Equity stock market is afloat on two-year high during a period of consolidation. External events such as the turmoil in Egypt caused temporary swing but did not drag down the market. Investors appeared to hold very tight for their positions to embrace potential paper loss temporarily but to benefit from the longer term asset appreciation. Hedge funds and individual investors previously attempted to move away from equity stock market to the sideline. The former dared not to short against market in the beginning of year after initial attempt and then switched to accumulation instead. The latter quickly felt uncomfortable holding cash on the sideline and promptly jumped back to the market. Those reaction supports market to buoy at current level.
Market participant sentiments are diversified. There are both buyers and sellers among institutional investors, individual investors, as well as hedge funds. The common anticipation is a possible short term correction which causes speculative day trading activities. However nearly all market participants anticipate a rising market trend in the year ahead. Wealth effect and greed encourages investors to take risk on possible short term temporary loss during market correction, rather than to miss a pop on market momentum. Therefore, any market dip quickly attracts speculative buyers and reverts movement direction. On the other hand, investor confidence are fragile and extended rally causes anxiety as short term overshoot for profit taking. During this market consolidation period, this scenario provides opportunity for risk-taking speculative traders. Despite anticipation from the majority of market participants, a sizable market correction is unlikely due to increasing risk appetite of investors, unless for "black swan" event that creates investor fear running for exit door.
As mentioned in earlier post dated back on October last year, it is observed that individual investors begin to return back to equity stock market after long waiting period with cash on the sideline. The flow of capital into equity stock market continues while investors begin to exit from treasuries and bond market at the same time. The article "Big Returns on Bonds Have Come and Gone" has similar interpretation on market observation as the speculative investment portfolio trading philosophy.
A. It will be difficult for fixed-income investors to make any reasonable rates of return this year (and perhaps for the foreseeable future) if rates begin a secular trend toward higher yields;
B. "Pick your poison" -- credit risk; currency risk; interest rate risk; or switch to equities to achieve a positive rate of return on your nominal dollars (before adjusting for inflation) -- the "easy ride" in bonds is over;
C. This makes life for investors difficult trying to find "safe" returns (ask anyone who has held a municipal bond since November how "safe" they feel), and it effectively forces all investors to embrace some type of risk if they hope to achieve a rate of return from what used to be considered their "safety net";
D. Ben Bernanke and the Fed have achieved one of their goals (creating a positive wealth effect) by driving money market rates and fixed-income yields so low that, inevitably, investors have no choice but to look for returns by gravitating away from bonds and toward equities (and commodities, of course); and
E. To be clear, this perspective could be wrong, and interest rates may not head higher (or they may rise very slowly over time). Take a look at David Rosenberg's commentaries at Gluskin Sheff for a very different perspective on the direction of interest rates versus the view espoused by Gross.
Although the perception on market trend has been correct since last October, the speculative trading portfolio performance is not impressive despite a moderate gain better than broad market index. In consideration of leveraging and active management, the performance is below reasonable expectation. One of the major shortfall is in the timing of market cycle. For short term timing of intra-day trading, it is not easy to predict a trend out of the random nature of market movement driven by market participants instantaneous reaction. However, for longer period of time spanning overnight or days, the picture may be clearer from observation of market participants activity. The entry and exit point of most tradings are mostly far from the optimal time for maximum profit. Some trades incur a loss which can be avoided if the timing of trade execution for position opening or closing is advanced or postponed for a few hours or less.
The trading skills of day traders may not be easily acquired. However, with longer time span between trading transactions, the confidence can be improved with more data analysis of market participants activity. Therefore the speculative trading strategy is adjusted accordingly to accommodate overnight equity holding which is previously suggested to avoid to reduce risk exposure. For risk mitigation, overnight holdings should have less leveraging than day trading positions and adequate borrowing margin buffer should be provided. Previous experience during financial crisis serves as a painful reminder on the destructive power of over leveraging in an environment of extended unfavorable market movement.
Americans earn and spend more, save less
As incomes slowly creep back up, Americans are spending more freely and saving less.
Less worried about layoffs, jobholders spend more
Ninety percent of the work force has a job, the same as a year ago. But last year, people were still worried about getting laid off. Today, they aren't.
'Can't Lose' Market May See Another Leg Up Ahead of Data Release Next Week
Investors are having it both ways right now in the "can't lose" market. With the four month sprint up, many people are now calling for a pullback right after the new year - but with so many people calling for that one wonders if it will be just that easy.
History suggests time is right to buy Dow stocks
"Big stocks are still playing catch-up," says Bob Doll, chief market strategist at BlackRock, a firm that manages $3.45 trillion in assets. "As they go higher, investors are going to say 'Stocks are going up, so I better buy some more of them.'"
How to trade the oncoming stock market bubble
Bull markets are built upon the bricks of skepticism and upon the backs of bears who are short the market and therefore will have to buy at some point to cover and/or chase the rallies.
Don't Fight the Tape: U.S. "Remains Attractive" as Recovery Accelerates, RBC's Harris Says
The risk trade is back on across the globe. Stocks in the U.S. and around the world are trading near multi-year highs on the heel of positive global economic news.
Despite the current risks in the market, there's no need to fight the bulls says Marc Harris, co-head of global research at RBC Capital Markets.
Dow 12,000: Rally Hits New Heights But Ritholtz Sees Correction Coming
Notably, Ritholtz is not expecting a massive sell-off and believes the bull market will resume once the correction runs its course.
"It's Much Worse": Howard Davidowitz on the State of the Union
Here again, Davidowitz is highly critical and dismissive.
Low-wage jobs dominated hiring so far in job market recovery
There are two problems with the jobs recovery to date. Employers haven't added enough jobs. And those they have added aren't particularly good ones.
Private Sector on the Mend But There's Still Too Much "Uncertainty," Walker Says
"We're talking about broadening the base of taxation in order to keep the tax rates as low as possible. The fact is we're not talking about ATB tax cuts we're talking about dramatic tax reform. The truth is we couldn't afford to extend a lot of the tax cuts we did extend...that was a mistake and I hope it's not repeated again."
How "Big Short" Author Michael Lewis Got Duped By Wall Street
On the whole, however, the stock market is a much safer place for individuals than the bond market. “The bond market I’d say is generally rigged against the individual investors," Lewis declares. "But there’s a caveat. It’s rigged to the extent that Wall Street firms know what they’re doing. And in the last four or five years we had this episode where these Wall Street firms created a poker table where they were the fools, and as a customer you could actually do quite well being on the other side of trades from them.”
Inflation or Disinflation??
Labor costs are often cited as a reason why the U.S. is not heading into an inflationary period, even as commodities prices continue to soar.
Is the Fed's Real Target 1,755 for the S&P?
For one, the relationship between stock market and employment gains has been absent since the recovery from the March 2009 stock market lows and the initial wave of Fed QE. As the Fed expanded its balance sheet by $2 trillion, unemployment has risen from 8.6 percent to Friday's suspect number of 9.0 percent, while stock prices have nearly doubled.
Don’t Look Now, But European Stocks Have Been Soaring
Plenty have written off Europe as doomed to deal with its fiscal issues for the next decade or so. But maybe they should take another look. Year-to-date European indexes in some fiscally troubled countries have been experiencing a riotous relief rally.
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