Welcome back to work! Futures are looking up by 2%, following rallies in Asia and Europe.

Lots of fund managers come into the new year carrying plenty of cash. They had unceremoniously dumped the losers they were too embarrassed to show on their books at the end of Q4. This sets up the January effect, especially amongst smaller cap names, that can snap back after the December sales.

But it also leaves these managers holding excess cash, which they often feel compelled to put to work right away, so as to not fall behind their benchmark (which carries no cash).

We like to see Institutional buying. In its purest form, it conveys conviction, implies ongoing purchases over longer periods of time. Generally speaking, it suggests that there is an ongoing flow of money into equities, typically based on expectations for improving earnings and supportive of higher prices.

Unfortunately, this New Year’s rally does not seem to have any of those features. The cash getting put to work can move markets, but it is ephemeral — not typically a lasting trend. I am happy to see markets go higher — I have a decent slug of equity holdings in my portfolios (>50%) — but I am more concerned about the damage of the next leg down than the gains of the present rally.

What would increase my enthusiasm stocks? As noted, I prefer conviction driven, not calendar focused moves. I want to see stronger, not lighter volume. And, I prefer to see the leading sectors of the economy lead the market — that means financials, technology, and consumer goods. As we noted Sunday, sentiment has gotten pretty negative. But its not at levels associated with long term rallies.

The bottom line is this: These rallies are for traders, not longer term investors. We remain mired in a long term secular bear market — and that means preserving capital and managing risk. Yes, you can be opportunistic, but that is a secondary, not primary objective.

Be smart, think out your goals, have a plan and trade safe in 2012

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “The Cotton Candy Rally”

  1. “…These rallies are for traders, not longer term investors…”

    “longer term investors”

    I wonder, in general, ~”Who those may be?/What do they believe they are ‘Investing’ in?/Which do they use as a ‘Unit of Account’?/Opportunity Cost of Capital bogey?/’Discount rate’?/Future, expected, Tax liability xx%?, etc.”

    on a different facet..

    The Coming War on General Purpose Computation
    January 1st, 2012

    Via: Cory Doctorow at Chaos Computer Club: …”

    “…The last 20 years of Internet policy have been dominated by the copyright war, but the war turns out only to have been a skirmish. The coming century will be dominated by war against the general purpose computer, and the stakes are the freedom, fortune and privacy of the entire human race…”


    ‘Steve Jobs, The Pioneer Of The Computer As A Jail’

    Apple to Require Sandboxing in Mac App Store Apps in March 2012

    Microsoft’s Desperation to Catch Apple in the Crackpad Race to the Land of Dumb and Dumber

    Richard Stallman Was Right All Along

    More: Craphound

    Posted in Dictatorship, Economy, Elite, Surveillance, Technology

    past that, this..”Be smart, think out your goals, have a plan and trade safe in 2012″, from BR, is, per usual, sound counsel..

  2. number2son says:

    My plan? Avoid the markets and look for investment opportunities in the real economy.

  3. philipat says:

    Agreed. And the secular bear will probably last until at least 2018.

    So in the meantime, where do investors, as opposed to traders, go? There is a lot of damage still to be caused by the financial markets, both on innocents, against whom the markets are rigged, and on pension funds whose promises were predicated upon 7-8% annual compounded returns. Not, of course, that Defined Benefits plans are that relevant anymore.

    In the meantime, small investors, having seen the light, are pulling more and more money out of the markets in favor of Treasuries (Which the street will soon start shorting, permission between the Fed and the PD’s notwithstanding) and cash, which is losing every year because of negative carry. Its interseting that small investors somehow seem to have figured out that HFT/Dark Pools/Expert Networks etc. etc. are screwing them?

    Meanwhile, I’m happy in commodities and hard assets, mostly rapidly appreciating Real Estate in Emerging Asia.

    Good luck with the “Investments”

  4. philipat says:

    Forgot to ask another question. If small savers other than Wall Street no longer wish to participate in the “Investment Markets”, what does that mean for the Street. Ultimately, it would seem to leave a large “Circle Jerk”, presumably to be consumed by the Vampire Squid??

  5. zeropercent says:

    2 Trillion x 1.5% management fee = 30 Billion (after lights turned on)

    Happy New Year

  6. rootless says:

    Generally speaking, it suggests that there is an ongoing flow of money into equities, typically based on expectations for improving earnings and supportive of higher prices.

    I obsessive-compulsively need to quibble over this statement here.

    “There is an ongoing flow of money into (out of) equities” makes as much sense as if one said “there is an ongoing flow of equities out of (into) money”.

    There isn’t any flow of money into equities, or out of equities. Someone is buying equities, someone else is selling those equities. At any transaction, the “flow” of money takes place from the new holders of the equities to the old holders of the equities, and a reversed “flow” of equities from the old holders of the equities to the new ones.

  7. constantnormal says:

    I do wonder how long before “the next down leg”. So far, EVERYTHING about this interval in the world’s economic history has taken longer to arrive, and lasted longer when it did arrive. Not too surprising, given the record amounts of global leverage that is orbiting the planet, and the utter lack of any controls over the markets.

    It would not surprise me terribly to have the confluence of mildly improving “recovery” data, and this influx of deployable cash to result in a substantial rally that carries us all the way to the previous market peak.

    That was one of Doug Kass’s unlikely-but-possible surprises for 2012 … #1, as I recall …

    It might even entice a lot of the small investors back into the markets … the last bag holders to enter the party …

    If so, I will be terrified all the way there. And even more terrified all the way down.

  8. Concerned Neighbour says:

    Happy New Year to one and all.

    Crap like this is yet more evidence – as if more were needed – that the efficient market hypothesis is pure bunk.

    On a side note, the propaganda war continues to reach new heights (lows?) as we’re told that housing has now assuredly bottomed (for what, the 50th time since the crash started?) and that job numbers are roaring back.

  9. theexpertisin says:

    In my study, I have a framed stock certificate for a company called Grigsby-Grunow. This was a can’t miss technology company (radio) just prior to the market collapse of the depression era. My father lost significant loot on this stock, on a repairman’s wage, but the “reminder” has saved me a bundle over the years.

    BR – your opinion on matters financial is always appreciated.

  10. dina says:

    CNN is showing the following in Breaking News: Stocks begin 2012 with gains as investors see signs of strength in overseas economies.
    Market is optimistic about overseas economies. The rally is real.

  11. MaxMax says:

    Barry, thanks for your continuing pithy thoughts, they’re a big help.

  12. Robert M says:

    You’ve a gap opening. If you close w/ large imbalances in upside/downside vol and adv/dec no.’s Iwill start thinking the opening days of 1987 and look for a continuation. The FED is likely to be seen as the new incarnation of Portfolio Insurance.
    PS I recognize that fragmentation of market makes those statistics suspect

  13. DeDude says:


    Technically speaking you should probably talk about creation of money in equities rather than “flow of money into equities”. The reality is that when stock X, with a total of 10 million shares gets a lot of purchase action and the price increase from 100 to say 120 the shareholders wealth has increased by $200 million. That is an extra $200 million of money that was just created outside of the control of the Fed; but exactly as good and effective paper money as that printed by the government. The “flow of money” into stocks is more a relative term since the newly created stock market money shifts the balance of total money a little in favor of stocks. The actual amount of money printed on green paper with constant $ denomination can only change when the government decide to print more of it.

  14. rootless says:


    So according to you any price increase of anything that is traded (not just equities) in the economy equals money creation, doesn’t it? Because why would equities be different from anything else that is traded? And you say price increase is the same as wealth increase. Inflation equals wealth increase. But don’t you actually just confuse price inflation with money creation? And also with wealth increase?

  15. DeDude says:

    I agree that you have to adjust for inflation but that is fairly easy to do and trivial compared to most stock market swings. For most of the things that we discuss as issues of “money” the papers circulating on Wall Street are equal to the green paper circulated by government. Certain other asset classes are less volatile than stocks or have less total value than all stocks so they are not quite as important for monetary expansion/contraction.

    I always have been shaking my head when people get all wired up about M1, M2, M3 when creation and destruction of money by Wall Street often is much bigger (and have much bigger effects) than what the Fed is doing. We need a value of everything from period A to B minus inflation and that is the total shift in monetary base (M15?).

  16. rootless says:


    No, I’m not talking about the need to adjust for inflation. I’m talking about your claim that price increase (decrease) is the same as money creation (destruction). Here you are talking about equities. But what is different about equities compared to any other traded good (asset)? It could be anything else, for instance real estate, apples, oranges. If the price of apples increases does this mean there is creation of money in apples, like there was, according to you, “creation of money in equities”, if the price of equities increases?

  17. sellstop says:

    I think we may be surprised on the upside this year. The year of the bond decline(finally!), and the year of contained inflation with increased bank lending. The money is just looking for a home. Probably a few “headfakes” tho.

  18. DeDude says:


    No apples and oranges are consumables not assets so they don’t count much for that reason (as well as for the reason that when you count up all value of everything they are a very small piece).

  19. DeDude says:

    I guess what I am trying to say is that those little green pieces of paper that the government prints nice $ signs on are not that different from the papers printed by Wall Street – and that before anybody begin to put a huge significance to that particular type of “money” they need to consider if other types of paper have similar characteristics and perhaps should be counter in when certain “money” calculations and models are created. For each situation we should consider what “money” is and why it would make sense to include or exclude certain types of paper as being “money”.

  20. rootless says:


    Apples and oranges can be assets too. Just put them in a freezer. But these were only examples. I also mentioned real estate. You can’t dismis this by saying this is just a consumable. If you want to exclude goods with a short duration, take any good that has a longer duration, e.g. machinery, buildings, cars. Is real estate money? And if the price of real estate increases does this mean money was created in real estate? If it doesn’t why is this supposed to be the case when the price of equities increases?

    I agree that currency isn’t the only money in the economy. I also agree that the government isn’t the only one who creates money. Banks, for instance, create money out of thin air all the time, and the government’s base money is only a small fraction of all the money in the economy. I just don’t agree that money is created simply by price increase in the stock market. Even less that wealth was created in the stock market. If wealth, I mean real wealth, was created just by price increases in the stock market, any group of people, or even a whole country could create wealth just by the inhabitants trading things in circles among each other and attaching a higher price tag at each transaction on average, w/o producing anything. It would be nice, if inflating asset bubbles were wealth creation. But book value isn’t the same as wealth, and asset bubbles only create fictitious wealth, the illusion of wealth. Wealth is being redistributed through the stock market, but not created there.