's 500 (.SPX) is up a robust 14 percent so far in 2012.
As a result, hedge funds have returned just 3 percent year to date, though assets under management have swelled to $2.56 trillion, according to eVestment, a data firm that tracks the industry.
Nevertheless, fixed income-based hedge funds have seen inflows of $38.8 billion this year, while equity funds have watched $7.4 billion come out.
That risk aversion during an aggressive stock market run-up may be what is holding back fund performance more than anything else.
Hedge fund manager and author James Altucher predicts more trouble ahead, in which there will be "an enormous unraveling of hedge fund assets at end of year when hedge funds open their doors and this will lead to a bad Q1 in 2013."
Moreover, industry insiders say managers have struggled to meet benchmark returns as the market has become far less fundamentally driven and more influenced by headline events such as the European debt crisis and fiscal peril in the U.S.
Aggressive monetary easing from global central banks also has made it more difficult for fund managers to anticipate market movements, with active fund managers overall suffering what could turn into their worst year ever against benchmark returns.
'We're Heading for Recession,' Says Sam Zell
A compounding lack of confidence in the future has kept American companies from investing in their businesses and is leading the country back into recession, real estate mogul Sam Zell told CNBC.
"Nobody wants to make commitments beyond tomorrow," Zell said during a"Squawk Box" interview. "One of these (recession) triggers is when enterprise projects start getting delayed. We're heading for a recession and that's exactly what you're looking at now. You're looking at capital expenditures across the board being deferred for a reason: There's no confidence."
The Great Disconnect: Awful Earnings vs. a Hot Stock Market
A week from today, when Alcoa officially kicks off third-quarter earnings season, analysts who know the company best are expecting the aluminum producer to report a penny per share in earnings on $5.6 billion in sales. That's down sharply from $0.15 per share and over $6.4 billion in revenues that it delivered in the Q3 last year.
But there's only one problem: Alcoa's projected plunge is not an island of strife, it's part of a bigger crisis. All totaled, more than 80% of Q3 earnings pre-announcements have been negative, a rate that Jeff Kleintop, chief market strategist at LPL Financial, says is not only running at more than double the historic norm, but is a key factor in why he thinks we're looking at the start of a "global profit recession" that is going to see estimates come down.
Kleintop is also on watch for any erosion in profit margins, pointing out that "companies have already cut costs to the bone." As he sees it, there is a limit to the amount of time that corporate America can deliver double-digit profit growth while revenues are barely moving.
As he sees it, traders may be focused on policy events like the easing authorized by the Federal Reserve and ECB, but "what matters most to investors" is long-term earnings growth.
Wall Street Equities Traders Face Worst Year Since 2006
Wall Street banks' equities-trading units aren't getting much relief from the strongest stock rally since 2009, as sinking volume and already thin margins threaten to make their annual performance the worst in six years.
The rally isn't enough to stem the decline in volume. Average daily volume for U.S. equities was 6 billion shares in the third quarter, the lowest since at least 2008 and about half the 10.9 billion average in the first quarter of 2009. The figure has dropped year-on-year for 12 of the past 13 quarters. Volume on the London Stock Exchange fell 11 percent from the second quarter and is up 2.6 percent from a year earlier, according to data compiled by Bloomberg.
Outflows from equity mutual funds and lower volatility have helped depress volumes. Money has exited U.S. equity funds in 2012, the sixth consecutive year of outflows, Richard Ramsden, a Goldman Sachs analyst, wrote in a report last month. The Chicago Board Options Exchange Volatility Index, or VIX, has averaged 18.13 so far this year, down from 22.09 for the same period in 2011 and 23.65 in 2010.
"It's going to be a continued environment of risk-aversion and really quick trigger fingers on the part of portfolio managers to protect gains," said Davis, who is based in Washington. "It will be quite some time before there are money flows into hedge funds and you have aggressive money going after aggressive returns like the old days."
Earnings Season May Decide Market's Next Direction
Stocks have been moving sideways since the Federal Reserve announced QE3 in mid-September, and investors are now awaiting the next big market catalyst: third-quarter earnings.
"The market's swinging around and there's no conviction-people are nervous about a lot of things," said Yu-Dee Chang, chief trader at ACE Investment Strategists. "For the time being, I expect more weakness."
"[Investors] don't want to miss the rally if the earnings season is positive," said Trunow. "Stocks might stay up or go higher if we see an overall positive surprise, but I see more risk on the downside at this point over the next quarter or two. But once we're done with the election and get clarity on the 'fiscal cliff,' I think we can go up from there."
It's Not the Economy, Stupid
I've written hundreds of articles about the economy in the last two years. But I think I can reduce those thousands of words to one sentence. Things got better, slowly.
Of course, there were peaks and valleys along the way. We tip-toed toward recession last summer. We flirted with a capital-R Recovery in the winter. We returned to the sad new normal in the spring. But basically: Things got better, slowly.
Despite Gains, Many Flee Stock Market
The stock market is reaching toward new highs on the fourth anniversary of the financial crisis, but many people refuse to be lured back.
Even as stock indexes have doubled in value since the market low in March 2009, investors have yanked a net $138 billion from mutual funds and exchange-traded funds that invest in U.S. stocks, according to the Investment Company Institute, a mutual-fund trade group. Investors over the same period put $1 trillion into bond funds, a traditionally lower yielding but safer investment.
"The fear in the mind and heart of the investor is more acute now than it was in the '70s, because the investor class today doesn't know what to do, doesn't see an option," said David Kotok, president of Cumberland Advisors, which manages about $2 billion in Sarasota, Fla.
Many investors are afraid of the real-estate market and are unhappy with bonds. "People don't want to be in cash at a zero interest rate and have a growing fear of longer-term bonds because the yield is so low and the price risk is now high," Mr. Kotok said.
Demand for bonds, together with central bank policies aimed at stimulating the economy, has pushed interest rates and bond prices to extremes. Prices and yields will eventually return to more normal territory, and people invested in bond funds could see future declines.
Still, Mr. Kotok said, clients call him asking to get out of stocks. "The conversation will go something like this: 'The market is up enough, I don't like the way things are, take me out and put me in bonds.' I get that every few months. I rarely get a call telling me to go the other way," Mr. Kotok said.
Mutual-fund firms are seeing another exit today. Demand for U.S.-stock funds peaked in 2000, after technology stocks collapsed and the market began a 2½ year decline.
Some optimism returned in 2003, but flows into U.S. stock funds never reached 2000 levels.
People began taking substantial money out of U.S.-stock funds in 2008, the year Lehman Brothers Holdings declared bankruptcy, big banks sought a government rescue and the global economy teetered on a precipice.
The decade's two financial calamities cost the stock market many long-term, stable investors who helped support the double-digit annual stock gains that created vast wealth in the 1990s.
"People are scared stiff to go through an '08 again," said Mark Pollard, a financial adviser in Princeton, N.J., with Merrill Lynch Wealth Management. "People do talk about that: 'Whatever you do, I don't want to go through an '08 again.' "
The Fiscal Cliff: So Bad it May Be Good
"What we really need is to come up with a credible long term plan to reduce the debt level," North says. "It's weighing on the economy and needs to be cleared up."
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