Whenever we see a major market move, there are always a series of post hoc analyses, explanations and rationales.
They are never convincing to me. Why? Because the narratives tend to try to tell a story that gives us comfort, rather than determine what actually happened and why.
Consider yesterdays 244 point pop. The talking heads claimed it was either:
-Draghi finally doing something to save the Euro;
-The Fed’s open ended response to economic weakness;
-The market getting comfortable with the prospects of an Obama win;
-Markets had over-compensated for an earnings decline;
-Prospects of a huge China stimulus
-ADP data suggests that perhaps the economy is okay.
To each of the data points, I say bullocks!
There simply is nothing new in any one of those items that wasn’t a) well known and/or b) expected or c) easily deduced by simply looking at history.
What did cause the rally? I don’t know, and mostly, I don’t care. That is really the worng question for investors to be asking themselves. After the fact explanations are worthless, and Day -to-day action is primarily noise. (If you want to look at charts, try using weekly data instead. More signal, less noise).
However, since you have already read this far, and are mostly unsatisfied with my explanation why all the other explanations are wrong, let me point you to one very interesting factor: Underperformance.
In yesterday morning’s reads, I included the chart below from the WSJ. (PM reads had a different chart from the same article). The piece, titled More Gains, Even More Pain: Summer Rally Puts the Hurt on Defensive Hedge- and Mutual-Fund Managers showed just how far behind — and therefor under-invested in equities — these pros must be.
Stock oriented hedge funds are charging 2% + 20% of the profits for their YTD returns of under 3%. Mutual funds that focus on large cap stocks are up YTD less than 7%. Oh, and those of you who index are up YTD 13%.
If you want an explanation as to what is driving stock prices, that is as good as any . . .
Summer Rally Puts the Hurt on Defensive Hedge- and Mutual-Fund Managers
Source: WSJ
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.
Ken Fisher calls it Heat chasing.
Your reason has more weight, and a higher percentage of probability, for the hedge fund managers.
However, many people who buy stock don’t do detailed analysis, they are “headline chasers”, so the ADP news could have had an effect, esp. since the “right” has been predicting another crash…
[...] Barry on why the market really rallied. (TBP) [...]
Are you traveling again soon BR? This may be just a September head fake…
Agreed, but for different reasons, somewhat.
Day to day activity is both noise, but also part of the sequence of days ending with the day before and starting much earlier. I look for patterns. It’s my gift. Some patterns don’t matter much. Others provide insight and set the groundwork for a hypothesis.
As I mentioned yesterday, asset managers have essentially discovered that if you never sell, you never introduce liquidity shock in to the equity markets. This works because the bottom is covered better than ever before.
Algos set the daily variation so well that even a couple of down days of any size is big news.
Central Bankers worldwide have graduated into full fledged central planners that divine what is a behaved market and what is not. Market clearing is not a permitted activity any longer. Stimulus, the promise of stimulus or a full fledged floor provide props that keep the sick, injured, and defective alive. Asset bubbles are the result. Real value is not necessarily reflected in price any longer. This is much worse than in 2008. Today, all it takes is a little whining for a bailout of equity markets. In 2008 you needed a world ending financial collapse to get a handout.
Liquidity is king. Profits only introduce the daily noise you refer to. They don’t matter any more when price is set, at least not for more than a few days. If they do, they don’t seem to affect the broader indices.
Economics doesn’t matter. Only an interaction of liquidity, central planner support, algos, and asset managers who never sell. Buy the index to make money, not stocks. Will CAT gain from the announced Chinese expansion. Who knows? Too much risk trying to find out. Too complicated to worry about. Central planners have your back on the broader markets and algos set the floor.
Bonds aren’t safe any more. Central planners will prop up failure and negate the need for a flight to safety. Will the cash flow into equities from bonds? Probably since bubble economics is all that matters today.
Re under performing hedge funds: I’ve been hearing a lot of PM’s talking about how 1 & 10 is the new 2 & 20.I think the hedge fund business is dying. If they aren’t being administered Last Rites they certainly are taking up residence at the local hospice.
Thank goodness.
The heavy majority of under performing managers or simply those with par performance are being exposed; they are not Ray Dalio or Stevie Cohen. Hell most of them aren’t even good enough to have John Paulsons bad year.
Despite them wearing trading success as an accoutrement, we see that their seams are heavily frayed and their collars dirty. They won’t live to see the sunrise of the secular bull.
I agree with the conclusions but have some trouble with some of the numbers.
Per Lipper via WSJ http://online.wsj.com/mdc/public/page/2_3024-mfm12_8_CategoryRankings.html
Thru Aug 31 Large Cap Funds YTD 12.0%
S & P 500 div reinvested 13.51%
S & P 500 Funds 13.06% fees
BR,
some of our, former, Friends–from ‘Across the Pond’–may be letting you know that ~”it is “bollocks”, Yank”..
forewarned is forearmed, and all that..~
past such, nice Read, and ‘but, of course..~’..
http://www.thefreedictionary.com/bollocks
v.
http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus-ns-aaf&v%3Aproject=clusty&query=bullocks+definition
(no?)
To put it another way, if nobody is permitted to fail, then how can you believe any of the successes are real?
Agree with Barry’s thinking 100%. However, when every manager is stampeding into stocks, any usually harmless “dip” in the averages can lead to a massive sell-off. And since the Fed embraced the stock market as their 3rd (and only achievable) mandate, the FOMC simply cannot risk NOT stimulating stocks.
I guess we just have to hop in and ride the FOMC train to “paper” prosperity.
Detect sour grapes in BR’s post. All the “smart money” poormouthed the summer rally and pointed to the failure to blow past the double top. Well it happened and they now look a little silly. Forget the charts, in the short term it’s all about europe and the perceptuion of whether or not it’s out of intensive care.
~~~
BR: As I said, we came into the year overweighted in equities, and now 9 months later we are equal weighted and I want to move to underweight equity over the next few quarters, if not sooner)
What you see from me is annoyance at lame after the fact explanations.
One thing I have learned is that QE is never, ever, ever priced in. Today we get yet more worse than expected economic news, and yet again the market will rally in the hopes for more stimulus (apparently Draghi’s pledge yesterday for infinite stimulus wasn’t enough).
We live in interesting times.
ISI’s technical dude said it was short covering. He cites that the tape-reading is all upticks between 9:30 am and 11:00 am.
I’m very picky about the technicians I listen to…. he’s one of those who knows his stuff – at least as long as I’ve been following his calls.
Mort..A,
‘Covering Shorts’ is a SYnthetic Long, at the min., no?
w/ that, the ‘Thesis’, still, stands, yes?
I mostly agree with BR, but not on this one.
Here is a post on my blog in response: http://jcinvests.wordpress.com/2012/09/07/reasons-for-yesterdays-stock-rally/
The whole thing is a bit weird, maybe more akin to a Hunter Thompson acid trip with a couple of fifths of 10 year old bourbon as a chaser. When you look at the hedge fund data, the exit of so may from the equity market and the movement into bonds that at least in the near term won’t do much in terms of yield or capital appreciation things are just ripe for those of us who do value analysis. If one treats equity investing properly these days, one can construct an income generating portfolio that will also see some capital appreciation. It can be hedged if needed by S&P 500 options but I’ve not found that necessary at this point.
My bottom line is positive for this year and I don’t expect that to change going forward.
I wonder when the point of inertia from all of these terrible earnings numbers will break the back of this rally. At some point you’d think that reality (being the demand shortage for goods/loans/etc) would trump the tsunami of liquidity… I guess a company’s shares can trade at an infinite P/E up until the point of bankruptcy.
Speaking of tsunamis – they don’t exactly leave a positive footprint, now do they?
I just don’t see how this ends well. All this QE would be a lot easier to stomach if the (intended) transmission mechanism of the stimulus effect weren’t broken beyond repair.
Meanwhile, equities can only go up. “They” won’t let the market fall. Never heard that before.
When will the buyers run out? QE3? Really. The market is at 4 year highs. More than enough liquidity. Even more financial repression? It is time for the government to stop manipulating the markets.
But weren’t all the pros trailing almost all year? why the sudden jump? I maintain its the Obama certainty, ADP surprise and Draghi bond-buying that eased off Spanish, Italian yields all at once. Stocks – especially banks – are almost 1:1 correlated with the EURUSD cross
Under performance matters as much as under invested
However:
1. Obama has been 57% vs 43% on intrade all year. Nate Silver has him at 301 electoral college votes at 528 for months now.
2. Every EU expert says this sterilized bond program won’t do the trick.
3. ADPs track record is bad enough that it would not cause a 2% pop
(If you want to look at charts, try using weekly data instead. More signal, less noise).
Barry – Sounds like shades of Peter Gabriel here!!! And ‘My head sounds like that!!”
Mark E Hoffer – I would agree with you on that point, esp. where it involves HF manager underperformance.
No, no, no, no, no… The market goes up for one reason. ‘Someone’ ramps the futures under the cover of all these supposed ‘reasons’. It’s so easy, and something the Fed has discussed in the past they could/would do. Yet, people still don’t want to believe it.
Now more than ever it couldn’t be easier to ramp the indexes/sp-500. Every single stock is under the control of a trade-bot/algo that looks to the ES and SPY for guidance. When they see the ES going up, they go up. Spend some time trading futures and you’ll see what a sham the whole market is.
Dh claims, “… To put it another way, if nobody is permitted to fail, then how can you believe any of the successes are real??
On the other hand there are the facts http://www.uscourts.gov/Statistics/BankruptcyStatistics.aspx
[...] News doesn’t drive markets: investors do. (Big Picture) [...]
BR claims, “… 3. ADPs track record is bad enough that it would not cause a 2% pop…” …today’s medicore, though potentially revisable, job number proves it.