Caution and skepticism prevail across Wall Street and Main Street, as investors have yet to fully buy into the market's upward momentum. Institutions and hedge funds, which dominate trading in the U.S. market, continue to hedge their long positions by shorting other stocks, shorting index futures, and purchasing index put options, which are among the most-active options on a daily basis.
Mutual-fund players aren't terribly sanguine either, preferring to avoid the playing field. In 2000, when the SPX was last in the 1,550 area, domestic stock funds enjoyed $259 billion in inflows. As of the end of April, domestic stock funds are on pace for only $63 billion in inflows this calendar year, as investment dollars continue to chase overseas markets. All of the broad indices are hitting new highs, yet the public is still not engaged. As contrarians, this is a welcome indication that plenty of money still lingers on the sidelines.
As an example of the pervasive shorting activity that continues as the market achieves new all-time highs, odd-lot short selling continues to build momentum. The smoothed 20-day moving average of odd-lot short positions has been slowly building up speed for the past 2 years and is now near a 7-year peak. Some are viewing the increased shorting activity as the work of hedge funds and thus not an indicator of pessimism surrounding stocks, with the implications being that short interest can no longer be used as a contrarian bull signal. My view is that regardless of the motivation for the huge short positions, they have to be unwound at some point in the future and thus represent future buying power.
Let's look at these developments in a bit more detail.
The lack of participation in the US market by the "little guy" is interesting. My guess is there is a combination of factors at work.
1.) A long hangover from the 2000-2001 sell-off.
2.) The number of people who respond the country is on the "wrong track" in political opinion polls has been very high for about two years. I am wondering if people's perception of the economy is negative as well.
3.) There is a large amount of skepticism about the market's advance.
In addition, the large short position in the market provides tremendous upward pressure. As the market rises, shorts have to cover their positions.
3 comments:
It is, however, important to remember a key difference between a speculative short and a short used as a partial hedge for a long position:
* if the market rises strongly, the speculative short adds buying pressure when it comes due
* if the market rises strongly, the short hedge can be covered by taking profits, in which case the buying and selling are the same dollar volume in the aggregate.
Speaking for us little retail guys (if I may) - I expect to be thorughly raped and pillaged by Mr. Market just as soon as I jump back in. And why not?
1) Unlike in the good old days when I more or less believed at least certain things that my government told me, I don't believe ANYTHING that comes out of this administration, including jobs reports, inflation statistics, GPD, you name it. Same goes with all financial filings from public corporations. Call it the Enronization of America.
2) After 7 years of being spun and manipulated by the media, my walking-in position these days is that they are LYING ABOUT EVERYTHING. So, anything I hear on CNBC or in the WSJ, for example, can be, best case, discounted as spin and worst case, dismissed as outright propaganda.
3) Wrong track? Yeah. The country is definitely on the wrong track. Bush & Cheney & the investor class have made it their life's work to cheat and steal every stinkin' penny from my pocket. Whether they need it or not.
Too cynical to make any money from this bull market, I guess.
My loss, I know. But at least I'm sleeping at night, even while my savings gets eaten away by inflation and the dropping dollar. Oh well. Better to be robbed a penny at a time than to lose it all on one roll at the craps table.
Two thoughts on this.
1) I suspect the small guy is mostly caught up in the real estate bubble. So they don't have a lot of spare money to throw around the market. Where they are invested it's through 401K's etc, which are covered by the institutional players
2) In the dotcom boom, it was obvious where to put your money. Where do you put your money now? Frankly this is where I'm at because I'm not sure what market sector is really where to go. I tend to think that investing in alternative energy investments should do well, but it's not like the sure fire winners we had back in '99.
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