Market rally finally came to a halt with the announcement of Goldman Sachs quarterly result. Many investors are expecting a correction to re-enter the market. As mentioned in previous week's post, individual investors stopped buying in the previous week but still holding with existing stocks. But investors' mentality change very quickly. Goldman's disappointing result causes panic selling despite Apple's and IBM's strong result. Individual investors recalled memory of last year's flash crash and sold stocks to protect profit gained in the rally. The shadow of financial crisis loomed in the mind.
On the other hand, institutional investors and hedge funds remained relatively calm. As a consequence, the trading volume is only moderately higher. Sell-off is most dominant in the financial and technology sectors. Decline in the former sector is due to unsatisfactory result in some banks and the latter is due to overbought during the rally. Some investors are rotating sectors and slowly accumulating positions in the portfolio.
In the coming week, individual investors may continue to liquidate the portfolio to protect profit. However, due to wealth effect the core holdings will be kept for long term appreciation. Therefore although individual investors are no longer driving the market up, there is little chance of a market crash either. Some individual investors have already taken profit before the rally ends and are waiting on the sideline with cash to re-enter market again. Hedge funds currently do not have heavy holding in equity stocks. Seeing a potential strong support at lower level, hedge funds would not risk to sell down the market. Instead hedge funds are using available cash to accumulate positions.
Although it was mentioned in last week's post that there is risk for holding positions overnight, greed resulted in such a mistake. A heavy position in leveraged financial ETF was initiated on Tuesday. Since the holding was bought at exactly day low, it already made a decent profit if the position was closed at the end of day. However, it is speculated that Apple will announce a strong result and market will be boosted. After-hour market went up further on Apple result. Therefore it was decided to keep the position overnight for more profit. However, market was manipulated and Goldman's result was used as an excuse to drive down stocks. Fortunately, only individual investors were in panic while institutional investors remained calm and hedge funds did not speculate a significant market decline. Some frightened individual investors were selling to protect profit. Day traders are also active in a turbulent market. Wealth effect encourage investors to hold on with core positions in the portfolio. As a result there is only minor market correction in this week.
Equity stock market have not dropped significantly. Those investors waiting on the sideline with cash will keep on waiting for a lower entry point. Unlike last year's flash crash, individual investors now has a larger role in market participation. After the flash crash, market continued to decline due to lack of buying desire. Investors were seeking safety in treasuries and bonds. Currently, investors are liquidating treasuries and bonds and enhancing the positions in equity stocks and commodities. Therefore even if market retreats, there is buying support along the decline. On the other hand, investors do not have strong confidence to chase if the market rallies.
Although there is confidence that the new leveraged ETF position in the speculative trading portfolio may finally break even, there is an opportunity cost for extended duration of holding. Firstly, there is the interest cost due to leveraged borrowing. Secondly, the holding locks up resources for speculative trading in a turbulent market. Thirdly, leveraged ETF exhibits value decay over time due to leveraging and unfavorable market movement. Therefore portion of the holding was liquidated with a loss to free up some of the limited resources and reduce risk exposure on leveraged ETF. This is a precious experience for future trading practice.
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Investors' return to US stocks could be too late
While millions sought refuge in traditionally stable bonds over the past two years, they missed a more than 90 percent rally in stocks. Suddenly bonds don't look so safe, and some of the $11 trillion that Americans have parked in mutual funds is shifting back to stocks.
Sooner or later, investors will put their money where it's gaining the most, predicts Bob Doll, chief stock strategist at BlackRock, the world's biggest money management company. Investors tend to chase rather than anticipate returns. He expects investors will embrace stock funds over bonds, ending what he calls an era of fear.
"The numbers suggest a slow rebound for investor confidence in stocks," says Strategic Insight's Avi Nachmany. "But they'll continue to buy bonds for the same reasons they bought them before: There's an insatiable interest in income, and people are still scared."
Here Comes the Dumb Money!
But investors are clearly starting to get more comfortable with stocks after pulling money out of stock funds constantly between early May and early October last year. Since then, they have put a total of $9 billion into stock funds, compared with $3 billion in bond funds.
Hedge fund industry assets swell to $1.92 trillion
Hedge fund assets grew a record $149 billion during the last three months of 2010, according to new data released on Wednesday.
According to Hedge Fund Research (HFR), which tracks industry performance and asset flows, hedge funds around the world now invest $1.917 trillion.
The increased flows came even as the industry delivered only lackluster returns of 10 percent, lagging behind mutual funds and the industry's own more impressive 19 percent gain in 2009.
Financial stocks pull market lower
Stocks suffered their largest one-day decline since November after banks reported steep drops in profits Wednesday.
Dow, S&P dip as F5 view hits Nasdaq, Google up late
Stocks fell on Thursday as lackluster tech and materials earnings failed to live up to heightened expectations, threatening to short-circuit a seven-week run.
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Strong profits at General Electric sent industrial stocks higher Friday and helped the Dow Jones industrial average notch its eighth straight week of gains.
Despite the "Wounds", Now's The Time to Invest in "Best in Class Franchises" Like Goldman, Says Rolfe
It’s been a tough week for financial stocks with disappointing results from Goldman Sachs and Cititgroup, but there's no need to sweat the disappointing news says David Rolfe, chief investment officer of Wedgewood Partners.
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